A Fist Full of Dollars, or a Yen to make sense of currency

The dollar, any currency, has several major functions in an economy. The one we are most familiar with is that of ‘a medium of exchange’. That means we go to the bar with a ten in our pocket and exchange that for a beer and a sandwich. We have exchanged money for goods. The second is what we call a ‘store of value’. You can take that ten and put it in your pocket (or in your bank account) and leave it there and you’ve got purchasing power tomorrow. The third function of currency is as ‘a unit of account’. Which is what happens when we say we buy $1 trillion worth of stocks when what we really own are a bunch of electronic blips on a computer at Fidelity, but we account for everything in dollars. We use the currency to account for the real value of the goods. That is only different from the medium of exchange in that we use it whether we make the exchange or not. Money, to be any good has to be ‘legal tender’. That means we can use the money to pay our taxes, pay our bills, repay our loans and other legal obligations (see Shakespeare The Merchant of Venice). Since it is legal tender, the other party has to take it, even if it is worth less than the dollars they lent us or whatever.  Read more