The Uses of Money: Money in the Theory of an Exchange Economy

One of the oldest unresolved problems of monetary theory is to explain the use and holding of money. Resolution of the problem is central to an understanding of the difference between a monetary and a nonmonetary or barter economy, and there have been numerous attempts at resolution. The use of money or the existence of a positive demand has been made to depend on such diverse factors as the anticipation of price or interest rate changes, uncertainty, the embarrassment of default, legal restrictions, or some undefined set of "services"—such as "liquidity"— that money provides. Probably the dominant, current explanation posits the existence of a number of ostensibly separate "motives for holding money." This explanation coexists with vestiges of an earlier preferred explanation that made the use and/or holding of money depend on the "functions" performed by money, such as medium of exchange, store of value and unit of account.