MONEY: Anything that is generally accepted in exchange as payment for goods and services. The emphasis is on "any" because any item or asset can serve as money so long as it is generally accepted in payment throughout an economy. While the key function of money is to act as a medium of exchange, money also functions as a store of value, standard unit of account, and standard of deferred payment As a medium of exchange, money acts to lubricate the economy by facilitating production, consumption, and allocation activities. If the economy has too much money, the inflation occurs, and if it has too little money, then recession and unemployment result. In modern economies, like that in the United States, money comes in the form of paper currency, metal coins, and balances in checking accounts. However, throughout history a wide range or items have been used as money, including rocks, livestock, gemstones, animal skins, and even chocolate bars. Items that best serve as money have the characteristics of durability, divisibility, transportability, and noncounterfeitability. Value As a medium of exchange money is valued NOT for what it IS, but for what it CAN DO, that is make payment and to purchase goods. The key to this aspect of money rests with the difference between value in use and value in exchange. Value in use results when a good or service provides satisfaction of wants and needs. This is sometimes termed intrinsic value. Hot fudge sundaes, polio vaccines, and televised sporting events provide value is use. A person who consumes these goods and services is better off or more satisfied. Value in exchange results when an item can be traded for a good or service with value in use, but that item need not have intrinsic value in use. Money has value in exchange. An item need not have value in use to effectively function as money and as a medium of exchange, so long as it has value in exchange. A common misconception is that the only TRUE money are items like gold or silver that have value in use. This misconception exists because money originally had both value in use and value in exchange, what is commonly termed commodity money. However, the modern view is that the best types of money are actually those with little or no value in use, so long as they have value in exchange. Functions Money can come in many shapes and sizes, from large stone wheels used on the Island of Yap to cigarettes used in World War II prisoner of war camps to animal skins used in colonial America to standard paper currency used in virtually every modern economy. But whatever the item used as money, it performs four basic functions: (1) medium of exchange, (2) standard unit of account, (3) store of value, and (4) standard of deferred payment. A word or two about each seems in order: Medium of Exchange: This function means that money is accepted throughout the economy as payment for goods and services. Buyers acquire goods by giving up money. Sellers receive money when parting with their goods. This is, without question, the most important function of money. This is the function that makes money MONEY. Unit of Account: This function means that money is used to designate the prices of goods and services. Any item that is generally accepted as payment for goods and services is also the obvious choice for denominating the prices of those goods and services. Store of Value: This function means that money can be used to purchase the same quantity of goods and services, that provide the same consumption value, in the future as it can purchase today. Inflation is the primary nemesis for the ability of money to store value. Standard of Deferred Payment: This function means that money is used to designate future payments, such as those for loan repayments. The standard of deferred payment is a natural result of the standard unit of account and store of value functions of money. Characteristics Over the centuries, different economies have used many different items as money. Some items have worked better than others. Those items that tend to work best as money, that best perform the four money functions, are those that have four characteristics: (1) durability, (2) divisibility, (3) transportability, and (4) noncounterfeitability. Durability: Items that work best as money tend to durable. Durability allows a money item to store value, and especially to retain value in exchange transaction after transaction. Durability is one big reason that metals, such as gold and silver, rose to the ranks of money. Divisibility: The more easily an item can be divided into small increments, the better it can perform the medium of exchange function. To be generally accepted in payment, money needs to be exchangeable for both battleships and bubble gum. Transportability: Because market transactions take place at different locations, items that function best as money must be easily moved from market to market. If it takes more time, effort, and resources to MOVE money to the market than what they money can buy, then the money is not very useful. Noncounterfeitability: Items that function best as money are those that are difficult to duplicate or counterfeit. Money that is easily counterfeited quickly loses its value in exchange because ANYONE can create their own money. And if you can create your own money, you have no reason to accept in trade for the valuable goods and services in your possession. U.S. Money In most industrialized nations money is comprised of currency, coins, and checking account balances, all of which are commonly used to make payments. In the United States, the currency part is Federal Reserve Notes issued by the Federal Reserve System (the Fed). Together with coins minted under the authority of the U.S. Treasury, paper currency constitutes between 30 and 50 percent of the money supply. The remaining 50 to 70 percent comes from checking account balances at commercial banks, credit unions, and (the last few remaining) savings and loan associations. While checking accounts are technically under the jurisdiction of banks, they are indirectly controlled through the actions of the Federal Reserve System. The total of currency, checking account balances, and a few other minor items (like traveller's checks) constitute what Fed officially labels M1. The Fed also has an M2 and other M-numbers that include other types of bank accounts and financial assets. Policies Maintaining the "proper" amount of money in the economy is just as important as maintaining the correct amount of lubricant in an engine. Too much money means inflation and too little means recession. Controlling the quantity, or supply, of money falls under the heading of monetary policy, which in the United States falls under the venue of the Federal Reserve System. The two basic forms of monetary policy are expansionary and contractionary: Expansionary monetary policy: This consists of an increase in the quantity of money circulating around the economy, usually combined with an decrease in interest rates. The purpose of expansionary monetary policy is to stimulate the economy during times of a business-cycle contraction and resulting high rates of unemployment. Contractionary monetary policy: The alternative is a decrease in the quantity of money in circulation, combined with a increase in interest rates. The reason for contractionary monetary policy is to put the brakes on the economy during times of a business-cycle expansion when inflation is on the rise. Check Out These Related Terms...      | money characteristics | money functions | M1 | barter | commodity money | fiat money | value in use | value in exchange | Or For A Little Background...      | macroeconomics | exchange | market | stabilization policies | economy | government functions | inflation | unemployment | business cycles | And For Further Study...      | fractional-reserve banking | banking | money creation | monetary policy | Federal Reserve System | money supply | money supply, aggregate demand determinant | Keynesian economics | aggregate market analysis | Recommended Citation:      MONEY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: December 15, 2025].

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