What money is for

You have a chicken. You want shoes. The cobbler is a vegetarian.

This is the problem money solves, and it is worth sitting with for a moment, because almost everything else in this course is a consequence of it. Without money, every trade needs a double coincidence of wants — I have what you want, and you have what I want, at the same moment, in the same place. Most of the time that does not happen, so most of the time the trade does not happen.

Money is the thing that breaks the coincidence in half. You sell the chicken to whoever wants a chicken. You buy the shoes from whoever sells shoes. The two halves never have to meet.

Three jobs

Anything that works as money is doing three separate jobs at once. They are usually taught as a list, which makes them sound equally important. They are not. They fail in different ways, and the failures look nothing alike.

A medium of exchange. The chicken problem. This is the job money exists for.

A store of value. It holds its worth between selling the chicken and buying the shoes — whether that is ten minutes or ten years.

A unit of account. It gives you one scale to compare a chicken, a pair of shoes and an hour of someone's time. Without it, a shop with 300 products would need 44,850 separate exchange rates.

Predict

Which of the three jobs is failing when a currency is in high inflation — prices doubling every few months?

Choose one answer

Medium of exchangeStore of valueUnit of accountAll three fail together

Lock in answer

Why the jobs pull against each other

Here is the part that most explanations skip: the three jobs make contradictory demands, and every form of money is a compromise between them.

A good medium of exchange wants to be abundant and easy to move. A good store of value wants to be scarce. Those are opposites. Push hard on one and you damage the other, which is roughly what every argument about monetary policy is about underneath the vocabulary.

Not the same thing

Money

A claim on other people's work that you happen to be holding.

Measured in

Units of currency

For example

The balance in your account this morning.

Chase it alone and

Chase it alone and you can end up with a large number attached to a shrinking claim — the balance grows, what it buys does not.

Wealth

Things that produce, or entitle you to, future output — skills, tools, businesses, land, ownership.

Measured in

What it produces, per year

For example

A workshop that turns out shoes whether or not you are in it.

Chase it alone and

Chase it alone and you can be asset-rich and unable to pay for lunch, which is how solvent people go bankrupt.

Which is which? Put each one on a side.

• A machine that makes 400 shoes a week

  MoneyWealth

• The cash you were paid for last month's shoes

  MoneyWealth

• Knowing how to make shoes

  MoneyWealth

Check

A country doubles the money in circulation overnight. Nothing else changes — same factories, same workers, same skills. What has happened to its wealth?

Choose one answer

It has doubledIt is unchanged, and prices will tend to riseIt has halved

Check answer

›What has been used as money, and why it stoppedOptional

Cattle, salt, shells, tobacco, cigarettes in prison camps, large immovable stones on the island of Yap. Each one satisfied the three jobs well enough for its time and place, and each one failed when the compromise stopped holding.

Cattle are a decent store of value and a hopeless medium of exchange, because you cannot pay half a cow and get change. Shells work beautifully until someone arrives with a boat and a lot of shells, at which point the scarcity that made them a store of value evaporates.

The pattern repeats: money stays money for as long as the thing that made it scarce keeps holding.

Worth remembering

• Money solves the double coincidence of wants: it splits one trade into two, so the two sides never have to meet.
• Money is a claim on other people's work. Wealth is the capacity to do the work.
• Money does three jobs — medium of exchange, store of value, unit of account — and they fail separately.
• In high inflation the store-of-value job fails first; the medium-of-exchange job usually survives longest.
• The jobs pull against each other: exchange wants abundance, storing value wants scarcity.