So, what is money? You might tend to think of money as bills, coins, checks, or something along those lines.
However, is this what money has always involved? Broadly defined, money is anything that lets us get what we want.
Now, money serves three functions:
Let's look at each of these separately.
What do we mean by that? We mean that this is what helps us to get what we want.
EXAMPLEIf you go to the grocery store, you are not bartering. You are not exchanging something that you have for your groceries. Rather, you are going to use your debit card to pay for those groceries. That debit card is acting as a medium of exchange because it is an acceptable form of payment to trade for what you want--in this case, your groceries. Your debit card is linked to your checking account that contains your money, and that money is acting as a medium of exchange.
Now, you are not always using your money right now to purchase something that you need--because when you do, it is acting as a medium of exchange.
However, when you are not using your money to purchase what you need, perhaps you store some of it in a savings account. You know that it will retain its value, and you can access it later, whenever you need to. This is a store of value.
So, once a money becomes an acceptable form of payment--like the dollar is in the U.S., as the current form of currency--things are then quoted in terms of dollars. Dollars are used in financial transactions and to help keep records.
This provides a way for us to compare the value of things.
EXAMPLEFor example, if you know that one item is a certain price in dollars, and a different item is another price in dollars, you can compare the two items to determine which is the better deal.
Now, we did not always have money as the form of currency. Before money, people engaged in barter for what they needed. Barter is simply exchanging one item for another.
The image below shows white traders bartering with the Indians. You have likely learned about their exchanges of items in history classes.
Here is another historical example, dating back to 1874. This man is trying to buy a newspaper subscription with chickens--because that is the item he had available to exchange for what he wanted.
Barter has worked in many economies throughout history, but it can also be quite inconvenient. One of the biggest problems with barter is called the double coincidence of wants.
The problem is, though, that you will need to find a hairdresser who is willing to accept your economics tutoring as a form of payment.
In most cases, then, your tutoring services are likely not a great medium of exchange, because it is going to be difficult for you to find someone who needs such a specific thing.
Because of the time wasted trying to find someone who has what you want and also wants what you have, people started trading commodities.
A commodity is something that has value in and of itself, because it is useful in an economic system or society, and therefore easily traded.
Here are some examples of commodity monies that have been used over time:
Well, the better commodities were:
People might value large stones, but they are not necessarily easy to carry around, nor easy to divide. An item like milk is going to spoil quickly, so that would not serve as a good store of value.
However, gold, silver, copper, and jewels are easy to transport and do not spoil. Therefore, they turned out to be the most efficient of the commodities.
Many people, then, began using gold as a medium of exchange. As that happened, it began to serve that third purpose as a unit of account.
People could cite prices of items in terms of gold (e.g., this item is worth a certain number of ounces of gold), and perform and record financial transactions using gold as a unit of account.
Source: Adapted from Sophia instructor Kate Eskra.