bullet1 Question   What is Money?

Money is supposed to have four major functions. It is a

  • medium of exchange or legal tender

Whatever people usually give in exchange for the things that they buy is the medium of exchange. This is the function that defines money.

  • unit of account or measurement of value

The unit of account is the unit in which values are stated, recorded and settled. The differences between this and the medium of exchange may seem subtle, but just as different pictures can be painted with statistics, so with accounts. In Britain a few decades ago, Guineas were often used as the unit of account, while the medium of exchange was expressed in Pounds. Both Guineas and Pounds in turn could be expressed in shillings -- the Pound was 20 shillings and the Guinea was 21 shillings.

  • means of payment or standard of deferred payment

This is the unit in which debt contracts are stated. Deferred payment means a payment made in the future, not now. Here, again, it is usually the same as the medium of exchange, but not always. During periods of inflation, people may accept paper money for immediate payment, but insist on some other medium, such as real goods and services or gold, for deferred payment -- because the medium of exchange would lose much of its value in the meanwhile.

  • a store of value or wealth

People keep money in order to maintain the value of their wealth. While it would usually be the same as the medium of exchange, in inflationary times other media might be substituted, such as jewelry, land or collectable goods. In this sense, money is "set aside" for the future.

Money is thus intimately related to value and time.

Money = Value + Time