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Money is What Money Does

Key Economic Concepts:

• Characteristics of Money
• Money
• Trade-off

Description:

Throughout history, a wide variety of items have served as money. These include gold, silver, large stone wheels, tobacco, beer, dog teeth, porpoise teeth, cattle, metal coins, paper bills, and checks. All of these types of money should be judged on how well they accomplish the functions of money. Money is what money does. To be a good medium of exchange, money must be accepted by people when buying and selling their productive resources and when buying and selling goods and services. It should be portable or easily carried from place to place. It also must be divisible so that large and small transactions can be made. To be a good store of value, money must be durable so it can be kept for future use. It also should have a stable value so people do not lose purchasing power if they use the money at a later time. To be a good standard of value or unit of account, money must be useful for quoting prices. To accomplish this, money must be familiar, divisible, and acceptable.

Lesson Objectives:

Students will:

• Define and explain the functions of money.
• Describe the characteristics that are needed to enable money to carry out these functions effectively.

Introduction:

Throughout history, a wide variety of items have served as money. These include gold, silver, large stone wheels, tobacco, beer, dog teeth, porpoise teeth, cattle, metal coins, paper bills, and checks.

All of these types of money should be judged on how well they accomplish the functions of money. Money is what money does.

To be a good medium of exchange, money must be accepted by people when buying and selling their productive resources and when buying and selling goods and services. It should be portable or easily carried from place to place. It also must be divisible so that large and small transactions can be made.

To be a good store of value, money must be durable so it can be kept for future use. It also should have a stable value so people do not lose purchasing power if they use the money at a later time.

To be a good standard of value or unit of account, money must be useful for quoting prices. To accomplish this, money must be familiar, divisible, and acceptable.

Resources:

• Currencies in Crisis- Proposals Draw Fire: This 1999 Washington Post article discusses vast swaths of the developing world sinking into recession, dealing a crushing blow to the living standards of millions.
  www.washingtonpost.com/wp-srv/business/longterm/feb99/currency/currency7.htm ^[1]
   
• Currencies in Crisis- A Beanie Baby Guide to a Grown-Up Problem: This 1999 Washington Post article discusses the main reason Beanie Babies have value and uses this example as a guide to a grown-up economic problem.
  www.washingtonpost.com/wp-srv/business/longterm/feb99/currency/baby7.htm ^[2]

Process:

Evaluate each item below as to how well it would perform the functions of money. In your evaluation, discuss how well the item would serve as a medium of exchange, a store of value and a standard of value. As you make your evaluations, be sure to consider portability, uniformity, acceptability, durability, and stability in value.

Salt [Portable but messy; uniform; acceptability depends on society; somewhat durable; divisible into grains; may be too plentiful to be stable.]

Large stone wheels [Difficult to carry; could be uniform; acceptable but might be counterfeited; durable; not divisible; would be stable in value only if the number of wheels is controlled.]

1. Cattle [Not portable; not uniform; not durable;they die; not divisible.]
2. Gold [Serves most functions well but is heavy for big purchases.]
3. Copper coins [Serve most functions well but may not be limited, and large amounts are not portable.]
4. Pieces of paper printed by a government [Serve functions well unless the government prints too many of them.]
5. A personal check [Serves most functions well, but acceptability can be a problem if one does not trust the check writer.]

Read "Currencies in Crisis: Proposals Draw Fire" at www.washingtonpost.com/wp-srv/business/longterm/feb99/currency/currency7.htm ^[1]

What's the rationale for adopting the US dollar as "legal tender" in Argentina? Which of the 3 functions of money does the Argentinian peso fall short on? [store of value]

What does the author say is behind the movement to establish new currencies and replace old currencies? [increasing volatility of value of currency]

Read "Currencies In Crisis: A Beanie Baby Guide To a Grown-Up Problem" www.washingtonpost.com/wp-srv/business/longterm/feb99/currency/baby7.htm ^[2]

How is currency like beanie babies? [Currency is like any other item that's bought and sold--it generally obeys the law of supply and demand. The greater the supply of a currency, the less it's worth; the less the supply, and the greater the demand, the more that currency will cost.]

Why don't we use beanie babies as currency?  Which function of money would a beanie baby have problems fulfilling? [Medium of exchange/unit of account: The Beanie is not divisible... Well, it could be, but it would make a big mess.]

Why aren't Disney Dollars accepted outside the Disney theme parks? [It's not a standard of value: The money may not be familiar and is not acceptable.]

Adapted from Morton, John. Advanced Placement Economics: Macroeconomics. Copyright (c) Council for Economic Education: New York. p 141.

Links Used:

1. ^{^ ^} "Currencies in Crisis: Proposals Draw Fire" - (www.washingtonpost.com) This 1999 Washington Post article discusses vast swaths of the developing world sinking into recession, dealing a crushing blow to the living standards of millions.
2. ^{^ ^} "Currencies in Crisis- A Beanie Baby Guide to a Grown-Up Problem" - (www.washingtonpost.com) This 1999 Washington Post article discusses the main reason Beanie Babies have value and uses this example as a guide to a grown-up economic problem.

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