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NOTE 3.02. The Emergence of Indirect Exchange

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2. The Emergence of Indirect Exchange

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The tremendous difficulties of direct exchange can be overcome only by indirect exchange,

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where an individual buys a commodity in exchange not as a consumer's good for the direct satisfaction

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of his wants, or for the production of a consumer's good, but simply to exchange again for another

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The Theory of Money and Credit

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has been used as a medium of indirect exchange.

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The butter was worth more to A than the eggs.

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Say the exchange was ten dozen eggs for ten pounds of butter, then for one pair of shoes.

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Not because he wanted to consume the butter, or to use the butter to produce some other

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good in a later stage of production, but because the butter greatly facilitated his obtaining

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in exchange for quantities of a more marketable commodity, for example, butter. Butter, for

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one thing, is more marketable because, unlike the plough, its nature is such that it does

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not lose its complete value when divided into smaller pieces. Dee now uses the butter as

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a medium of indirect exchange to obtain the various commodities that he desires to consume.

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It is fundamental to human experience that there is great variety in resources, goods desired, and human skills.

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So is there great variety in the marketability of various commodities.

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Tending to increase the marketability of a commodity are its demand for use by more people,

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its divisibility into small units without loss of value,

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D. D. first exchanges his plough for X1's butter, and then uses the butter to exchange

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Exchange for the various goods that he desires to use, with X2 for eggs, X3 for shoes, X4

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for horses, etc.

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As the more marketable commodities in any society begin to be picked by individuals

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as media of exchange, their choices will quickly focus on the few most marketable commodities

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available.

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If D saw, for example, that eggs were a more marketable commodity than butter, he would

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exchange his plow for eggs instead, and use them as his medium in other exchanges.

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It is evident that, as the individuals center on a few selected commodities as the media

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of exchange, the demand for these commodities on the market greatly increases.

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For commodities, insofar as they are used as media, have an additional component in

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the demand for them, not only the demand for their direct use, but also a demand for their

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use as a medium of indirect exchange.

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This demand for their use as a medium is superimposed on the demand for their direct use, and this

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The increase in the composite demand for the selected media greatly increases their marketability.

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Thus, if butter begins as one of the most marketable commodities, and is therefore more and more chosen as a medium,

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this increase in the market demand for butter greatly increases the very marketability that makes it useful as a medium in the first place.

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The process is cumulative, with the most marketable commodities becoming enormously more marketable, and with this increase spurring their use as media of exchange.

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The process continues, with an ever-widening gap between the marketability of the medium and the other commodities,

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Until finally, one or two commodities are far more marketable than any others, and are in general use as media of exchange.

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Economic analysis is not concerned about which commodities are chosen as media of exchange.

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That is subject matter for economic history.

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The economic analysis of indirect exchange holds true regardless of the type of commodity used as a medium in any particular community.

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Historically, many different commodities have been in common use as media.

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The people in each community tended to choose the most marketable commodity available.

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Tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia,

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Cattle in Ancient Greece, Nails in Scotland, Copper in Ancient Egypt, and many others, including beads, tea, cowrie shells, and fish hooks.

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Through the centuries, gold and silver, specie, have gradually evolved as the commodities most widely used as media of exchange.

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Exchange.

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Among the factors in their high marketability have been their great demand as ornaments,

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their scarcity in relation to other commodities, their ready divisibility and their great durability.

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In the last few hundred years, their marketable qualities have led to their general adoption

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as media throughout the world.

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A commodity that comes into general use as a medium of exchange is defined as being a

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money.

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It is evident that whereas the concept of a medium of exchange is a precise one, and

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indirect exchange can be distinctly separated from direct exchange, the concept of money

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is a less precise one.

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The point at which a medium of exchange comes into common or general use is not strictly

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definable, and whether or not a medium is a money can be decided only by historical

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inquiry and the judgment of the historian.

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However, for purposes of simplification, and since we have seen that there is a great impetus

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on the market for a medium of exchange to become money, we shall henceforth refer to

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to all media of exchange as moneys.