Introduction

Money is the good that is commonly accepted in exchange for other goods and services. To see why it matters, imagine an economy of just one person -- there is nothing to exchange, so money serves no purpose. Even with several people, if none of them trades with each other (say, a family living in isolation), money is still irrelevant. The moment people begin transacting through a market, however, money becomes indispensable.

Without money, exchange has to happen through barter -- trading one good directly for another. Barter depends on a rather unlikely coincidence: a double coincidence of wants, where each party happens to want exactly what the other is offering. Someone with a surplus of rice who wants clothing must find another person who has surplus clothing and wants rice specifically -- and as the number of people in the economy grows, the cost of searching for such a match becomes prohibitive.

The solution is to use a single, widely acceptable intermediate good that everyone is willing to take in exchange -- this good is money. Once such a good exists, individuals can sell what they produce for money and then use that money to buy whatever they actually need, without ever needing a double coincidence of wants. While facilitating exchange is money's most fundamental role, it serves several other purposes as well, discussed next.