MATTOLE SELF-SUFFICIENCY PROJECT

Why Do We Have Money?

Money exists to facilitate barter. Suppose I have an extra loaf of home-made bread while Gail has extra eggs and would like a loaf of my bread. Gail and I figure out what would be equivalent amount of eggs for one loaf of bread and make an exchange. The following week, Gail would like another loaf of bread but I still have eggs and so I don't need any eggs right then. However, I would like some of the apple cider that Cedar has made and Cedar would like some of Gail's eggs. Under a pure barter system, Gail, Cedar, and I would need figure out a mutually equitable exchange of eggs, cider, and bread.

With money, Gail can "barter" money for my bread. I can then "barter" the money I received from Gail with Cedar for the apple cider that I want. And, Cedar can then "barter" the money he received from me for eggs from Gail, In this way, money facilitates barter and indeed, is a form of bartering. In this example, money is in the middle of the exchange, hence the term, "medium of exchange."

Money has four distinct functions. These are (1) to simplify the exchange of goods and services, (2) to activate production, (3) to provide a standard unit for measuring the value of goods and services, and (4) for storing savings.

Last Updated: 23 Mar 2005