Money: The Three Essential Functions Explained

Key Takeaways

1. 1Medium of exchange: money solves the double coincidence problem by letting you trade with anyone, anytime, without needing what they have or them needing what you have
2. 2Unit of account: money provides a shared yardstick of value, eliminating endless relative pricing and making accounting, budgeting, and contracts possible
3. 3Store of value: money lets you carry purchasing power across time — but this is the most fragile function, and inflation can seriously damage it
4. 4All three functions are required — if even one fails, money stops working effectively, even when the other two are intact
5. 5Hyperinflation is the textbook case: people still use the currency to trade and price goods, but they stop saving it because the store-of-value job has collapsed
6. 6The three-function framework explains why cowrie shells, gold, paper notes, and digital currencies can all qualify as money — they each meet the bar differently