Definitions and Basics

What Does “Money” Mean in an Economic Context? at

Money is a good that acts as a medium of exchange in transactions. Classically it is said that money acts as a unit of account, a store of value, and a medium of exchange….

How Money Has Changed, at

What is money? It can be anything people want it to be—literally….

Before coins or paper money, people exchanged (traded) fish for stone tools or leather goods for wood. This method of exchanging one thing for something else is called barter. It is still in use today: Sue might agree to fix Ramon’s electrical wiring if Ramon agrees to figure Sue’s income tax. They’ve exchanged services, not goods, but they’ve still bartered….

The difference between barter and money is the situation. Money can be used in most situations; in a barter, each individual must have something to exchange that the other individual needs or wants. Sue and Ramon can agree to swap electrical work for accounting, but Harold, another accountant, might insist on being paid in dollars and cents. Harold may not need any electrical work done, and he can spend dollars anywhere….

Money Supply, from the Concise Encyclopedia of Economics

The U.S. money supply comprises currency—dollar bills and coins issued by the Federal Reserve System and the Treasury—and various kinds of deposits held by the public at commercial banks and other depository institutions such as savings and loans and credit unions….

Money demand. Modeling Money, by Robert P. Murphy.

Probably all economists, and even many non-economists, are familiar with the time-honored “equation of exchange” approach to money, which takes a macro perspective by essentially overlaying the entire stockpile of money on top of the underlying “real” micro economy.

The original and more intuitive version of the equation is MV = PT, where M stands for the total quantity of money in the economy, V is the “velocity of circulation” (meaning how many times, on average, a dollar bill changes hands for the time period in question), P is the average price of a transaction (“price level”), and T is the total number of transactions….

In the News and Examples

Are Credit Cards A Form Of Money?, at

Suppose my girlfriend and I go shopping for classic video games, and I find a copy of Music Machine for the Atari 2600 selling for $50. I do not have the $50 so I get my girlfriend to pay for the game on my behalf with the promise that I’ll pay her back at some later date. So we have the following transactions:…

What does the Federal Reserve actually do? John Taylor on Monetary Policy, podcast at EconTalk

John Taylor of Stanford University talks about the Taylor Rule, his description of what the Fed ought to do and what it sometimes actually does, to keep inflation in check and the economy on a steady path. He argues that when the Fed has deviated from the Rule in recent years, the economy has performed poorly. Taylor also assesses the chances for a monetary or financial disaster and the Fed’s recent expanded role in intervening in financial markets.

Is gold money? Gold Standard, from the Concise Encyclopedia of Economics

The gold standard was a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price….

Milton Friedman on Money, podcast at EconTalk

Russ Roberts talks with Milton Friedman about his research and views on inflation, the Federal Reserve, Alan Greenspan and Ben Bernanke, and what the future holds….

Barter and cigarettes as money: Mike Munger on Middlemen, podcast at EconTalk. Oct. 27, 2008.

Mike Munger of Duke University talks with EconTalk host Russ Roberts about the often-vilified middleman–someone who buys cheap, sells dear and does nothing to improve the product. Munger explains the economic function of arbitrage using a classic article about how prices emerged in a POW camp during World War II. Munger then applies the analysis to the financial crisis….

A Little History: Primary Sources and References

Of the Nature and Uses of Money, Chapter I of A Treatise on Political Economy, by Jean-Baptiste Say

In a society ever so little advanced in civilization, no single individual produces all that is necessary to satisfy his own wants; and it is rarely that an individual, by his single exertion, creates even any single product; but even if he does, his wants are not limited to that single article; they are numerous and various, and he must, therefore, procure all other objects of his personal consumption, by exchanging the overplus of the single product he himself creates beyond his own wants, for such other products as he stands in need of….

Barter, Chapter I of Money and the Mechanism of Exchange, by William Stanley Jevons

The first difficulty in barter is to find two persons whose disposable possessions mutually suit each other’s wants. There may be many people wanting, and many possessing those things wanted; but to allow of an act of barter, there must be a double coincidence, which will rarely happen. A hunter having returned from a successful chase has plenty of game, and may want arms and ammunition to renew the chase. But those who have arms may happen to be well supplied with game, so that no direct exchange is possible. In civilized society the owner of a house may find it unsuitable, and may have his eye upon another house exactly fitted to his needs. But even if the owner of this second house wishes to part with it at all, it is exceedingly unlikely that he will exactly reciprocate the feelings of the first owner, and wish to barter houses. Sellers and purchasers can only be made to fit by the use of some commodity, some marchandise banale, as the French call it, which all are willing to receive for a time, so that what is obtained by sale in one case, may be used in purchase in another. This common commodity is called a medium, of exchange, because it forms a third or intermediate term in all acts of commerce….

A History of Central Banking in the United States, at the Federal Reserve Bank of Minneapolis.

Nearly every country around the world, and certainly every developed industrial nation, has a central bank. Most serve one or more of the following functions: acting as a bank for bankers, issuing a common currency, clearing payments, regulating banks and acting as a “lender of last resort” for banks in financial trouble.

Origins of Central Banks: Lombard Street, by Walter Bagehot

I venture to call this Essay ‘Lombard Street,’ and not the ‘Money Market,’ or any such phrase, because I wish to deal, and to show that I mean to deal, with concrete realities. A notion prevails that the Money Market is something so impalpable that it can only be spoken of in very abstract words, and that therefore books on it must always be exceedingly difficult. But I maintain that the Money Market is as concrete and real as anything else; that it can be described in as plain words; that it is the writer’s fault if what he says is not clear….

Of Money, by David Hume

MONEY is not, properly speaking, one of the subjects of commerce; but only the instrument which men have agreed upon to facilitate the exchange of one commodity for another. It is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy….

Advanced Resources

Purchasing Power of Money as Related to the Equation of Exchange, by Irving Fisher, Chapter 2 from The Purchasing Power of Money

We define money as what is generally acceptable in exchange for goods.The facility with which it may thus be exchanged, or its general acceptability, is its distinguishing characteristic….

On the frontier, without any legal sanction, money is sometimes gold dust or gold nuggets. In the Colony of Virginia it was tobacco. Among the Indians in New England it was wampum….

The Function of Money, Chapter I of The Theory of Money and Credit, by Ludwig von Mises

Where the free exchange of goods and services is unknown, money is not wanted. In a state of society in which the division of labor was a purely domestic matter and production and consumption were consummated within the single household it would be just as useless as it would be for an isolated man. But even in an economic order based on division of labor, money would still be unnecessary if the means of production were socialized, the control of production and the distribution of the finished product were in the hands of a central body, and individuals were not allowed to exchange the consumption goods allotted to them for the consumption goods allotted to others….

The History of Bimetallism in the United States, by J. Laurence Laughlin

The conflicting opinions of the day in regard to the adoption of bimetallism by the United States, and the disregard of the facts within our own experience, make it desirable that these facts should be investigated historically, and the results presented in a simple form for general use. Monetary science, moreover, will gain by any honest attempt to collect accurate data which may serve in the process of verification of economic principles, enabling us either to confirm the truth of previous conclusions, or to demonstrate their divergence from actual facts….

Related Topics

Real, Relative, and Nominal Prices
Monetary Policy and the Federal Reserve
Foreign Currency Markets and Exchange Rates
Money Management and Budgeting