What Is Money?

• Author: Irena Asmundson and Ceyda Oner
• Position: and are Economts in the IMF's Strategy, Policy, and Review Department.

Back to Basics

Money may make the world go around, as the song says. And most people in the world probably have handled money, many of them on a daily basis. But despite its familiarity, probably few people could tell you exactly what money is, or how it works.

In short, money can be anything that can serve as a

store of value, which means people can save it and use it later—smoothing their purchases over time;

unit of account, that is, provide a common base for prices; or

medium of exchange, something that people can use to buy and sell from one another.

Perhaps the easiest way to think about the role of money is to consider what would change if we did not have it.

If there were no money, we would be reduced to a barter economy. Every item someone wanted to purchase would have to be exchanged for something that person could provide. For example, a person who specialized in fixing cars and needed to trade for food would have to find a farmer with a broken car. But what if the farmer did not have anything that needed to be fixed? Or what if a farmer could only give the mechanic more eggs than the mechanic could reasonably use? Having to find specific people to trade with makes it very difficult to specialize. People might starve before they were able to find the right person with whom to barter.

But with money, you don’t need to find a particular person. You just need a market in which to sell your goods or services. In that market, you don’t barter for individual goods. Instead you exchange your goods or services for a common medium of exchange—that is, money. You can then use that money to buy what you need from others who also accept the same medium of exchange. As people become more specialized, it is easier to produce more, which leads to more demand for transactions and, hence, more demand for money.

Many monies

To put it a different way, money is something that holds its value over time, can be easily translated into prices, and is widely accepted. Many different things have been used as money over the years—among them, cowry shells, barley, peppercorns, gold, and silver.

At first, the value of money was anchored by its alternative uses, and the fact that there were replacement costs. For example, you could eat barley or use peppercorns to flavor food. The value you place on such consumption provides a floor for the value. Anyone could grow more, but it does take time, so if the barley is eaten the supply of money declines. On the...