David French | 18/02/2009 1:54:02 PM

This article was first published in The Morning Bulletin in October 2005

I have given a number of school talks on the topic of money and how to make it work for you. Perhaps parents might like to use the concepts to assist in teaching their children about money.

While money is often said to be the root of all evil, in fact money is simply a tool that makes it easier for people to live and work together. First year economics students learn the acronym MUDS to help remember the role money plays in society.

Money is a Medium of Exchange. Before money was invented, people swapped things. This was called Barter. While the concept seems simple, it has a number of flaws. You might not be able to find someone in the local area to swap with, which could mean high costs in trying to do the swap. Or like Jack’s mother in Jack and the Beanstalk, it might to difficult to gauge what something is worth.

In that context, Money is simply a tool to facilitate swapping - If I am buying a car I am swapping money for a car; if I am selling a car I am swapping a car for money. If I have money I can swap it for just about anything.

Money is also a Unit of account. Simply, we use money to add up what things cost, or what we owe. Despite the current trend to say, “oh, that’s just 180”, it actually doesn’t mean anything. You could be talking about 20 bananas, or 20 pigs. When we say $20, everyone knows what we mean. People become familiar with what money buys, they have a picture in their mind as to what they can get for it.

Money is also the Standard of Deferred Payment. People are not normally paid to go to work each day. Their work is counted up and they are paid each week, fortnight or month. People need to agree on what they will be paid at the end of the period, and we describe that amount using money.

Finally money is a Store of Value. We can keep our money or spend it later. Inflation means that Money is not a very good store of value. If you keep your money under the bed, its purchasing power will diminish as the prices of goods rise. In my primary school days, lollies were often 2 for a cent. Now, we don’t even have cent pieces, and 5 cents each seems to be the norm. Inflation makes it very difficult for individuals and businesses to plan for the future. This is a big cost to society that undermines employment and economic growth.

Better stores of value include bonds or interest bearing deposits at banks, shares, and property. A deposit or bond involves lending money to the bank, government or company, and for that you are paid interest. Shareholders are part-owners of a company, and so are entitled to a share of profits. Everyone needs somewhere to live, work and have holidays. Buying into property means you get paid for letting other people use your building. These options provide a return on your money that offsets the effects of inflation.

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