What Functions Does Money Perform in Economic Systems, Both Ancient and Modern?

We are now ready to introduce a working definition of money. According to most economists, money fulfills three purposes:

Money is a store of wealth. Most humans would agree that gold and silver are valuable and highly desirable commodities. Even though we no longer base our money on gold and silver today, we are a highly numerate society and most of us agree that a high bank balance or paycheck represents real wealth even though it is merely ones and zeros on a disk someplace or ink on a piece of paper. Surely, the Greeks and Romans valued gold and silver and would accept them as indicators of wealth. Early Germanic tribesmen and the Huns of the steppes still used the size of their herds as the primary indicator of their wealth but gold and silver represented real value to them as well.

Money is a standard or a measuring scale by which most other commodities or things of value are measured. Your ounce of gold will buy a certain number of pigs, modii of grain, oaken casks, feet of rope, pounds of wool, amphorae of wine, etc. Notice that it is because money has the properties outlined in definition number 1, that it is a store of wealth and is therefore valuable, that it can function as a standard of value. In modern society, paper dollars or electronic bits and bytes represent money and a standard or scale of value, but modern money has gotten away from being tied to a commodity having real, intrinsic value. Notice that the idea of a standard of value is quite distinct and differen from the idea of a medium of exchange. Saying that one pig is worth two denarii is quite a useful function of money in its own right, but it is not the same as actually trading the denarii for the pig. I know that it sounds nit picky, but understanding this difference can help us to understand some of the peculiar events that occur when something goes wrong with the economy and the money system.

Money is a medium of exchange. Gold and silver (as well as electronic ones and zeros or ink marks on paper) can store a lot of value in a small, light package. Merchants need to be able to go into a port where the inhabitants of the country have lots of sheep or wine or oak lumber for sale. They take money out of a chest that isn’t any bigger than a corner of the purser’s cabin. They trade the money for the cargo, which might fill up the whole ship. Suppose an anxious buyer in Rome wanted some fine horses bred in Cappadocia. Without money, the merchant might have to load a cargo of Roman salt, and trade it for a cargo of North African wheat. The wheat would be traded in Narbonensis for some fine wine, which the Cappadocian horse breeders and merchants will pay dearly in fine animals. With money, the ancient merchant does not need to keep making all these intervening trades and risk actually losing money on some of them. The merchant simply buys a cargo for silver drachmae in one port and sells it for gold aurei in another.

In theory, you could use sand or seawater as your standard of value, but it is much more convenient to weigh out a few grams of silver for your two pounds of coffee than to pump oh, say five thousand gallons of seawater into the hold of the merchant’s ship as payment for your coffee. besides, the merchant might become upset send a waterfront ruffian to slit your throat if you tried to pay off in seawater. He’d probably interpret your responsible act of prompt payment as an attempt to sink his ship. The world wouldn’t be quite the same if grizzled old sailors and sunburned camel drivers were the wealthiest people on earth!

Return to The Roman Economy Table of Contents

The Ancients' First Use of Money
What are the Functions of Money?
Some Different Economic Systems in History