/biz/ - Business & Finance

Money is the tool that facilitates the indirect exchange system, which mankind developed as an alternative to the inefficient barter system.

In the barter system, parties directly exchange the goods they want to 'sell' for the goods they want to 'buy'. This system carries with it several limitations that impede economic growth, and therefore human progress. these limitations are explained fully here: https://www.yourarticlelibrary.com/economics/money/5-main-difficulties-found-in-barter-system-discussed/37849

The indirect exchange system addresses these difficulties. In the indirect exchange system you 'sell' your good not for a good that you need directly, but for another good which you can then 'sell' for the good that you need. This interim 'good' becomes the medium of exchange(money).

For this to work, the medium of exchange must, like all the goods we wish to exchange it for, be a commodity with qualities that ensure there is constant demand. The reason being is simple - if we are to exchange goods for another good(the medium of exchange) rather than the good we want directly, we must be confident that the good which is now acting as a medium of exchange will have sufficient 'demand' from someone else who possesses the goods we want to 'buy' in exchange for the good which is now acting as the medium of exchange.

For example: if a farmer wants to exchange some wheat for say, some furniture from an artisan, there must be an artisan willing to exchange their furniture for the wheat in return. But the artisan doesn't want wheat in exchange for their furniture- however there are wide array of goods in the economy that the artisan WOULD want in exchange for the furniture.

This is where the indirect exchange system comes in. The two parties, who both have goods they wish to exchange between each other, can now use a 'medium of exchange' to complete the exchange.