What Is Money?

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Money is anything generally accepted as payment for goods and services. It performs three functions: medium of exchange, which avoids the problems of barter such as needing a double coincidence of wants; store of value, which holds purchasing power over time; and unit of account, a common measure for prices.

Without money, a farmer with wheat who wants shoes must find a shoemaker who wants wheat, which is slow and inefficient. Money makes trade, specialisation and saving far easier. Good money is durable, portable, divisible, scarce and acceptable. Past societies used shells, salt, gold and silver; today, most money is notes, coins and digital bank balances.

Modern money is mostly fiat money, which has value because the government declares it legal tender and people trust it, not because it is made of something valuable. Its value depends on keeping the supply under control; too much money printed causes inflation, as happened in Zimbabwe and Weimar Germany. Digital payments and cryptocurrencies raise questions about what counts as money.

Misconceptions: money is not the same as wealth, since wealth includes land, houses and skills, and credit cards are not money but a way to borrow. Tip: test any item against the three functions to see whether it works as money.