What is money?
From barter to fiat money: what money does, why it works, and what inflation is.
Transcript
Without money, people must barter: I trade my eggs for your shoes.
But it only works if you want my eggs, and I want your shoes. That rare match is called a double coincidence of wants.
Money fixes this. It is a medium of exchange: sell to anyone, buy from anyone.
It is a store of value: you can earn today, and spend months later.
And it is a unit of account: every price is quoted in the same measure, so we can compare eggs, shoes, and rent.
Modern money, like the dollar, is fiat money. It is not backed by gold. It works because the government says so, and because everyone trusts and accepts it.
If too much new money is created while goods stay the same, each unit buys less. Prices rise. That is inflation.
Money is trust, that we can all count on.
More in this series
1:44Money and gold
Why gold was money, how paper receipts and the gold standard worked, why it ended in 1971, and why gold is still stored today.
1:28How exchange rates work
The price of one currency in another: why we need it, what moves it, and who it helps or hurts.
1:31Why US rate hikes shake the world
How a Federal Reserve rate hike pulls money into the dollar and squeezes currencies, debts and growth elsewhere.