What is money?

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 latersmoothing 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. Reproduced by permission of Bibliothèque de Sciences Po