What Is Money?
Henry B. Stobbs, MFA
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What Is Money?
The World’s Oldest Money
Lydia, 600 BCE
“Anything can be money…”
– Milton Friedman
The value of money is the value people
attribute to what they want to
exchange.
Money is a substitute for barter.
A student asked, “What is an IOU? Is it
money?” What do YOU think?
And the answer is…
If money is a substitute value for barter
exchange, then an IOU is an
INCOMPLETE EXCHANGE.
The Characteristics of money
There are four basic functions of money.
• It is a medium of exchange
The Characteristics of money
There are four basic functions of money.
• It is a medium of exchange
• It is a unit of account / standard of value
The Characteristics of money
There are four basic functions of money.
• It is a medium of exchange
• It is a unit of account / standard of value
• It is a store of value
The Characteristics of Money
There are four basic functions of money.
• It is a medium of exchange
• It is a unit of account / standard of value
• It is a store of value
• It is a standard of deferred payment***
The Characteristics of Money
Two other important characteristics of
money are that it has liquidity…
The Characteristics of Money
and, it is portable.
Medium of Exchange, Defined
When money is used to intermediate the
exchange of goods and services, it is
performing a function as a medium of
exchange.
Unit of Account, Defined
A unit of account is a standard numerical
unit of measurement of the market value of
goods, services, and other transactions.
Also known as a "measure" or "standard" of
relative worth and deferred payment, a unit
of account is a necessary prerequisite for
the formulation of commercial agreements
that involve debt.
Unit of Account: Defined
To function as a 'unit of account', whatever
is being used as money must be:
• Divisible into smaller units without loss of
value.
• Fungible: that is, one unit or piece must be
perceived as equivalent to any.
• Verifiably Accountable.
Store of Value, Defined
To act as a store of value, a money must be
able to be reliably saved, stored, and
retrieved – and be predictably usable as a
medium of exchange when it is retrieved.
The value of the money must also remain
stable over time.
Standard of Deferred Payment,
Defined
A "standard of deferred payment" is an
accepted way to settle a debt – a unit in
which debts are denominated, and the
status of money as legal tender, in those
jurisdictions which have this concept, states
that it may function for the discharge of
debts.
Two Types of Money
• Type Number 1: Fiat (Latin: Let it be done)
• Type Number 2: Commodity
Can you explain the difference?
Fiat Money
• Lacks intrinsic value
• Only works if government backs and
controls it
Commodity Money
• Precious metals
• Anything that can approximate the four
basic functions
In the Middle:
Representative Money
Time to Review!
• What are the four functions of money?
•
•
•
•
A medium of exchange
A unit of account or standard of value
A store of value
A standard of deferred payment****
*** Modern text books do not include the fourth standard, but rather role it into the other
three. However, it is still included on many tests and in older textbooks (as well as in the
minds of older economics teachers).
• What is another important characteristic of
money?
• Money is characterized by
– its liquidity
– Its portability
• Who said “Anything can be money?”
• Milton Friedman, a famous economist who
won the Nobel Prize in Economics
1912 - 2006
• What is meant by “a standard of value”?
• Everyone accepts it as a uniform
exchange medium. A dollar in Peoria has
the same value as a dollar in Terra Haute.
• What is an IOU?
• An incomplete exchange
• What is the difference between fiat and
commodity money?
• Fiat money Lacks intrinsic value
• It only works if government backs and
controls it
• Commodity money consists in precious
metals or anything that can approximate
the four functions of money
• What is the value of money?
• The value of money is the value people
attribute to what they want to exchange.
Fiat money has no inherent value, and is
worth what we can agree it’s worth.
The Money Supply
• The total supply of money in circulation
in a given country's economy at a given
time. There are several measures for the
money supply, such as M1, M2, and M3.
The money supply is considered an
important instrument for controlling
inflation.
M1
• One measure of the money supply that
includes all coins, currency held by the
public, traveler's checks, checking
account balances, NOW accounts,
automatic transfer service accounts,
and balances in credit unions.
M2
• One measure of the money supply that
includes M1, plus savings and small time
deposits, overnight repos at
commercial banks, and non-institutional
money market accounts. A key
economic indicator used to forecast
inflation.
M3
• Includes M2, plus large time deposits,
repos of maturity greater than one day at
commercial banks, and institutional
money market accounts.
M1, M2, M3
our nation’s money supply
That’s All, for Now…
And now, for the exam!