Money

The market process developed using direct exchange, or barter, of goods.  But this system has some severe limitations:

• Suppose that Jones, a fisherman, would like to buy some wheat, but Smith, the wheat farmer, dislikes fish.  Jones must then find a product, say butter, not for his own use, but in order to resell to Smith.  Jones is then engaging in indirect exchange, using butter as the medium of exchange.  
  
• Now suppose that Robbins wants to sell his tractor in order to purchase a number of other items: horses, wheat, rope, barrels etc.  He cannot cut the tractor up and exchange a part of the tractor for the goods he desires.  Again, what he will have to do is exchange the tractor for a product that can be used as a medium of exchange.  He sells the tractor for say 100 pounds of butter, then exchanges the butter for the goods he desires.
  

Once any particular commodity starts to be used as a medum, this process has a spiralling, or snowballing, effect.  Once the usefulness of that commodity, say butter, as medium of exchange becomes widely known and used, this use feeds upon itself.  A commodity in use as a medium of exchange is known as a money.

Once a good comes into use as money, the market rapidly expands and becomes more productive.  The reason for this is that the price system becomes enormously simplified, since the price of any commodity can be measured in terms of the medium of exchange.  Money also makes business calculations possible.

Just about any commodity can, and has, been used as a commodity of exchange: iron hoes in Africa, salt in West Africa, beaver skins in Canada, codifsh in colonial New England, tobacco in colonial Virginia, etc.  Cattle was the most common medium of exchange in early civilizations.  Cigarettes are a common medium of exchange in prisons.

But two commodities have been used as money more than any other: gold and silver.  Why?  Because gold and silver satisfy all the qualities that a good money should have:

• Wide acceptance - a money should be able to be traded with as many people as possible.
  
• Intrinsic value - a money should be valuable by itself; this helps it gain wide acceptance.
  
• Durability - a money should retain its value.
  
• Divisibility - a money should be able to be divided and also combined.
  
• Convenience - a money should be easy to hold and transport.
  
• Scarcity - a money should be scarce or difficult to manufacture.