Why money matters

Published on May 31, 2021   19 min
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Hi, my name is Mariano Torras. I'm Professor of Economics at Adelphi University in New York. We are going to be doing a lecture series on macroeconomics.
In the very first lecture, we learned that economics is not fundamentally about money, and that it is about real things that are produced and people that are employed. Yet it is impossible to understand the functioning of modern economies without considering the role of money. We know, for example, that having too much money in circulation would likely cause rapid inflation, possibly even hyperinflation. Having insufficient money in circulation would cause the opposite problem, deflation, while less frequently seen, most would agree that deflation is a more serious problem than inflation. The appropriate goal then is to have enough money in circulation to support the overall functioning of the economy, but not too much more than that.
But what is money? Money is defined by its three main functions. The first is that money is a medium of exchange. The existence of a universally accepted medium of exchange greatly facilitates economic transactions. Without it, a shoemaker seeking milk, for example, would need to find a dairy farmer who was looking for shoes. An exchange medium with recognized value means that the shoemaker can accept it as payment in complete confidence that he will be able to pay some dairy farmer the money for her milk. Try to imagine our modern economies functioning without a medium of exchange. Not easy. There was a time when crops or grain represented most of a society's economic value. But such value could never be stored for long, since crops typically perished in short order. Even today, most of our material possessions containing economic value breakdown ware out or otherwise depreciate in a relatively short period of time, money does not do this and therefore serves as a store of value. It is nevertheless not perfect in this regard, since as we know, inflation erodes money's value over time. The third function that money serves is as a unit of account. Being able to express prices or values in terms of quantifiable units, such as dollars, euros, cents, pence, or what have you, greatly clarifies the relative worth of different commodities and also allows sellers to express prices in a precise manner.