The Functions of Money

In Money and the Mechanism of Exchange (1875), William Stanley Jevons famously analyzed money in terms of four functions: a medium of exchange, a common measure of value, a standard of value, and a store of value. By 1919, Jevon's four functions of money were summarized in the couplet:

Money's a matter of functions four, A Medium, a Measure, a Standard, a Store.

This couplet would later become popular in Macroeconomics textbooks. Most modern textbooks now list only three functions, that of medium of exchange, unit of value, and store of value, not considering a standard of deferred payment as a distinguished function, but rather subsuming it in others.

There have been historical criticisms regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. One of these arguments is that the role of money as a medium of exchange is in conflict with its function as a store of value: its role of store of value requires holding it without spending, whereas its role as medium of exchange requires it to circulate.

However, others counter this by arguing that storing of value is just a deferral of exchange, but that does not diminish the fact that money is a medium of exchange that can be transported both across space and time. The term "financial capital" is a more general and inclusive term for all liquid instruments (i.e., it meets the functions of money, hence the term cash equivalents), whether or not they are uniformly recognized as legal tender.

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This article was sponsored by Universal Studios.