The roles of the money

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Money (the set of assets generally accepted as payment for goods and services and repayment of debts) has three basic roles in the economy:

  1. Money is a medium of exchange. In other words, allow to avoid a direct exchange of goods. In absence of money, the only possible transaction would be barter, however this latter is inconvenient and inefficient. For example, imagine money doesn’t exist: your company (assuming they would still exist in a world without money) would pay you for your job with goods, maybe with what the company produces or with a standard set of goods (food, clothes, etc.). Anyway, it’s unlikely that you will get exactly what you want or need (even if they give you food, maybe they’d give you apples while you want peaches), therefore you’d have to find someone to barter what they gave you with what you want, that may require time. In addition, rememeber it isn’t enough to find what you want, but also the owner has to be interest in what you have, so you may to accept a sub-optimal exchange.
    It’s worth noticing that a world based on barter would substantially limit development: in fact, companies would produce generalistic, unspecialized, products, because they would be easier to be accepted in a barter. Therefore, the absence of specialized products would most likely restrain efficency and innovation.
  2. Money is a unit of account, serving as a yardstick to measure a good’s value, thus allowing comparison of virtually all goods and services. Unit of account and medium of exchange roles are strictly related, but they do not coincide: for example, it’s possible to pay using assets different from money. In theory (and sometimes may happen in countries where inflation is high) it is also possible that prices are based on the value of specific goods, and then transaction is complated using money.
  3. Money can also be a store of value, thus allowing to postpone consumption. In a world based on barter, if I had a bunch of apples, I’d have to barter (or eat) them before they get rotten: this means that maybe I’d have an apple indigestion and then starve for weeks. If instead of apples I had money, I could buy every day an apple. It’s worth noticing that money does not work perfectly as store of value — inflation is a clear example of this.

Original post (in Italian): Le funzioni della moneta

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