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Third, money serves as a unit of account    , which means that it is the ruler by which other values are measured. For example, an accountant may charge $100 to file your tax return. That $100 can purchase two pair of shoes at $50 a pair. Money acts as a common denominator, an accounting method that simplifies thinking about trade-offs.

Finally, another function of money is that money must serve as a standard of deferred payment    . This means that if money is usable today to make purchases, it must also be acceptable to make purchases today that will be paid in the future . Loans and future agreements are stated in monetary terms and the standard of deferred payment is what allows us to buy goods and services today and pay in the future. So money    serves all of these functions— it is a medium of exchange, store of value, unit of account, and standard of deferred payment.

Commodity versus fiat money

Money has taken a wide variety of forms in different cultures. Gold, silver, cowrie shells, cigarettes, and even cocoa beans have been used as money. Although these items are used as commodity money    , they also have a value from use as something other than money. Gold, for example, has been used throughout the ages as money although today it is not used as money but rather is valued for its other attributes. Gold is a good conductor of electricity and is used in the electronics and aerospace industry. Gold is also used in the manufacturing of energy efficient reflective glass for skyscrapers and is used in the medical industry as well. Of course, gold also has value because of its beauty and malleability in the creation of jewelry.

As commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a unit of account. Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or other commodity held at a bank. During much of its history, the money supply in the United States was backed by gold and silver. Interestingly, antique dollars dated as late as 1957, have “Silver Certificate” printed over the portrait of George Washington, as shown in [link] . This meant that the holder could take the bill to the appropriate bank and exchange it for a dollar’s worth of silver.

A silver certificate and a modern u.s. bill

Two images are shown. The bottom image is a silver certificate—U.S. paper currency from 1957 or earlier. The top image is of a modern U.S. currency which no longer indicates that it is commodity-backed, but which is still legal tender for all debts.
Until 1958, silver certificates were commodity-backed money—backed by silver, as indicated by the words “Silver Certificate” printed on the bill. Today, U.S. bills are backed by the Federal Reserve, but as fiat money. (Credit: “The.Comedian”/Flickr Creative Commons)

As economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved towards the use of fiat money    . Fiat money has no intrinsic value, but is declared by a government to be the legal tender of a country. The United States’ paper money, for example, carries the statement: “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.” In other words, by government decree, if you owe a debt, then legally speaking, you can pay that debt with the U.S. currency, even though it is not backed by a commodity. The only backing of our money is universal faith and trust that the currency has value, and nothing more.

Watch this video on the “History of Money.”

Key concepts and summary

Money is what people in a society regularly use when purchasing or selling goods and services. If money were not available, people would need to barter with each other, meaning that each person would need to identify others with whom they have a double coincidence of wants—that is, each party has a specific good or service that the other desires. Money serves several functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. There are two types of money: commodity money, which is an item used as money, but which also has value from its use as something other than money; and fiat money, which has no intrinsic value, but is declared by a government to be the legal tender of a country.

References

Hogendorn, Jan and Marion Johnson. The Shell Money of the Slave Trade . Cambridge University Press, 2003. 6.

