The three functions of money
Two sorts of money exist:
1) Fiat money is a money that has no intrinsic value (i.e. it is not made of anything valuable) but that has a nominal value by decree of the government. For example, all paper currencies are fiat money. Inflation results from the issuing of too much fiat money by a government.
2) Specie, on the contrary, does have an intrinsic value. For instance, gold or silver coins are specie because those are two precious metals.
Money serves three functions:
1) Medium of Exchange = it resolves the "double coincidence of wants problem", that is the unlikelihood of finding someone who has what I want and wants what I have. By accepting a common medium of exchange, people make transactions more likely to happen.
2) Store of value = it allows individuals to convert perishables (such as food) into more durable goods that can be stored and saved in between two transactions.
3) Unit of Account = it provides a standard relationship between various goods and services in the economy, thereby facilitating transactions.
- Morrison, James A. "International Monetary Exchange in Theory." Oct 12, 2010. Middlebury College