What does money do?

Money buys stuff—easy, right? Beyond this, economists have come up with some handy ways to think about what it is we do with money that help explain why it’s so important to our day to day lives.

First, money is a medium of exchange which lets us earn, buy, and sell completely different things in the same units. Instead of trying to trade what we have for what we want, we are able to sell what we have for money, and then buy what we want with money. This makes money unique, and fairly central to how we get the things we need.

On top of this, money also a unit of account—i.e. it lets us put the prices of very different things in the same terms. This lets us quantify the value of the hours we work in the same terms that we use to put value on a loaf of bread or the price of rent. People debate how far we can (or should) go in trying to express the value of things using money, particularly when it comes to placing prices on nature or living things.

Money is also used as a store of value. While other products might wear out, break, or become out of date, money generally feels like a safe way to store our savings. If you work overtime or do an extra job, you can store up your earnings, and use them later to pay for a holiday, a wedding, or the deposit on a house. Sure, you could theoretically store your savings in some other way—perhaps by collecting rare Pokémon cards—but money is probably a more safe bet. This is why it’s such a big deal when the value of money unexpectedly decreases because of inflation.

Which of the above understandings of money is most important or accurate is something economists don’t agree on. What we know for sure is that money is a pretty unique thing—and having a lot of it gives you quite a bit of power, not to mention freedom.