So, what is money? There’s no obvious answer. Money has been many things. However, the functions of money have not really changed significantly over time. So, a common way to define money is by its three functions.
Medium of Exchange – Money is anything that another person is willing to accept as exchange for something of value. They are willing to accept it because they believe others will accept it from them as well. In this respect money eliminates the “coincidence of wants” problem. For example, you have the ability to teach your hairstylist guitar and would like to do so in exchange for a haircut. But she prefers to learn drums. Whereas if you can sell your guitar lessons for money, she’ll take that in exchange knowing she can later use it to pay for her drum lessons.
Unit of Account – Exchange requires the determination of relative value. How much is an employee’s time worth in days on the beach in Florida? Or in Honda Accords? Money prices allow us to simultaneously answer all these questions by setting a dollar price. This allows both parties to more easily determine if that valuation is mutually acceptable. Why does a $100 pizza sound expensive? Because we have in our minds a menu of other things that could be purchased for $100 that are much more valuable than a pizza.
Store of Value – The value of much of our labor is perishable, particularly those of us in the service sector. Therefore, in the absence of money we would be relegated to providing the service at the point of trade. We would literally have to sing for our supper. This last aspect of money is particularly important. There are many competing moneys in the world. But it’s those that hold their value best (e.g. the US Dollar) that tend to be most readily accepted.
This image is of one of the famous stone wheels of Yap. The islanders once used these large stone wheels as a monetary system. Would it fit our definition? First, so long as the other islanders were willing to accept a stone wheel in exchange for most goods or services, it would work. Second, it seems perfectly reasonable to imagine a pizza be priced at 1/20th of a stone wheel and a pair of shoes at 1/5th. And finally, the stone wheels are very large and hard to produce. And so, one imagines they could hold their value. And so, yes. The stone wheels of Yap were a viable monetary system.