Introduction: This teaching note serves as a comprehensive guide for college instructors aiming to enlighten students about the concept of money—what it is, what it isn’t, and the distinctions between various forms such as fiat currency and cryptocurrency.
Engaging college students in discussions about money is remarkably effortless. They enter the classroom with a keen interest in financial matters, driven by immediate concerns and an inquisitive nature about how their future dreams can be realized through earning, saving, and investing money. This intrinsic motivation makes the teaching of money’s role in society both straightforward and rewarding.
To kick off your exploration of money, prompt your students to define it and elaborate on its connections to trade, pricing mechanisms, labor markets, capital accumulation, economic growth, and institutional frameworks. Embrace a range of responses, encouraging students to relate their interpretations of “money” to a flourishing society. You can wrap up this discussion by emphasizing that money acts as the lubricant in the machinery of exchange—serving three essential societal functions: medium of exchange, store of value, and unit of account.
Next, engage the class with a simple exercise: raise your hands if you would prefer to be paid in dollars upon graduation versus accepting Bitcoin. Record the responses for later analysis.
The Three Functions of Money in a Modern Economy
As an economics instructor, it is imperative to elucidate the crucial role that money plays in modern economies. By dissecting the three primary functions of money—medium of exchange, unit of account, and store of value—students can gain a clearer understanding of how money underpins a stable and prosperous society. Stable money fulfills critical functions in contemporary life, facilitating market transactions, lowering transaction costs, measuring economic activity, and safeguarding wealth.
Commence your discussion of money by presenting the three functions listed below. Define each function, emphasizing how they enhance the economic lives of individuals.
Medium of Exchange
Money, such as the U.S. dollar or the Euro, is widely acknowledged as a valid form of payment for goods, services, and resources. This universal acceptance makes trading far more efficient than the cumbersome barter system, which necessitates a direct exchange of goods. By eliminating the need for a “double coincidence of wants” between buyers and sellers, money catalyzes voluntary trade and wealth creation across local, national, and international economies. Hence, money plays a pivotal role in reducing transaction costs, enabling smoother exchanges, and assisting parties in establishing the value of goods and services.
Unit of Account
Money provides a common metric for measuring value, allowing for easy comparison of different goods, services, and resources. For instance, it helps us ascertain how many hours of labor equate to the price of a car or how many apples are equivalent to a computer. This function also facilitates the assessment of economic activities, including personal income, total revenues for small businesses, a firm’s expenditures, or a nation’s Gross Domestic Product. The unit of account function is inherently linked to discussions around prices, wages, interest income, and rents, all expressed in monetary terms.
Store of Value
When inflation remains stable, money can be saved and utilized later without a loss of purchasing power. When money reliably serves as a store of value, individuals and institutions are more inclined to engage in financial markets. This behavior fosters investment, enhances capital accumulation, stimulates innovation, and promotes technological advancements—something unachievable in a barter economy or in a modern economy plagued by rampant inflation. However, it is critical to acknowledge that periods of high inflation can severely undermine money’s ability to function as a store of value.
What Money Is NOT
Understanding what money is not is just as vital as grasping its true nature. Money is not synonymous with wealth or income.
Wealth refers to the total value of assets owned by an individual, household, or nation, minus any liabilities. While money is a financial asset that contributes to wealth, it is merely one component of a broader financial picture. Focusing narrowly on money risks obscuring a complete understanding of an individual’s, business’s, or nation’s economic health.
Income, on the other hand, represents the flow of money received over time, typically through wages, salaries, investments, or profits. This is distinct from money itself, which is a static concept. Income indicates the money coming in, while money represents the total amount held at any given moment.
Money vs. Cryptocurrency
Cryptocurrency is a hot topic nowadays. This digital currency employs cryptography for security, making it difficult to forge. Cryptocurrencies like Bitcoin function independently of central banks and governments, relying on a decentralized framework known as blockchain for transaction documentation and new unit issuance. Although it’s particularly popular among younger demographics, understanding its distinctions from traditional money is crucial.
The money most of us use daily is fiat currency—money that governments endorse as legal tender and is widely accepted by individuals and businesses. Unlike precious metals or commodities, fiat currency lacks intrinsic value. While cryptocurrencies share some characteristics with traditional money, they are not broadly accepted for everyday transactions. Their prices can be extremely volatile, complicating their roles as a unit of account or store of value. Additionally, the absence of central authority backing raises questions about their long-term reliability and potential misuse.
U.S. Dollars or Cryptocurrency?
Returning to the earlier query posed to students, cryptocurrency is indeed a captivating phenomenon within finance and technology, yet recognizing its limitations in comparison to traditional money is essential. While currencies like Bitcoin utilize decentralized systems, they lack the acceptance, stability, and institutional backing that traditional currencies enjoy.
Consider the case of Odell Beckham Jr., the Cleveland Browns football star, who opted to receive his salary in Bitcoin. In November 2021, his contract of $750,000 converted into 11 Bitcoin. However, by January 2022, Bitcoin’s value had plummeted by about 55%, reducing his salary’s value to approximately $413,000. Moreover, Beckham faced tax liabilities based on the original U.S. dollar amount, with a combined federal and state tax rate of 50.3%. Consequently, his net pay dwindled to just $35,000, a stark contrast to the $373,000 he would have received had he opted for U.S. dollars. This scenario underscores the difficulties of using cryptocurrency as a stable store of value, unit of account, or reliable medium of exchange.
Furthermore, the fact that the federal government does not accept cryptocurrency for tax payments further emphasizes its limitations as a substitute for traditional money. Nonetheless, the number of businesses accepting cryptocurrencies is rising, along with a growing interest from broader demographics.
For students, staying informed about the evolving landscape of cryptocurrency while recognizing the fundamental differences from traditional money discussed in academic settings is crucial.
