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So many people spend their entire lives chasing money. People have become so comfortable with the fact that money can be traded for goods and services, that most people don’t stop to think about what it is really worth. Money is worth nothing. The only reason money is worth anything at all is because people believe that it is. I provide a service, and the only reason I am willing to accept your twenty dollar bill as payment is because I believe that I can take that money to the grocery store, the mall, the movie theatre, etc and get something that I want for it.

The Three Functions of Money

Money has three functions. Money acts as a medium of exchange, a unit of measure, and a store of value. A medium of exchange allows people to make purchases more efficiently than in a barter system. If I go to the bakery and I want a loaf of bread, if there was no money system, I would have to negotiate with the baker to provide something I have that he wants in exchange for his bread. If I don’t have anything that he wants, then I need to go to a place that provides something he wants and negotiate with them, so I can take their product to the baker and trade it for his bread. The concept of money saves me the trouble of having multiple transactions just for the items I want. Think of the time and energy it would take just to run a few errands.

The unit of measure function of money allows people to post and compare prices. When I go into the bakery, I can see that a loaf of bread costs $2. It allows people to compare prices much more easily than in a strict barter system where trade depends on being able to come up with the item that the other party wants, as well as negotiating skills.

What is a Store of Value?

Money is not the only item that acts as a store of value. Gold, diamonds, even stocks and bonds all act as a store of value. Your labour has a certain price, depending on what you do for a living. We are used to equating that labour with a dollar value, $10 per hour, $50 000 per year, etc. This can also be stated in terms of goods and services. Your labour is worth 5 loaves of bread per hour. Without a store of value, you must consume your earnings immediately, or you will lose them. If you don’t need anything, a store of value allows you to postpone your purchases until a more convenient time. You can put money away for a rainy day, or save up for that I Phone because you know that your money will still be worth something tomorrow.

In most of the world, people are accustomed to money being paper notes and coins. Money can actually be anything that people choose it to be. What is considered to be money is usually set out by the government, but when there are cases of runaway inflation, people often abandon money and resort to barter. In cases where there is no money available, people have chosen other items. Before Confederation, when people were waiting for shipments of money from England to arrive in the new world, people used playing cards as money. There are some African tribes that use circular stones as currency. The larger the stone, the more it is worth.

Another Example of Currency

Not that I’ve ever been to prison, but I have read that cigarettes often become used as a type of money there.  Obviously smoking is an addiction and those that need to satisfy that addiction will go to great lengths to do so.  If you have a supply of cigarettes, and I want them, one way to get them is trade.  As this becomes more widespread, even those that don’t smoke will begin to hoard cigarettes because they know that they can be traded.  Eventually cigarettes actually begin to fulfill the three functions of money.  If I provide you a service, such as fixing your radio, and am willing to accept cigarettes as a form of payment, I am doing that because they are a store of value to me.  I know that I can get something else for them later.  This also fulfills the medium of exchange function of money.  As this miniature prison economy evolves, the prices that others charge for goods and services become known, and that fulfills the unit of measure function of money. 

Money is quite simply, a man made creation. It serves a purpose, and you should use it as you need to, but it should never be your primary focus. It should also never be the way that you evaluate yourself or others. It is the main method that we use to acquire the necessities of life - food, shelter and clean water, but we should never lose sight of the fact that there may be a day when humans resort to other means to acquire their necessities.