The Nature and Functions of Money
AdvancedMoney is anything generally accepted in payment: it serves as a medium of exchange, unit of account, store of value and standard of deferred payment, solving the double coincidence of wants under barter; general acceptability is its essence, with durability and divisibility as supporting qualities.
- Money is anything generally accepted in payment — acceptability, not the object itself, is its essence
- The four functions — medium of exchange, unit of account, store of value, standard of deferred payment — each solve one difficulty of barter
- Supporting qualities of good money: durability, divisibility, portability, homogeneity, counterfeiting resistance and stable supply
文體小知識：經濟現象說明文——說明貨幣的定義、四項功能與輔助性質，解釋貨幣如何解決以物易物的困難。
§Text Passage
1In an economy without money, trade can only proceed by barter, which faces at least three difficulties: the double coincidence of wants — both sides must want exactly what the other offers; the difficulty of pricing — exchange ratios multiply as goods proliferate; and the difficulty of storing value — many goods do not keep. Money exists precisely to solve these problems.
2Money is defined as anything generally accepted in payment for goods, services and debts. It performs four functions: a medium of exchange, removing the double coincidence of wants; a unit of account (standard of value), letting all goods be priced in one unit for easy comparison; a store of value, carrying purchasing power to the future; and a standard of deferred payment, letting loans and contracts be written in money terms.
3What makes a good work as money is, above all, general acceptability, usually sustained by legal status and public trust. Supporting qualities include durability, divisibility, portability, homogeneity, resistance to counterfeiting and stable supply. Shells, salt and precious metals all served as money in history; in prisoner-of-war camps during the Second World War, cigarettes became money.
4The form of money has evolved: from commodity money with intrinsic value, through metal coins and paper notes, to fiat money sustained by law and trust; today most settlement runs through bank deposits and electronic payment. The form changes but the four functions do not; inflation weakens money's roles as a store of value and a standard of deferred payment.
1Summary 重點摘要
Money is anything generally accepted in payment: it serves as a medium of exchange, unit of account, store of value and standard of deferred payment, solving the double coincidence of wants under barter; general acceptability is its essence, with durability and divisibility as supporting qualities.
2Vocabulary cards Vocabulary
Anything generally accepted in payment for goods, services and debts.
Trading goods directly for goods without money as an intermediary.
Under barter, both parties must each hold what the other wants for a trade to happen — the greatest obstacle to exchange.
Money's first function: being accepted by all, so exchange no longer requires the double coincidence of wants.
Money's second function: all goods are priced in the same unit, easing comparison, record-keeping and contracting.
Money's third function: carrying today's purchasing power into the future, which depends on a stable value of money.
Money's fourth function: loans and contracts are set in money units and repaid in money.
Money's most crucial quality: acceptance by all. For modern money it rests on legal status and public trust.
Money with intrinsic value or use of its own, such as shells, salt or precious metals.
Money given status by law with little intrinsic value of its own; modern banknotes and deposit money are examples.
3Step by step Steps
- Step 1: Three difficulties of barterIn a moneyless economy, trade proceeds by barter and faces at least three difficulties. First, the double coincidence of wants: what you hold must be exactly what the other wants, and vice versa. Second, pricing: exchange ratios multiply as goods proliferate. Third, storing value: fish and vegetables do not keep. For example, a fisherman wanting rice must find a farmer who happens to want fish, and they must still agree on an exchange ratio.
- Step 2: The definition and the medium-of-exchange functionMoney is anything generally accepted in payment for goods, services and debts. Its first and most important function is the medium of exchange: because everyone accepts it, the seller of fish need not want rice — sell for money first, then buy. The double coincidence problem disappears and transaction costs fall. For example, paying a fare by card: the driver need want nothing from you. General acceptability is the essence of money.
- Step 3: Unit of accountMoney's second function is the unit of account (standard of value): everything is priced in the same unit, making comparison, bookkeeping and contracting easy. Without money, ten goods would need ten times nine divided by two, i.e. 45 exchange ratios; with one hundred goods, 4,950. For example, a supermarket's thousands of price tags let you compare at a glance — impossible under barter, where every pair of goods needs its own ratio.
