2. The Emergence of Indirect Exchange
The tremendous difficulties of direct exchange can be overcome only by indirect exchange,
where an individual buys a commodity in exchange not as a consumer's good for the direct satisfaction
of his wants, or for the production of a consumer's good, but simply to exchange again for another
The Theory of Money and Credit
has been used as a medium of indirect exchange.
The butter was worth more to A than the eggs.
Say the exchange was ten dozen eggs for ten pounds of butter, then for one pair of shoes.
Not because he wanted to consume the butter, or to use the butter to produce some other
good in a later stage of production, but because the butter greatly facilitated his obtaining
in exchange for quantities of a more marketable commodity, for example, butter. Butter, for
one thing, is more marketable because, unlike the plough, its nature is such that it does
not lose its complete value when divided into smaller pieces. Dee now uses the butter as
a medium of indirect exchange to obtain the various commodities that he desires to consume.
It is fundamental to human experience that there is great variety in resources, goods desired, and human skills.
So is there great variety in the marketability of various commodities.
Tending to increase the marketability of a commodity are its demand for use by more people,
its divisibility into small units without loss of value,
D. D. first exchanges his plough for X1's butter, and then uses the butter to exchange
Exchange for the various goods that he desires to use, with X2 for eggs, X3 for shoes, X4
for horses, etc.
As the more marketable commodities in any society begin to be picked by individuals
as media of exchange, their choices will quickly focus on the few most marketable commodities
available.
If D saw, for example, that eggs were a more marketable commodity than butter, he would
exchange his plow for eggs instead, and use them as his medium in other exchanges.
It is evident that, as the individuals center on a few selected commodities as the media
of exchange, the demand for these commodities on the market greatly increases.
For commodities, insofar as they are used as media, have an additional component in
the demand for them, not only the demand for their direct use, but also a demand for their
use as a medium of indirect exchange.
This demand for their use as a medium is superimposed on the demand for their direct use, and this
The increase in the composite demand for the selected media greatly increases their marketability.
Thus, if butter begins as one of the most marketable commodities, and is therefore more and more chosen as a medium,
this increase in the market demand for butter greatly increases the very marketability that makes it useful as a medium in the first place.
The process is cumulative, with the most marketable commodities becoming enormously more marketable, and with this increase spurring their use as media of exchange.
The process continues, with an ever-widening gap between the marketability of the medium and the other commodities,
Until finally, one or two commodities are far more marketable than any others, and are in general use as media of exchange.
Economic analysis is not concerned about which commodities are chosen as media of exchange.
That is subject matter for economic history.
The economic analysis of indirect exchange holds true regardless of the type of commodity used as a medium in any particular community.
Historically, many different commodities have been in common use as media.
The people in each community tended to choose the most marketable commodity available.
Tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia,
Cattle in Ancient Greece, Nails in Scotland, Copper in Ancient Egypt, and many others, including beads, tea, cowrie shells, and fish hooks.
Through the centuries, gold and silver, specie, have gradually evolved as the commodities most widely used as media of exchange.
Exchange.
Among the factors in their high marketability have been their great demand as ornaments,
their scarcity in relation to other commodities, their ready divisibility and their great durability.
In the last few hundred years, their marketable qualities have led to their general adoption
as media throughout the world.
A commodity that comes into general use as a medium of exchange is defined as being a
money.
It is evident that whereas the concept of a medium of exchange is a precise one, and
indirect exchange can be distinctly separated from direct exchange, the concept of money
is a less precise one.
The point at which a medium of exchange comes into common or general use is not strictly
definable, and whether or not a medium is a money can be decided only by historical
inquiry and the judgment of the historian.
However, for purposes of simplification, and since we have seen that there is a great impetus
on the market for a medium of exchange to become money, we shall henceforth refer to
to all media of exchange as moneys.