Three Functions of Money

Three Functions of Money

High-quality money rates highly in each of these areas, low-quality money does not. The best money ranks highest across all categories.

Money serves three basic functions:

-Store of value
-Medium of exchange
-Unit of account

How different forms of money rank in each of the five characteristics will determine how well it can carry out these three functions.

What I’m Crunching — June 9, 2024

What I’m Crunching — June 9, 2024

I finished this one this week. Road trips are great for making progress on audiobooks.

Hanes has accomplished much in the world of bow-hunting. His achievements are remarkable and he has advanced the sport. His intense training (he regularly runs marathons and ultramarathons) means he outworks most others by a mile. He’s devoted to being the best bow hunter he can be.

As a piece of writing, the book is quite repetitive. I found myself asking, “How many different ways can he say the same thing?” The answer is, surprisingly many! Maybe a series of blog posts would have been adequate to get the message across. But, the book is likely allowing his message to be distributed to a wider audience.

Five Characteristics of Money

Five Characteristics of Money

I’ve made the point that money is a tool. It is a technology. It was invented to solve a problem.

Every tool has a level of quality. In the world of hand tools, Snap-on tools are better than Craftsman which are better than Harbor Freight. In the same way, different forms of money have different levels of quality.

We can gauge tool quality in several categories. With hand tools, categories could include physical materials (stainless vs. aluminum), production method (stamped vs. die cast), ergonomics, warranty (lifetime vs. shorter), etc. Money also has natural categories within which we can gauge its quality. I’m calling these the five characteristics of money.

How Money Solves a Problem

How Money Solves a Problem

Money solves the problem of the double coincidence of wants. Stated positively, both sides of a transaction must desire what the other has or the transaction can’t happen.

Money solves this problem in at least four ways:
1. Separates the act of buying from selling
2. Enables economic specialization
3. Increases market liquidity
4. Enables indirect exchange

Let’s look closer at each of these four elements.