1  What is money?

Money comprises bank notes, bank deposits or anything else that can be used to buy goods and services, and that is accepted as payment because others can use it for the same purpose.

Money can be thought of as having three functions.

  1. Money is a medium of exchange: We exchange money for goods and services, avoiding the limitations of barter.
  2. Money is a measure of value, or unit of account: The value of things tend to be measured in specific currencies, enabling us to compare them against each other.
  3. Money is a store of value: Money can be saved, retrieved and later exchanged. If performing this function well, it will retain its purchasing power into the future.

Currencies are the most typical way that these functions are performed in modern times. As a result, we often think of money and currency as interchangeable terms. But money could also be a precious metal or any other easily exchangeable item that can perform the these three functions.

The three functions enable us to use money to:

  1. Save and borrow to rearrange our consumption over time
  2. Invest money in expectation of some benefit in the future
  3. Insure ourselves against risk

Over the following sections I examine each of these activities.