Money is a multifaceted concept; it serves multiple functions as a medium of exchange and a store of value. Furthermore, its ability to be transferred quickly allows people to save for their future and engage in transactions across regions.
Governments exert control over the money supply by manipulating interest rates and changing bank reserve requirements, or they can print money to stimulate the economy.
Money is a store of value
Money can serve as a store of value when used to purchase things without it depreciating over time. Gold, other precious metals, and interest-bearing assets like U.S. Treasury bonds all make for ideal stores of value. Conversely, milk will eventually spoil and lose its purchasing power – therefore not being considered a good store of value.
An efficient economy relies on an adequate store of value that allows people to save and invest, promoting economic development. A weak currency, on the other hand, destroys savings and hinders investment – an inevitable result of economic instability.
While some individuals use other commodities as stores of value, many rely on money as the ultimate store of value. Although people may recognize its storage function, not everyone understands why this property exists or how they can evaluate whether their store of value is safe.
Money is a medium of exchange.
Money serves several functions in society. Primarily it serves as the medium through which goods and services can be exchanged between individuals; it stores value for future use, serves as an accounting unit, and helps individuals compare the worth of various objects relative to one another.
Before money’s advent, people traded goods and services directly between themselves, often through the double coincidence of wants–meaning both parties owned something they needed from each other. With money’s invention came an answer to this problem.
Money must meet specific criteria to serve as an efficient medium of exchange: it must be easily transported, universally acknowledged as legal tender, physically long-lasting, and have stable value; in addition, money can serve as a standard of deferred payment – unlike land or works of art which cannot be deferred payment standards. Money is created when commercial banks lend directly to individual borrowers (known as “inside” money as this form consists of private debt claims).
Money is a store of wealth.
Money is a store of wealth that enables people to exchange goods and services, save, invest, make transactions over long distances, and engage in long-distance commerce. Without it, complex societies would find it more challenging to trade among themselves.
Before money, most economies relied on bartering; individuals would trade their goods directly for those they needed, creating a double coincidence of wants that was only resolved through money as an intermediary good. Money serves as an ideal store of value as long as it remains durable and identifiable while remaining fungible – meaning it can be exchanged for other items without losing its value and reduces transaction costs by eliminating individual evaluation of each good.
Money serves three essential roles as a store of wealth: it serves as an exchange medium, unit of account, and standard for deferred payment – this last function enables people to use money for future purchases and contracts that require payments in the future, such as loans.
Money is a form of debt.
Historically, money has always been backed by some tangible material or item of value; for instance, gold coins were once used to represent certain amounts of gold, while specific weights of silver backed banknotes. Nowadays, however, most countries use fiat money, which does not depend on any good physical backing; most loans originate as loans to people or businesses and are then deposited with banks who loan out this sum into circulation, creating the “Money Supply.”
People and companies borrow money to finance large purchases they could otherwise not afford; this debt must be repaid, usually with interest. Central banks can also create money through Treasury bond purchases, known as Monetary Policy. Credit theories of money, also called debt theories, assert that money consists of debt.