- 2019.11.08 [Fri]
What’s money #4 Function of Currency: Medium of Exchange (settlement function)
Function of currency: Medium of Exchange (settlement function)
This function is described as follows:
—- Excerpt from Wikipedia “Money” —-
In a society with currency in circulation, transactions can be carried out smoothly by using money, which is a recognized value, through exchanging measurable goods and money. On the other hand, in equivalent exchange without currency in circulation, the necessary condition for the transaction to be established is that the counterparty has what you want and you have what the counterparty wants.—————————-
Living in the modern times, the above-mentioned transactions take place naturally in daily life, so it is difficult to become aware of the function of money as a medium of exchange.
In the previous article, I wrote that the generation who have experienced war have a different level of awareness of money storage function than the post-war generation, but I know that the exchange function is also differs from the experience I’ve heard.
During wartime and post-war chaos, commodity price rose by about 100 times within just three years and several months, so even if you went to get food from a farmer with money (hoping that he would distribute some food to you), he would ignore it.
At that time, for example, there would be occasions when you have to take your important kimono to exchange for food.
The exchange function is linked to the value storage function written in the previous article.
You can imagine that since the value of currency tends to fluctuate, it will be difficult to buy and sell.
However, from another perspective, money is valuable because it serves as a medium of exchange for goods and services. These are the two functions that make both of them work.
Factors that determine which goods and services can be exchanged with money
Of course, things that can be bought normally are things that can be exchanged with money.
What determines what can or cannot be exchanged with money? Additionally, how is price determined?
If you expand the scope of the topic, it becomes a question of economics. What causes an exchange?
Person A: I’m hungry and I want to eat Yoshino’s beef bowl. Then he pays 350 yen to buy a medium-sized rice bowl.
Yoshinoya: In exchange for 350 yen, I provide a beef bowl. Then the exchange is complete.
For Person A who was hungry at that time, the value of the beef bowl is higher than 350 yen. So he wants to exchange 350 yen for the beef bowl.
For Yoshinoya, he’s willing to exchange for 350 yen since the cost of the beef bowl is lower than 350 yen, even with the added material costs and related expenses.
The exchanges are made when both parties meet. It’s usually too common to be aware of it.
And here, for both parties, this exchange is made with 350 yen as the media.
But if person A has a key ring worth 350 yen and wants to exchange it for a beef bowl, I think Yoshinoya would be unwilling to exchange. There is no way to evaluate the value of the key ring, and the store clerk was also not authorized to do that.
However, the value of 350 yen in money and currency is commonly recognized by all people living in the money economy. This is too natural to be recognized in daily life.
However, considering all the examples above, it is precisely because there is money (currency) acting as a medium of exchange, a person thus emerges to judge what can be sold with such an amount (price) and another person judges what can be bought with such a price. This is how an exchange is successfully made.
Is barter exchange fictional?
Prior to the popularization of currency, the society was based on barter exchanges. This seems to be a commonly accepted view in books and on the Internet. But I wonder, is this true?
In a situation where there is no medium of exchange, such as money, the ways to get what you don’t have are limited. One could only go for bartering, robbery, or persuasion, but these are much harder than using money. You can easily imagine that (laughs).
Person A has item A, and wants item B. Person A is willing to give up A to exchange for B.
Person B wants item A and has item B. So Person B is willing to lose B to exchange for A.
Only when both person A and person B satisfy the above conditions and meet each other, will the barter exchange be completed.
Even in this present age when the Internet is developed and a large number of people participate in online auctions, barter exchange is not always easy.
In my opinion, no matter how optimistic, I think that the size of barter exchanges in the era without money was quite small.
The medium of exchange is money, and the proportion of exchanges with money is very large because they rarely exchange goods or services in a way other than money. In ancient times, there were fewer people and the means of transportation were limited, so there were probably few people who could met each other, and it was rather difficult to exchange things.
The exception is Japan during wartime, when barter exchanges appeared frequently.
—- Excerpt from Wikipedia “Barter exchange” —-
In Japan, barter exchanges occurred frequently during the Second World War (Pacific War). Japan had a shortage of food, so food was distributed by the government, but gradually the amount of food distributed decreased, and finally it was reduced to an amount that people could not live with.
As a result, people who lived in the city had use what they have, such as kimonos (especially high-quality kimonos that are not used in daily life and kimonos brought in for wedding), ornaments, tableware, antiques, watches, and other items that can be exchanged, and went to the rural areas by train. They circled around the farmers, showed what they brought with them to the farmers, allowed the farmers to evaluate them, and then exchange them for rice or vegetables from the farmers, but the farmers might refuse to exchange.
Japan had a shortage of food and the city was in short supply, but the farmers still had enough rice and vegetables. As a result, high-quality kimono and bones piled up like a mountain in the farmhouse.
Under urgent circumstances, if the transaction failed completely, the people from the city would starve. This mainly happens due to the people living in the city. From the perspective of the farmers, even if the barter exchange failed, it wouldn’t affect them as much, as it was the people from the city that took the initiative to visit them and asked them for help. The farmers only considered these situations (in a sense, “sympathy”) and responded to these requests. Basically, in the transaction, the dominant and decision-making powers were in the hands of the farmers.————————
If there was not enough food, they could only pay for it no matter how expensive it might be.
During wartime, it is clear that the preservation function of money was destroyed, and only goods and food of high ordinary value were exchanged. In an emergency, the value of daily necessities such as food to sustain lives would no doubt rose without limit.
It could also be known that the exchange function of money was based on the fact that there were multiple people who had a common understanding of the value of the goods they wanted to exchange, and that the society was stable enough for currency exchanges to take effect.
The function that currency serves as a medium of exchange is to turn the value of the currency itself into a universal item.
There are trending products and services. Even for expensive antiques, only a few people can understand their value. Most people will have trouble getting the antiques, and they will sell them immediately and cash them in, or just collect them since there are no other purposes.
However, the value of money (currency) is recognized by almost everyone in areas where money circulates.
So, although I don’t have anything I want to buy now, but I can still buy what I want to buy immediately appears in the future. Money can be an object that makes you happy just by holding it.
Is modern society a bit too exorbitant?
I will continue to write the exchange function of money next time.