By Nate Novosel
Money is an interesting concept. If you’re reading this, you probably know the three fundamentals of currency:
- Store of Value – It holds the value of your work and output in a credit system that allows you to redeem that value for future goods and services provided by others.
- Medium of Exchange – It acts as a means to trade with another person where the two of you don’t provide things that the other directly needs in a comparable amount.
- Unit of Account – It allows you to quantify multiple goods with the same accounting system so that you can calculate how much you will get for your output and how much you need for someone else’s.
But let’s go beyond the theory and into the pragmatic applications of these ideas. First, you need things to survive: food, water, shelter, etc. Second, you are more effective at some activities required to live than others. Third, other people in society are more willing and able to do those activities for you. Fourth, you are neither friends nor family with those other people, so you don’t know whether you can trust the other person to reciprocate in a fair way the things you need for the things they need.
Enter money. I can get a bucket of water for myself from the well, or I can get a bucket of water for hundreds of people from the well, and they credit me for it. How do we measure that credit? Currency (e.g., dollars and cents). I provide the good or service, and they credit me for it. When I need a good or service from someone else because it’s inconvenient or impossible for me to do it (for) myself, I give that credit to someone else by handing them that money. And thus, we have a more functioning society.
So, if money is the solution to the problem of friction regarding the exchange of goods and services, what new problem(s) does money introduce? Well, it turns out…plenty.
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