Money & Finance › What money is & money theory › What money is: a shared, transferable claim
Three jobs of money: exchange, unit of account, store of value
· Concept
Fact, law or dataA rule, statute, definition or measured number.
Economists define money by three jobs: a medium of exchange, a unit of account and a store of value.
See it on the Money & Finance map →How it works
Medium of exchange: you sell your labor for dollars and spend them on anything, avoiding barter's need for a direct swap. Unit of account: prices, rents, debts and balance sheets are stated in one yardstick, so they can be compared. Store of value: money carries purchasing power into the future. Some add a fourth job, a standard of deferred payment: the unit loans and leases are written in. Good money does all three; failing money loses them one by one.
Why it matters
The three jobs are the test for any would-be money. Bitcoin, for example, is often judged weak as a unit of account because its price swings so much.
Think of it like
Unit of account works like price per square foot: one yardstick that lets very different deals be compared.
Facts, rules and data
The idea goes back to Aristotle; economist William Stanley Jevons set out the list in 1875 (Money and the Mechanism of Exchange). Every standard textbook uses it.
Debates and risks
Which job is most basic is debated: credit theorists say unit of account came first; textbook accounts start with exchange.
Connections (2)
▸Three jobs of money: exchange, unit of account, store of value define What money is: a shared, transferable claimFact, law or data
The connection
The three jobs are how economists define money in practice: anything widely used to pay, to price things and to hold value counts as money. Something that fails at them, like a currency in hyperinflation, starts to stop being money.
When and why
Foreshadowed by Aristotle, set out by William Stanley Jevons in 1875; standard in every economics textbook today.
How we know
A definition rather than a discovery: it holds by agreement among economists, and matches how people actually abandon failing currencies.
Debates and risks
Whether all three jobs are needed, or one is fundamental, is argued; debates over crypto often turn on this test.
▸Inflation: rising prices, shrinking purchasing power erodes the store-of-value role in Three jobs of money: exchange, unit of account, store of valueFact, law or data
The connection
Money is a store of value only if it holds purchasing power. Inflation erodes it: at 3% a year, a dollar loses about a quarter of its value in 10 years. High inflation pushes people into real assets or foreign currency, and hyperinflation can break the unit-of-account role too.
When and why
Wherever money exists; most dramatically in Weimar Germany, Zimbabwe and Venezuela, where people switched to dollars or goods.
How we know
Price indexes measure the loss directly; dollarization in high-inflation countries shows people abandoning the failing money.
Debates and risks
Some economists argue modest, predictable inflation barely hurts money's jobs; others call any steady inflation a hidden tax on savers.