Money
Introduction
Money is one of the most familiar features of everyday life—yet also one of the most misunderstood. What gives money its value? How does it emerge, evolve, and function in modern economies? This guide helps college students explore the core economic functions of money, including its role as a medium of exchange, store of value, and unit of account. With historical context, theoretical insights, and real-world applications, this teaching collection provides a foundation for understanding not just what money is, but why it matters. Perfect for sparking classroom discussions about inflation, banking, cryptocurrency, and the broader monetary system.
Definitions and Basics
What is Money? Marginal Revolution University.
Money and Finance, from Crash Course Economics.
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….
What is the money supply? Is it important? From the Federal Reserve.
The Federal Reserve FAQ article explains that the money supply encompasses the total amount of money—cash, coins, and balances in bank accounts—in circulation. It includes various measures such as the monetary base, M1, and M2, each representing different components of money used by households and businesses for payments or as short-term investments. While the money supply has historically shown relationships with economic variables like nominal GDP and price levels, the Federal Open Market Committee considers it as one of many indicators when formulating monetary policy.
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
Can Cryptocurrencies Become Money? Nicholás Cachanosky at Econlib. November 1, 2021.
Money is a network good. The more individuals and firms use the same means of exchange, the more beneficial it is to use the same means of exchange.
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
Arnold Kling, In Search of Stable Money, a review of Lawrence White’s Better Money: Gold, Fiat, or Bitcoin? Econlib, June 5, 2023.
It would seem that the best monetary standard is one in which the purchasing power of the monetary unit is stable. An unreliable money imposes large costs on households and businesses. They have to spend resources understanding the meaning of price movements (is this a relative price change or part of general inflation?), forecasting the rate of inflation, and trying to protect purchasing power of savings.
The search for the best monetary standard is therefore a search for stable money. White analyzes gold, fiat money, and Bitcoin from that perspective.
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….
Pedro Schwartz, Gold is Money, in Spite of Mr. Keynes. Econlib, May 6, 2013.
John Maynard Keynes never liked the automatic character of the classic gold standard, by which the currencies of the different nations were linked to a pre-defined amount of gold. But he went even further. He denied gold any useful role in the monetary arrangements of the civilized world… contrary to Keynes and other monetary interventionists, I will defend the freedom and the opportunity of having private and public gold currencies to compete with the fiat moneys of present day governments. Gold can be used as money without it being imposed by law. We should be free to make payments in gold or gold instruments and hold them among our assets, but it is not for governments to fix the rate between their paper money and gold.