So, without further ado, let’s look at why money emerged – and the three main functions it performs today.
Money as it Functions Today
If we distill the reasons behind the evolution of money into a single idea, we will see that it was driven by the desire to reduce transaction costs. Let me give an example. Long before the first currencies appeared, people used direct exchange. However, there was a catch: it required a double coincidence of wants when each party can offer something the other party needs.
Medium of Exchange
Unlike barter, money is a medium of exchange, or MoE: any object, physical or digital, which is universally accepted in exchange for goods or services. To put it simply, it’s something everyone is happy to end up with, which makes transactions so much easier.
Store of Value
Another problem with barter was that its objects had a shelf-life: with time, they could rot, spoil, or somehow lose their qualities. Being a store of value (SoV) means that something can be stashed away, retrieved at a much later time, and exchanged: more or less at the same value.
Money – way more durable and portable – was perfect for this role. It could be used to accumulate wealth and even pass it on to future generations. And even though money may devalue too due to inflation, we were still better off with it than with a jug of milk, a bag of grain, or a bison’s hide.
Unit of Account
And lastly, the money’s function as the unit of account (UoA) lets us operate money abstractly like set and compare values for properties, goods, and services. As the name implies, it made accounting possible, giving meaning to such categories as assets, liabilities, profits, and margins.
But there’s more: with a unit of account as a financial tool. We get an opportunity to appraise someone’s capital, analyze their past performance and make prognoses for the future – and, actually, create the complex economic system we have today.
