What is money? Because it is so frequently used we may tend to forget the important purposes it serves. Money functions in three important ways:

 

1. Medium of exchange: Money may be used as a unit of exchange in the buying and selling of goods or services. Without money the fanner would have to pay for all the things he needs with his crops or livestock. This could become rather tedious in the winter when he has no crop to sell. A lawyer would have to pay for-what would a lawyer pay with?

2. Unit of account or common denominator: Money provides us with a single measure of value to judge all other goods and services. If every good had a unique but un-measurable value, we would not be able to judge which one was more or less valuable because there would be no common denominator to judge the worth of the item.

3. Store of value: Money allows us to accumulate and store the wealth we possess. Farmers do not have to store soybeans to obtain other goods but instead just store their wealth through money.

Money is integral to capitalism and provides a tremendous efficiency in economic transactions. Money facilitates the process of exchange and therefore improves the well-being of everyone. The amount of money in circulation is a measure of economic prosperity.

Since money is the measure of economic wealth and the medium of exchange it is important in the study of commodities. Investors are constantly deciding whether to exchange money for commodities, or one commodity for another. The flow of money from one commodity to another can easily be seen by the change in prices. If money is flowing into gold and out of Treasury bills, the price of gold is Increasing and the price of bills is decreasing. The futures markets provide an interesting panorama of the ebb and flow of money from assets perceived to be overvalued to those perceived to be undervalued.