Functions of Money
“Money’s a matter of functions four,
A medium, a Measure, a Standard, a STore.”
-William Stanley Jevons
As Jevons’s couplet suggests, money has four primary functions. First, money is a medium of exchange.
Second, money is a measure of value. Third, money is a standard of deferred payment. Finally, money
is a store of value.
Medium of Exchange
Prior to the development of money, most societies used a barter economy. Any trade that occurred
would be a swap of goods or services. The problem with a barter economy is that it relies on a
coincidence of wants for an exchange to happen. In other words, each party must have something the
other wants. For example, if Suzy wants Sally’s wheel, Suzy will need to have something that Sally
wants. Money allows goods and services to be purchased, not just exchanged. This is probably money’s
most important function.
Measure of Value
Money serves as a measure of value-it is used to determine how much different goods and services are
“worth.” It can be used to compare the values of different objects. In order to be a true measure of
value, money must:
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Have any one piece be perceived as equal to any other piece. This is why cars, works of art,
jewelry, etc. cannot be forms of money.
Have some method of being counted or measured.
Without money as a measure of value, there would be no way to quote or bargain for prices, or to keep
track of how much is being spent.
Standard of Deferred Payment
A deferred payment is usually a loan-when a creditor gives a borrower a specified sum of money, with
the understanding it will be repaid, usually plus interest. Before money, creditors would often lend out
seeds or herds of cattle. The understanding was that the borrower would plant the seed, harvest his or
her crops, and be able to return more seed to the creditor, or tend the herd and return more cattle.
This is the origin of the concept of interest. Money replaced commodities as what would be loaned.
Now, borrowers could agree to pay back creditors a certain amount of money in the future. This made
loans much more common.
Store of Value
Before money, many goods which could be bartered became worthless over time. Food would spoil,
animals would die, etc. Money can be easily saved and stored, and then brought back out to be used. If
the money is reliable, it can be predictably used when it is brought back out. Money is not immune to
the earlier problem, however-inflation is the loss of the value of money over time.