Questions & Answers

Explain the factors that have led to high quantity demanded
Ogwang Reply
price of the product increase of price substitute product as people shift to cheap one
Black
what are the methods used by trade union to increase wages of their members?
Black Reply
strike
Pearl
the size of the commodity
Mensah
increase demand of labour decrease supply of labour
Black
I do support your answer Jackel.
keshav
but how do they do it?
Black
by increasing more labour and reduced the suppliers
Mensah
they can not increase labour, they increase demand of labour.
Black
how do they increase demand for labor?
Black
by analyzing the market equilibrium , cost reduction and cost control , savings in time .
yash
decreasing supply of labour are achieved through training and certification that require for you to employed, you must have certificate, also trade union encouraged government to restrict migration into the country causing shortage of labour supply. Note that the aim of union is to enhance life
Black
objective of union: better working conditions, liveable wage, protect member from unfair treatment which are done through negotiations betweens representative and management. known as collective bargaining.
Black
what is the nature of economics?
Tyscar Reply
economics is a social science since it seeks to solve social problem of scarcity
Jamal
main concerns is the decision individuals make on the allocation of scarce resources among the competing wants
Black
in the short run firm produce a positive as long as the price is larger than what?
yoel Reply
what is economic
Bah Reply
economics is the study of managing the resources in order to maximize the needs and satisfy the wants to a great extent in a regulated set-up..
Muhammad
One explanation for deviation when there is no impact on balance of trade
Shaneel
economic s is a social science that deals with human behavior as a relationship between ends and scarce means which has alternative uses
Derokiz
economic is a study of mankind in ordinary business of life
FIDELIS
economics it is the study of social science that deals with human behaviour as relationship between ends and scarce means which have alternative uses
salam
what is diminishing returns
Blessed Reply
what is the difference between calculus linear equation and derivative?
Bti
whats inferior goods?
jaamac Reply
Good having low quality , also known as giffin goods. When income increases people shift to better quality goods . Hence having a negative effect on inferior goods rather than positive relation ( ie when income increases demand increases but not in case of inferior goods ) example wheat and bajra .
yash
What do u understand by the word ENDS in professor Lord L C Robinson definition of Economics?
Kaba Reply
I understand that ENDS is the unlimited needs of human. But we have limited resources to achieve our unlimited needs/wants. Thank you.
Midhun
variable is a factor that can change
nyodb Reply
did you understand definition of variablE
nyodb
what is monopoly
Shahid Reply
A market situation where there is a single seller of a product for the buyers.
harmony
monopoly is when you have a product in the market and only one supplier got this product so he starts rising price and dominate the market, cause this product doesn't have a competitor
Anas
A market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute.
Jale
This is a kind of market that only one seller dominate the market without no competition of a y product or seller.
Ojo
what is production possibility curve?
Lisa
a production possibility curve is a diagram that shows two goods produced in an economy in such a way that increase in the production of one good cannot be done without the decrease on the production of the other. there are efficient points, inefficient points and unattainable points on the PPC
The
production possibility curve or frontier is useful analytical tool for illustrating the concepts of scarcity, choice and opportunity costs.
wilflay
The International Year of Soils, 2015 (IYS 2015) was declared by the Sixty-eighth session of the United Nations General Assembly on December 20th, 2013 after recognizing December 5th as World Soil Day.The purpose of the IYS is to raise awarenessworldwide of the importance of soils for food security,
what
what is indifference curve
Evet
Monopoly is the explicit right given to business or entrepreneurship by the government to operate as the only entity in the economy
wilflay
what is economic system ?
wilflay
economical matter solve this system is know as economic system
what
indifference curve is a diagram that shows the combination of only 2 commodities in such a way that each point on the indifference curve gives the same level of satisfaction
The
all consumer is equal consumtion as definite all ..that type curve is indifference curve
what
what is variable?
Rajeev
economic structure of any area is ,city or country is called economic system
Jairam
what is the difference between rational and irrational choice
Amina
help
Amina
Rational choice theory is an economic principle that assumes that individuals always make prudent and logical decisions that provide them with the highest amount of personal utility. ... Most mainstream academic assumptions and theories are based on rational choice theory.
Anas
Irrationality is cognition, thinking, talking, or acting without inclusion of rationality. It is more specifically described as an action or opinion given through inadequate use of reason, or through emotional distress or cognitive deficiency.
Anas
help
Mensah
The meaning of inverse
Mensah
?
Anas
inverse what ? inverse means opposite .. like if ones going down other goes up so inverse relationship
MansoorAfghan
Definition of Inversely Related: Two variables are inversely related when an increase in one variable causes a reduction in the other variable. For example, when the price of a good increases, its quantity demanded decreases.
Anas
It is argued that under optimization, since there is the second-order sufficient condition, the first-order condition is not necessary. Discuss.
John Reply
It is argued that in optimization the first part of second order condition appears opposite to their interpretation. Explain why you think otherwise.
John
Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product? Explain your reasoning.
Shauna Reply
we need to understand the things that manufacturer industies need to overcome the change of price, including all the all factors
Franck
hi
Jale
I expect the demand curve of such a case to be less extreme almost a horizobtal line.
tesfie
hi
Hashim
Hi
Prajwal
hi to
Sarparah
hello
Kaba
What is substitutional effect?
Nathan Reply
how can a manufacturer of consumers durable seek to respond to environmental change as rapidly as possible
Franck Reply
what are resources?
Kamboyi
what is price indeterminate?
Ng Reply
Hi 👋
Chris.M
Hi
Ebenezer

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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