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Money & Banking

Money & Banking

Money: The Economic Definition

We all know what money is. We may have different terms for it—smackers, c-notes, dead presidents, Benjamins, bucks, bones, clams, dough, moolah—but money usually finds a way to overcome these barriers of dialect and speak to us all.

Economists, however, have a language all their own when it comes to money. They define it as something that serves as a medium of exchange, a unit of accounting, and a store of value.

Money is a medium of exchange in the sense that we all agree to accept it in making transactions. Merchants agree to accept money in exchange for their goods; employees agree to accept money in exchange for their labor.

As a unit of accounting, money provides a simple device for identifying and communicating value. How much is that bicycle? It’s $200. Without this convenient, readily understood unit of accounting, setting and communicating value would be difficult. How much is that bicycle? Well, less than a piano but more than wheelbarrow—I’d say that bicycle is worth about one third of a piano plus two backpacks and a small pizza.  Two hundred bucks is a little easier, right?

Money serves as a store of value in that it allows us to store the rewards of our labor or business in a convenient tool. In other words, money lets us store the value of a long, hard week of work in a tidy little stack of cash. Without money, how would we set aside the compensation we receive for later use? We could be paid in cows, but that would not be a very convenient way to set aside our unspent compensation. We could be paid in pizzas, but the value of our labor would not be stored in the rotting little pies for very long.

In other words, economists largely define money by the functions that it serves. It need not be green and made of paper, and it need not be little metallic discs—money is anything that fills those three essential functions. Now, the best money is also highly convenient—it is light, easy to carry, and can be broken into smaller units for easy exchange. (If we used cows for money, how would we give change?) But most important, it must serve as a medium of exchange, a unit of accounting, and a store of value.

Why It Matters Today

"Money, money, money/ Must be funny/ In a rich man's world"

That little ditty from ABBA (John McCain's favorite band! For real! Look it up...) is about money. It's about choice and risk and reward, and what you're willing to sacrifices to have choices.  That's the way money works.  The Gospel of Shmoop does not suggest that we all try to fit through the eye of the needle that money on its own really is the answer to any kind of wishes for happiness.  

(As the Beatles sang, money can't buy me love.)

(Or if you prefer the way Biggie Smalls put it: mo' money, mo' problems.)

But whether you think money is the solution or money is the problem, it will help you to understand what money is, how it works, where it comes from and where it goes.  

Sometimes, a Song Says it Better: Money Money Money, by Abba

Abba talks of a rich man’s world with “money, money, money.”

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