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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

what are the alternatives various of economic system
olaleye Reply
what is microeconomics
Micro-economics refers to the branch of economics which deals with smaller unit or element of the economy.
or Is the study of individual economic unit in a economy..
micro economis is the studay of how Households and firms make decision and they interecr it.
what is financial intermediaries?
Imran Reply
financial intermediaries are those who are link between borrowers and lenders for.eg bank... Bank is a financial intermediary
tnx a lot of u
most welcome
why do you here ? why do you want to learn economics
والله العظيم انا ماعاوز اتعلمها
انا باخدها غصب عني في الكليه حضرتك
لس كدااا
I am student of ecnomics ,
yes Abdi temam
am good too see you
tnx why not
b/c im student
great, now I am sleeping see u nex time ok
what is the law of dimis
Toyin Reply
what is the feature of public ownership of production factors
what is the demand for commodity that posses identical utilities called
law of diminishing utility...as the quantity consumed of a commodity increases,the utility derived from each successive unit goes on decreasing... condition___ consumption of other commodities remaining the same.
sorry it's...Law of diminishing marginal utility
demand for commodities that posses identical utilities? The commodities having identical utilities are perfect substitutes...and the demand for such type of commodities is called "Competitive Demand".
Why many people can't differentiate Economists and financial analysts
what is the function of the central bank in an economic?
the central bank may lend some money to banks if necessary
what economics
Toyin Reply
Is this a question?
is the study of how societies allocate and manage their scare resources
What is populatiin
Azer Reply
Population is a number of people living in a particular area within a particular time
Population is the number of people living in a particular geographical area within a particular time
how does this chat work
ya the ideas are good thanks friends
so what's the next question?
what is demand schedule
Toyin Reply
is a tabular representation of the quantity demanded of a particular product at a particular price over a given period of time
you are welcome
What is Monetary Mass
Acha Reply
who is product of traditional economy
jamal Reply
what is elasticity
Suqlain Reply
change in quantity due to change in its price
degree of responsiveness of quantity demanded or supplied due to price.change
The law of demand and supply
Law of demand...keep other things constant when price of commodity increases demand is decreases n price decreases demand increases.
law of supply.. keep other things constant when commodity prices increase supply is also increased n price decreases supply is also decreased.
Thank you
when prices increases causing demand curve to shift to left holding other variables constant.
what is the difference between quantity demanded nd price
Survival Reply
what is the difference between quantity demand and price
There is an inverse relation between price and the quantity demanded...with the increase in price of a commodity, the demand for the commodity decreases and vice versa..
professor lionel Robbins define economics as a
as the science that studies human behavior as the relationship between earn and scarce means which has alternative uses
study of wealth
explain the help of a production possibility diagram how the opprtunity cost of producing different combinations of goods
Leethwinna Reply
what is the measurements of elasticity
Nessa Reply
what are the shift in demand
Mbah Reply
what is monopoly
monopoly is a structure in which there's only one producer/seller for a product
The difference between change in quantity demand and change in demand
single seller. compare with monopsony (single buyer) & duopoly (two sellers), and oligopoly (>2 sellers) These are about distortions to an ideal competitive market.
Why is the nature of demand curve sloping downward?
Because when price increases Demand Decreases
shift in demand is a movement from one demand curve to another

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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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