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Are the functions of money all wrong?

William Stanley Jevons described the four functions of money in 1875:

  • a medium of exchange,
  • a unit of account,
  • a store of value,
  • a standard of deferred payment

For some time I marvelled at his clarity, but this week it all unravelled for me. So this post is an attempt at a sanity check.

When we say money is a medium of exchange that means that we use money to exchange what we have for what we want. A medium solves the problem of the coincidence of needs and so we can sell what have for money, then buy what we want from someone else for that same money.

It is a problem though because unless we earned the money / until we spend the money, then it isn't mediating an exchange an exchange at all; any one sale/purchase is simultaneously an exchange in its own right, of money for goods, and two halves of two larger exchanges. In the former case money isn't a medium but the subject of exchange, and in the latter, money hasn't mediated any particular exchange. It is only by looking at the transactions in aggregate and seeing the money flowing that you can say point to an exchange (of a thing someone had for something they wanted) and say that the money did indeed act as a medium of exchange.

So what's the problem?

Well if I inherit a trust fund or make money from interest, or find money on the street or steal it, and I buy lemonade from a child at the curbside, who then drops it down the drain and loses it forever, the function of money that made that transaction a trade and not a theft has not been described. The money was exchanged for lemonade but it was not a medium of exchange. And none of the other classic functions describes this use. The fourth item, standard of deferred payment cannot count because the payment itself is not the standard, and nor was the payment deferred.

Maybe this would be an improvement:

Medium of Exchange: Immediate Extended
Metric measure
of value
of deferred payment
Material means
of payment
of value

But there are more problem with Jevons' categories. In order for money to be a medium of exchange, it must 'store value' between the two halves of the exchange, whether that be a nanosecond or hundred years. So the store of value function is already implied.

And what does it mean to store value? No serious people believe that value resides in objects! Value is a figment of our imagination so it cannot be 'stored' like gold can be stored. Indeed gold or anything can be stored, but the 'value' of it changes every day. Money is special because it is defined as having a constant purchasing power in relation to a certain marketplace. So if you put a dollar in your piggy bank, you know that it will be worth a dollar later on. Its the same with anything, except money is modulated by, inflation/deflation.

And in addition to these four, there are myriad 'functions' to which money can be and often is put:

  • a gift than can be changed into anything
  • a gift that shows you don't really care
  • as an untraceable bribe
  • a means of translating a trade surplus into political power
  • keeping the riffraff out of the best clubs
  • to chop up the lumps of cocaine or as a funnel for snorting it
  • burning for fuel during hyperinflation
  • etc.

So it doesn't even make sense to try to list these functions as a set. I've been trying for years to formulate some simple description of money but it is really hard because it is different things to different people. Aristotle eloquently described the properties of money, but that was really only applicable to physical money and hence not to debt.

So is it time to trash the 'functions of money' thesis?


Dear Matthew,
the final list is useful because it suggests one thing:beyond money there are people and money is about their relationships. It helps to built them, mantain or destroy... There are meanings attached to any transaction and there are social ties of a kind or another.Does it make any sense? This comes from Viviana Zelizer's The social meaning of money...

Doesn't the 'means of exchange' problem that you raise lose some relevance if you don't start from the (classical) premise that money 'solves the problem of the coincidence of needs'?

As is now well-known, money did not evolve from barter. The first and main function of money used to be as a unit of account, way before it began to be viewed as a means of exchange. In other words, credit (inscribed or not into ledgers) existed long before cash.

Thus, historically, money started off as just a way of measuring debt.

But even in the economy we are familiar with today, I doubt whether the role of money as a thing that facilitates exchanges really ranges upon the contribution of both parties to a common marketplace (i.e. I bring potatoes, you bring consulting services, a third party builds a bridge, etc. and by buying and selling our respective goods or services we'll make 'exchanges' of time and labour happen). Yes, as you point out, some people might just have inherited their money, or stolen it. Simply, if you are to consider WHY money exists at all, one of the reasons for its convenience - regardless of whether everyone is a 'productive' market participant, or whether half the people using this money are thieves robbing the other half - is that it makes exchanges EASIER... by enabling anyone to exchange it for anything else.

And isn't the reason for this liquidity, this ease of use and convenience, rooted in the fact that the thing used as money (be it fiat, hours, or prison cigarettes) is a commonly agreed measure of value?

In sum: I don't see why money cannot be seen as fulfilling a 'medium of exchange' function while at the same time being a subject of exchange: if by 'medium' or 'means', you mean 'something that enables a certain phenomenon/situation to exist or appear', then you could say that money is such a medium because if it didn't exist, then exchanges might not happen, including barter. You might have one of the 'human economies' described by David Graeber in 'Debt', for instance: stateless societies without markets, based primarily on communistic and hierarchical relationships (= gifts and coercion), with very little actual 'exchanges' (reciprocity) ever taking place. In these economies, the 'currencies' used are for non-commercial transactions: to acknowledge debts that can never be repaid.

As for the other functions of money you mention at the end: apart from coke-snorting and barbecue-lighting functionalities, which are rather dependent on a certain material form that money may assume (as banknotes) and not on its raison d'etre, I would say that all the others are rather 'secondary' functions, that are derived from the 'primary' functions identified by Jevons. Nobody will accept money as a gift or a bribe if it cannot be exchanged for something else, etc.

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