Money’s Primary Function: The Medium of Exchange

Introductory economics courses teach students that money serves three functions, a medium of exchange, a unit of account, and a store of value, but they rarely explain why money came to serve those roles in the first place. Following the Austrian School of economics, the medium of exchange function is primary and logically prior, while the unit of account and store of value functions are merely derivative, meaning an abstract unit disconnected from an actual medium of exchange, as with fiat dollars under modern monetary theory, is a theoretical impossibility masquerading as sound economics.

The following article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

Although often unintentional, one of the most fundamental errors that pervades mainstream economics instruction is to present economic categories independent of human action. This error is fundamental because, once committed, it pervades all aspects of the study of economics, making them unrealistic. For failure to treat economics appropriately as a social science, including human actions, interactions, subjective valuations, and choices, all kinds of economic categories lose their significance and become disconnected from the real world.

For example, a teacher could present textbook information about the definition of prices without explaining what a price is and how it is formed through property, subjective valuation, voluntary exchange, etc. Supply and demand graphs can be presented without articulating the underlying human choices that can be momentarily captured in such a graph. The critical role and function of the entrepreneur is likewise largely ignored in mainstream economics. This is also done chronically when it comes to money.…