The Importance of Money

Money is primarily a medium of exchange.

Money performs three important functions in society. It is a medium of exchange, a liquid store of value and a standard of value. Underlying all three of these functions is the concept of having or representing value. The money we are used to today does these functions so effortlessly that we may rarely think about its importance and practicality.

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Medium of Exchange

First and foremost, money is a medium of exchange. You use it to buy things. Barter is an older form of exchange, whereby two consumers exchange goods or services with each other. This is not always possible or practical, however. You may not get in return what you really want or need. Money solves this issue. Money's value is not necessarily for having the money itself, but for being able to use it to buy anything you want. The seller is happy to take your money because he can give it to somebody else who will also take it.

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Store of Value

Money is also a store of value. If you decide not to use it for a long time, you can still use it down the line. Inflation, however, decreases the value of your money over time, but you can invest your money to counteract that influence. Depositing your money in an interest-bearing account, for example, increases the future value of your money. Not only does your own money gain interest, but the interest gained also earns interest. This is called compound interest. Money is also completely liquid. You can use it as money at all times. Other assets that are money-like usually can be turned into money fairly quickly and cheaply.

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Standard of Value

Money is lastly a standard of value. We speak in terms of how many dollars something is worth. Of course, money must have or represent value in order for such an equivalence to exist. Money may have intrinsic value, as in the case of gold or silver coins. "Full-bodied money" is money that is worth its face value. Money may also represent other objects of value for which it can be exchanged. Today, our paper bills and coins are what's known as "fiat money," which is money declared by the government to be legal tender for making payments and discharging debt.

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Uses and Abuses

Money serves many important purposes that allow us to function as a society. People may, however, abuse money. The laws of the country determine which practices are illegal in the pursuit of obtaining money and which activities are illegal to use money for. Conversely, people can use money for noble goals that may be deemed to far exceed the money's actual worth, such as for helping the poor and needy.

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