Functions of Money

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To describe what money is, a good place to start is describe what money does. In other words, what are the functions of money?

    • Store of Value

    • Medium of Exchange

    • Measure of Value

     2 minute read

Store of Value

Money will store value. If I sell an item for $100, that $100 will hold its value until tomorrow, next week, or even next year. However, money is not a perfect store of value. Inflation slowly erodes the purchasing power of money over time.

For more on inflation see A Perfect Storm for Inflation.


Medium of Exchange

Money can be used as a method of payment. If it's Legal Tender, one must accept it for payment of debts. But if people don't have faith that the money will retain its value, they won't accept it regardless of that money's legal status.

So money's ability to store value is directly related to how well it works as a medium of exchange.


Unit of Value

Value: $250,000


We measure the value of things in units of money, or US dollars in the United States. If you have a house valued at $250,000, that is the measure of its value. We don't measure its value as 7.91 pounds of gold or 10.42 Toyota Corollas.


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