No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eleven: Money, Money, Money! 256 It is important to note that the other functions of money besides the medium of exchange (store of value, unit of account, standard of deferred payment) all arise only because of money’s use as the medium of exchange. It is only because money is accepted in payment for goods that it can function as a store of value, or that the price unit associated with money allows comparison of differing goods (unit of account), or that people would accept it in the future (standard of deferred payment). Money’s function as a medium of exchange therefore drives all its other uses. MONEY CREATION Given what we’ve said about attributes and functions of money, how could people possibly choose to use little pieces of paper—or even more surprising, electronic digits— as money? This is a long and somewhat complicated story, so let’s get started! First, consider Figure 11.1 . Let’s say I owe you $5 from an earlier loan, and we agreed that the standard of deferred payment was in U.S. legal tender currency. You have at least the four options shown. They are all $5 legal tender; do you have a preference? Well, for sheer convenience you probably would prefer the $5 bill—fits nicely in your wallet or purse and is recognized (and accepted) by everyone. But does it offer the same value as the other choices? You’ve probably seen and maybe even spent an Eisenhower dollar. It is a bit bulky but a little unique to have and spend. But it’s not especially rare; it certainly has no collectability status as a rare coin would. How about a Silver Eagle? Have you ever seen one? If you had one, would you want to spend it in a store? Why not? And then the wildcard, the little guy, the tiny 1/10oz Gold Eagle, which is about the size of a dime. Would you spend this at Dairy Queen? I hope not! Once we get to the Silver and Gold Eagles, I hope you have an idea that it’s perhaps not the best option to spend these as money, even though they are legal tender for their stated value. These coins consist of precious metals, and their metallic content greatly exceeds their legal tender value. In 2020, for example, a Silver Eagle would exchange for $23.40, while a 1/10 oz. Gold Eagle would exchange for $230. If you do want to spend your Gold Eagle at the corner store, please take me along and I’ll give you $20 for it! FUNCTIONS OF MONEY: 1. Medium of Exchange 2. Store of Value 3. Unit of Account 4. Standard of Deferred Payment Figure 11.1, How Do You Want Your $5? Let’s say you have your pick of four options to receive $5 of official U.S. government currency. Which would you choose: 5 U.S. Silver Eagles which are each $1 legal tender, a $5 bill, a 1/10-oz Gold Eagle coin which is $5 legal tender, or 5 U.S. Eisenhower dollar coins?