The previous example illustrates the need for a more efficient means of exchanging goods and services. As a result of the downsides to barter, cultures in different times and places eventually developed money. Consider cattle. Cattle were immensely useful in the past. They provided meat, milk, leather, and if harnessed, power. Throw in the fact that their dung could be used for fuel or fertilizer, and it becomes obvious that to the people of the past, cattle were as good as gold. Cattle served as one of the earliest forms of money because it seemed everyone could use them. Because cattle were universally accepted, they served as an efficient means of exchange. Now, before you consider trading in your dollars for cows, consider that your dollars do not wander off, nor must you feed them. Add to that the fact that cows do not fit in the average-sized purse, and you can see that money needed to evolve further.

Functions and Characteristics of Money

Regardless of the form it takes, money is anything that functions as a medium of exchange, store of value, or standard of value. Medium of exchange means that money is being used for the purpose of buying and selling goods or services. Money acts as a store of value when you get it today and are still able to use it later. Money is functioning as a standard of value when you are using it to measure how much a good or service is worth. When you write a check for a friend's wedding gift, then you are using money as a medium of exchange. Imagine that you go to the wedding in June and slip fifty dollars into your suit pocket for some spending cash. Now imagine that it is November of that same year and you are now at your friend's divorce hearing (things did not work out). In the midst of the hearing you reach your hand into your pocket and shout for joy, “Store of Value!” Although you feel awkward, you are pleased because the fifty dollars is still worth fifty dollars. After the scene you caused in the courtroom, you discover that court-ordered sensitivity training is going to cost you $150 per session. That would be using money as a standard of value.

Money works best when it is has the following characteristics: portability, durability, divisibility, stability, and acceptability. Portability refers to the ease with which money can be carried from place to place. It is desirable for money to be durable so that when you forget to remove it from your pocket before doing the laundry, you do not wind up broke. All of that annoying change that seems to find its way between the cushions of your couch is proof that money is divisible into smaller, peskier units. Stability exists when money's value does not vary too much. Acceptability helps to explain why you are far more likely to stop and pick up a ten dollar bill as opposed to ten dollars in Monopoly money.