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Third, money serves as a unit of account    , which means that it is the ruler by which other values are measured. For example, an accountant may charge $100 to file your tax return. That $100 can purchase two pair of shoes at $50 a pair. Money acts as a common denominator, an accounting method that simplifies thinking about trade-offs.

Finally, another function of money is that money must serve as a standard of deferred payment    . This means that if money is usable today to make purchases, it must also be acceptable to make purchases today that will be paid in the future . Loans and future agreements are stated in monetary terms and the standard of deferred payment is what allows us to buy goods and services today and pay in the future. So money    serves all of these functions— it is a medium of exchange, store of value, unit of account, and standard of deferred payment.

Commodity versus fiat money

Money has taken a wide variety of forms in different cultures. Gold, silver, cowrie shells, cigarettes, and even cocoa beans have been used as money. Although these items are used as commodity money    , they also have a value from use as something other than money. Gold, for example, has been used throughout the ages as money although today it is not used as money but rather is valued for its other attributes. Gold is a good conductor of electricity and is used in the electronics and aerospace industry. Gold is also used in the manufacturing of energy efficient reflective glass for skyscrapers and is used in the medical industry as well. Of course, gold also has value because of its beauty and malleability in the creation of jewelry.

As commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a unit of account. Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or other commodity held at a bank. During much of its history, the money supply in the United States was backed by gold and silver. Interestingly, antique dollars dated as late as 1957, have “Silver Certificate” printed over the portrait of George Washington, as shown in [link] . This meant that the holder could take the bill to the appropriate bank and exchange it for a dollar’s worth of silver.

A silver certificate and a modern u.s. bill

Two images are shown. The bottom image is a silver certificate—U.S. paper currency from 1957 or earlier. The top image is of a modern U.S. currency which no longer indicates that it is commodity-backed, but which is still legal tender for all debts.
Until 1958, silver certificates were commodity-backed money—backed by silver, as indicated by the words “Silver Certificate” printed on the bill. Today, U.S. bills are backed by the Federal Reserve, but as fiat money. (Credit: “The.Comedian”/Flickr Creative Commons)

As economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved towards the use of fiat money    . Fiat money has no intrinsic value, but is declared by a government to be the legal tender of a country. The United States’ paper money, for example, carries the statement: “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.” In other words, by government decree, if you owe a debt, then legally speaking, you can pay that debt with the U.S. currency, even though it is not backed by a commodity. The only backing of our money is universal faith and trust that the currency has value, and nothing more.

Watch this video on the “History of Money.”

Key concepts and summary

Money is what people in a society regularly use when purchasing or selling goods and services. If money were not available, people would need to barter with each other, meaning that each person would need to identify others with whom they have a double coincidence of wants—that is, each party has a specific good or service that the other desires. Money serves several functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. There are two types of money: commodity money, which is an item used as money, but which also has value from its use as something other than money; and fiat money, which has no intrinsic value, but is declared by a government to be the legal tender of a country.


Hogendorn, Jan and Marion Johnson. The Shell Money of the Slave Trade . Cambridge University Press, 2003. 6.

Questions & Answers

an increase in demand (while supply remains constant) what will happen to deh graph?
Thabiso Reply
what is going to happen to the graph if there is an increase in demand, While supply remains constant .
What will happen to the graph if there is an increase in demand While supply remains constant?
price will increase high than automatically demand will decrease
equilibrium ?
what is demand
Sarkwah Reply
demand is the willingness to buy a commodity backed by the ability to pay.
demand is mere desire on commodity with ability to back up with purchasing power
Equilibrium is when there's an equality between quantity demanded and quantity supplied
Victory Reply
Again the consumer will be in equilibrium if the price of the commodity is equal to Marginal utility of that product
wat is the law of supply
Agnes Reply
It's what* -The law of supply states that price and supply is relative. As all factors are equal, if price increases then quantity of supply there for increases.
the law of suppy state that when prise is high, more commodity with be supply and when p is low less of the same commodity will be supply.
It states that, "other things being equal, move supplied at a higher price than at a lower price ".
it's state that the increased in prices will lead to decreased in supply
what is the theory of supply and the determinants of demand
And please what is change in quantity supplied?
guys why are you so quiet
A woman has a television set which cost her $800 two years ago. A new set would cost her $1000 and she could sell her television set for $450. What is the opportunity Cost of keeping the old TV?
Murewah Reply
principle of effective demand?
Abubakar Reply
the is the situation in which the need of individuals exceed the available resource. increase in population rate and wrong decision making
esther Reply
what is the different between wants and demand?
wants are what people desire to have but they can live without them and demand is a thing that is most wanted
what are the demand pull inflation
the higher the aggregate level of activity, the larger the proportion of areas and industries which experience excess demand for goods and labour of various sorts , and the more powerful is demand-inflationary pressure . Demand inflation is contrasted with cost inflation , in which price and wage
increases are transmitted from one sector to another. These should be regarded as different aspects of an overal inflation starts , cost inflation explains why inflation once begun is so difficult to stop.
what is the important difference between positive and normative economics
positive economics is the study of how an economy works in practice, as opposed to the theoretical study of how it should run in theory and normative economics is the party of economics that is concerned with how the economy ought to be run.
positive economic deal with fact and also talks about how the economy actually is like while normative economic deal with value judgement and talks about how the economy ought to be like
What is the difference between opportunity cost and choice
opportunity cost are also known as forgun alternative why choice is to select one among alternative
importance of economic
Zakaria Reply
satisfaction of human wants
economics is about to economise . discuss
Angel Reply
Underlines the efficiency aspect. Economise towards what: Economise factors to reach equal distribution of Material wealth or Just to operate optimally to Service demand, i. e. Run markets efficiently?
join the conversation
abba Reply
Hi I'm Ashnly Parker.
what is terms of trade
Ibrahim Reply
different btn import and export
No question... This is nice
Gbenga Reply
hw can we solve problem of scarcity
scarcity is not necessarily a problem but a constant condition of the world. there are not enough resources to satisfy the unlimited wants.
wee need to be cooperative
by unlimited resourses and abundant want
What is the economic problem
And what is demand pull inflation
why do compute GDP?
steven Reply
can anyone shortly determine the word inflation.
Ibrahim Reply
Continous increase in the general level of prices or in the cost of living.
persistent increased in general price level
all correct...
rise in price.
deserving of money
A persistent tendency for nominal prices to increase
What is the problem of economic problem
the father of economics
Reuben Reply
Adem smith
Adem smith
Adem smith sure
the father of economic regarding to adam Smith
the father of political of economic and capitalism in his book and inquary in to the wealth of the nation.
Adam Smith his the father of economic
difference between injection and leakage
what is monopoly
Monopoly is a market structure where there is one firm who dominate the industry
hi,, I am new here. please welcome me.
you are welcome
monopoly is the one characterized by a mkt power in which a firm is a price maker
Some member just ask questions but not answering so y this happen
Monopoly is a market where only one seller exists. No competition
how long does the patent right prevail the monopoly
no attempt
what is state farming
anybody to attempt
Hi, I'm a new member please will you welcome me

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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