- Step 4: Store of valueMoney's third function is the store of value: it carries today's purchasing power into the future, so income and spending need not coincide. This depends on a stable value of money — persistent inflation erodes the real purchasing power of any given sum, and under hyperinflation the function fails entirely. For example, if prices rise 5 percent over a year, 1,000 dollars in a drawer buys 5 percent less when taken out; property and gold also store value, but money is more liquid.
- Step 5: Standard of deferred paymentThe fourth function is the standard of deferred payment: loans, wages, rents and instalment contracts are written in money units and repaid in money. This makes intertemporal transactions possible and underpins modern credit and finance; inflation, however, benefits debtors at creditors' expense and weakens reliability. For example, a phone instalment contract specifying 1,200 dollars a month for 12 months is unambiguous — a contract to repay 'eggs of equal quality' would invite endless disputes.
- Step 6: Qualities of good moneyThe core quality is general acceptability; the rest are supporting: durability (reusable), divisibility (for large and small deals), portability, homogeneity, resistance to counterfeiting, and a stable (scarce but steady) supply to anchor value. Shells, salt and precious metals each served as money where some qualities shone, and were abandoned where others failed. For example, cigarettes in prisoner-of-war camps were accepted, divisible and portable — but they go mouldy, so durability was their weak point.
- Step 7: The evolution of money's formMoney has evolved from commodity money with intrinsic value (shells, metal coins), to metal-backed paper, to fiat money sustained by law and trust; today most settlement runs through bank deposits and electronic payment, and cash is a small share of the money supply. The form changes; the four functions do not. For example, paying with an e-wallet transfers bank deposits — money is still the medium of exchange, unit of account, store of value and standard of deferred payment, just in digital form.
5Worked example Example
Application practice: in a prisoner-of-war camp during the Second World War, prisoners used cigarettes as a medium of exchange — canned food and chocolate from Red Cross parcels were first sold for cigarettes, which were then used to buy what each prisoner wanted. Explain, in terms of the functions and qualities of money, why cigarettes could serve as money, and point out one drawback of cigarettes as money.
- Read the question: two parts — match each of the four functions to how cigarettes were used, then explain their acceptability via their qualities, and finally state a drawback
- Match the functions: cigarettes were a medium of exchange (sell for cigarettes first), a unit of account (goods priced in packs), a store of value (holding cigarettes for later) and a standard of deferred payment (debts repaid in cigarettes)
- Analyse the qualities: cigarettes are divisible (by stick), portable and in reasonably stable supply, hence generally accepted — and general acceptability is the essence of money
- State a drawback: cigarettes deteriorate when damp, so durability is poor; supply fluctuates with parcel arrivals, and a sudden increase raises prices measured in cigarettes, so their value is unstable
- Answer: Cigarettes were generally accepted in the camp and performed all four functions — medium of exchange, unit of account, store of value and standard of deferred payment — while being divisible, portable and reasonably stable in supply; they therefore served as money. Their drawbacks were poor durability (they spoil when damp) and an unstable value, as supply fluctuated with the parcels received.
6Common mistakes Mistakes
7Quick check Quick check
Q1What is the greatest difficulty of barter?
Q2What are the four functions of money?
Q3Why is general acceptability the most crucial quality of money?
Q4Which function of money does inflation hit hardest?
Q5Under barter, how many exchange ratios are needed for ten goods?
8Recap Recap
- Money is anything generally accepted in payment — acceptability, not the object itself, is its essence
- The four functions — medium of exchange, unit of account, store of value, standard of deferred payment — each solve one difficulty of barter
- Supporting qualities of good money: durability, divisibility, portability, homogeneity, counterfeiting resistance and stable supply
- Inflation mainly hits the store-of-value and deferred-payment functions, hurting creditors and benefiting debtors
- E-payment and deposit money are changes of form; the functions and nature of money are unchanged