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Medium of Exchange

A medium of exchange is the means by which people value and exchange goods and services. Hunting and gathering and pastoral and horticultural societies produced little surplus, and people bartered, directly exchanging one item for another. In later societies, surpluses grew and trade expanded people then developed new ways of placing values on goods and services so they could trade them.

Although bartering continued in agricultural societies, people increasingly came to use money, a medium of exchange that places a value on items. In most places, money consisted of gold and silver coins. A coin's weight and purity determined the amount of goods or services it could purchase.

Toward the end of the agricultural period, currency (paper money) came into existence. Each piece of paper represented a specific amount of gold or silver stored in a ware- house. Currency represented stored value. Gold and silver coins continued to circulate alongside the deposit receipts and currency.

When fiat money replaced stored value, coins made of precious metals disappeared from circulation. People considered these coins more valuable, and they were unwilling to part with them. Then as inferior metals (copper, zinc, and nickel) replaced the smaller silver coins, people began to hoard these silver coins, and they, too, disappeared from circulation.

Even without a gold standard that restricts the amount of currency issued to the amount of stored value, governments have a practical limit on the amount of paper money they can distribute.

In general, prices increase if a government issues currency at a rate higher than the growth of its gross domestic product (GDP), the total goods and services that a country produces. This condition inflation means that each unit of currency will purchase fewer goods and services. Governments try to control inflation, for high inflation is a destabilizing influence.

During the first part of the postindustrial society, paper money circulated freely. Paper money then became less common, gradually being replaced by checks and credit cards. The next development was the debit card; a device that electronically withdraws the cost of an item from the cardholder's bank account. Like the check, the debit card is a type of deposit receipt, for it transfers ownership of currency on deposit.

The latest evolution of money is e-cash, money stored on a company's computer that can be transferred over the Internet to anyone who has an account with that company. E-cash can be used for making purchases and for paying bills.

We can use the term e-currency to refer to the most common form of e-cash. E-currency represents an amount recorded in a government's paper money, such as so many dollars or euros.

The second form of e-cash is electronic gold, which represents a balance in units of gold. A transaction in e-gold is actually the transfer of ownership to a specified amount of gold that the owner has stored in a bank's vault.