Video transcript
- [Voiceover] Hello, everyone, Grant here. So I'd like to talk to you today about the various functions of money. Functions of money. Now money, of course, is something that we all use every day and we kind of have ageneral feel for what it is, but it's interesting to step back and actually contemplate what is money. What gives it its value? What is it that we use it for? Why is it that you canuse some things for money throughout history, youknow, people have used not just gold and silver but things like saltor cigarettes as money, and why other things can't be used. And economists generallydivide the functions of money, the things that it does for us into three different categories. And sometimes peopleadd a fourth in there. I won't get to that in this video, I'll talk about it in a different one, but there's kind of three main ones that people usually talk about. So if you were an economist, just kind of philosophizing about what the functions of money are, you might start by thinking, well, what does the worldlook like without money? Like, for example, let's say that you were a lawyer and you providelegal counsel to people and this is the service that you provide and this is the way youadd value to the economy, and let's say it's the casethat you're refurnishing and you want a chair, youwant to go out into the world and you want to buy a chair. Well, what that would requireis that you find someone who happens to produce chairs. You find some person out there, and his way of adding value to society is to produce chairs,and this is what he does, and he's specialized atit and he's very good. Now the issue here, becausemoney doesn't exist, you basically have to trade with him, you have to barter in some way. And this is what'scalled a barter economy. And in order to do that, given that you've specialized in law, is the thing that youprovide and add value with, you kind of have to hopethat he wants legal services. If he happens to be in a situation where he wants the thing that you provide, which in this case is legal services, and if that were true andyou had that good fortune, then you would be able to trade some legal services over to him and he would trade yousome number of chairs, and all would be well. But of course, this is kind of rare, especially given how specialized you are. And this idea where you want something and he wants something andthose line up with each other actually has a name. This is called the doublecoincidence of wants. Double coincidence, andit's worth writing down because people kind of reference this when we're talking aboutbarter economies of wants. And by barter economy I just mean you know, this kind of set-up, but scaled up to the scale of society where everybody's tradingbased on their specialty and what someone else needs. And in a world of money this seems absurd, because in reality what you do, is you would be over here, and sure you would provideyour legal services, you'd kind of providelegal services to someone as your way of adding value, but it would be for justanyone who wants it, not based on what they produce, and in response, in exchange for that, they give you cash, theyjust give you money, something that you can then use, that everybody accepts forwhatever it is that you want. So in this case, if you want chairs, then you bring it over tothe guy who produces chairs and that's what he givesyou, you know, a chair. And in so far as moneyserves this function, where it is kind of theuniversal thing to trade, it's called a medium ofexchange, medium of exchange. And what that means is anytimethat you want to exchange for something, this isthe common thing of value that you use to actuallytrade with the world. But that's not the only thing money does. That's a really big part, that kind of allows theentire economy to exist, and it allows you to specialize in something like legal services. But what else does money do? What else would be harder todo in a world without money? Let's say you produce, as a lawyer, you know, producing legal services, a little bit more that youactually wanted to consume, and you're hoping to kindof save up some value, so that maybe later onyou can buy a house, or you can pay for your kid's education or something like that. You want to actually startstoring value and saving it up. Well, in this barter economy, you would have to find something, since money doesn't exist, you would have to find something of value and start storing that. Maybe, you know, chairsmight hold their value so you're hoping to store them or maybe you have to buy land or something that you think will store it, but there's not kind ofa good de facto medium that you can do it for. So in this sense, since that's something that we usually do with money, it's also called a good store of value. So this is considered kindof a second use of money, store of value, distinctfrom a medium of exchange, because the idea of needingsomething to trade with is pretty different fromwanting to kind of save value. And for this third function, think back to this casewhere you're hoping to barter legal services for chairs. I mean, once you startgetting into the specifics, you can start asking the question, well, actually, how manyhours of legal services correspond to one chair? And if you want to buysomething different, you're going grocery shopping, how many hours of legal services corresponds to buying one apple? And similarly the chair guy, he has to go off and everytime he's gonna buy an apple, he has to think how manychairs correspond to an apple? And trying to relate values like this starts getting really complicated unless you just have some kindof actual unit to deal with, something that you can useto actually measure value of everything, like a yardstick for value. And of course in the real economy, we just give everything adollar value, or a euro value, or a peso value, dependingon where you are, but you give it a value thatcorresponds to the currency, to the money that you're dealing with. So people will say moneyserves as a unit of value, a unit of value, and basically that means that it gives you the starting number, it gives you the meaning of the number one so that you can say, wellif this is worth one dollar, then what is worth three dollars? Or maybe an hour of this lawyer's time is worth a hundred dollars, and one of these chairs is worth $50, and you can start actuallycomparing the values of various different goods that way. And I actually think thisis a pretty interesting one. This is the kind of thing that would be easy to underappreciate until you realize how important it is to have something like this. And in the next video or two I'm going to talk abouta certain historical case of hyperinflation in Brazilwhere basically what happens is money loses some of these functions, and you can see just how mucha society actually breaks down if what is supposed to be money stops serving these functions. So with that, I will see you next video.
