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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.

References

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

Questions & Answers

In the same system, men with better jobs receive larger payments. What economic principle is applicable to this situation? ​
Mary Reply
what is scarcity
Kuzivaishe Reply
How economist think?
Muhammad Reply
what's supply
Gifty Reply
what's demand
Gifty
Hi
Isaac
hi
Adil
hello
Kuzivaishe
What is scarcity
GANJER Reply
the unavailability of resources to satisfy human needs and wants
Sepiso
which book is the best book for learning economics
Jonibek Reply
principal economic
Ibrahim
factor affecting or influencing changes in supply
Sham Reply
Price of goods/commodities. Quantity demanded price of raw materials. Cost of transportation. Taste and fashion weather Government policy etc
Enoh
insecurity hoarding
Enoh
What is economics
Khurram Reply
we study how to allocate scare resouces to satisfied unlimited wants.
Adil
Scenario affecting change in income in demand
Janiz Reply
what economic
guuguule Reply
it is the situation where by im a market there is only one supplier and producer of a certain comodity that has no close substitute or competitor
Sepiso Reply
yes
Alhaji
what is demand and supply
Alhaji
demand is the amount of a goods or service that consumers are willing to buy at a particular price, while is to provide something,to make something available for use.
jago
I need a scenario affecting change in income (demand)
Janiz
what is Economics?
Pintu Reply
Is the study of human behaviour as a relationship between ends and scares mean which have alternative use
Alhaji
yes
Tawa
what is monopoly
Alhaji
what are the difficultés if retail prix index for calculating thé value of money
Oscar
hmm OK wait
Castino
what is labour
Mamudou Reply
LABOUR is a measure of work done by human being
Blessing
It is all form of human effort use to utilize in production
Alhaji
Why is scarcity a foundermental problem in economics
Alhaji
Why is scarcity a foundermental problem in economics
Alhaji Reply
scarcity occur unbalance demand and supply at this time cost goods increase then inflation very increase
Tesfaye
scarcity is a foundermental problem because its a natural situation and it affects the world at Large.in other words,it's limit in supply relating to deman
Akwosih
'Economics is about making choices in the presence of scarcity"
manoj Reply
. 'Economics is about making choices in the presence of scarcity" - Dscuss.
manoj

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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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