"Medium of exchange" represents a forceful mandate, while "unit of account" subtly reshapes our thinking patterns. Once it becomes a habit and cultural norm, it becomes incredibly difficult to change.
Why is the value of $50 today different from its value in the past or future? What human manipulations happen behind the scenes, and how does the invisible "inflation tax" truly impact us?
This discussion clarifies what a monetary "unit" truly means and explores why "value" and "price" are often intertwined. Building a solid understanding of money is crucial for deepening your grasp of digital currencies and stablecoins.
Key Discussion Points
- A unit describes value; the unit itself holds no intrinsic value, but value requires a unit to be meaningful.
- The critical difference between "value" and "price."
- How our understanding and use of measurement units is deeply connected to language and culture.
- Why is Bitcoin not a good unit of account?
- Blockchain technology separates value from the unit of account, ushering in an era of 'pure units.'
- What does it mean that "New Taiwan Dollar" and "New Taiwan Dollar unit" are distinct, just as "US Dollar" and "US Dollar unit" are?
The Critical Role of a "Unit of Account"
The Interconnection Between Unit of Account and Medium of Exchange
The "unit of account" and "medium of exchange" are fundamentally linked. When a product is priced in New Taiwan Dollars (NTD), payment is made using the medium of exchange—NTD. In reality, "price" and "value" are two distinct concepts.
A unit is a standard of measurement. We use units constantly in daily life, like centimeters, meters, or kilometers. A unit itself has no value, but value must be described using a unit. For example, gold possesses value, but that value needs a unit like grams or ounces to be quantified. Simply put, units are used to describe value.
Consider this: according to IMF data, Taiwan's GDP in 2022 was $828.6 billion, surpassing Switzerland to become the world's 21st largest economy. In this data, the "US dollar" acts as the medium of exchange, while "billion" serves as the "unit of account."
How Units Give Tangible Form to the Abstract
Units provide a sense of tangible possession. This feeling of ownership is necessary for supply and demand dynamics to emerge. For instance, while you cannot physically hold Bitcoin, blockchain technology creates this unit, giving people a sense of ownership. It's an alternative way to embody money, units, and value.
Economic activity requires a "unit of account," especially as money evolves from physical to digital and even abstract forms. You must "make people believe" they truly "own" something for supply, demand, exchange, and transaction to occur. Everything has a unit, even intangible air and abstract time.
However, "value" itself does not have a "unit of account"; the unit is created. In the era of traditional finance, the power to create monetary units was held by sovereign states and governments, like with the US dollar or NTD.
For example:
Person A pays Person B 180 units of currency for one hour of their time. Two different units are describing two different values.
- The time value of one hour.
- The price of 180 units, described using a currency unit of account.
Is Only the "Monetary Unit" Subject to Inflation?
Creating "money" is essentially creating a "unit." Money is a special unit of account. It is the only unit in the world that捆绑 (bundles) "price" and "value" together. Because "price" and "value" are捆绑, it becomes controllable. Issuing more money causes inflation, but the same isn't true for water.
Physical units are constant in describing their value; they are the same now and in the future. However, a "monetary unit" essentially stores future productive capacity.
For example, two liters of water thirty years ago is the same as two liters of water today. The description "two liters" from thirty years ago wouldn't be described as "one liter" today.
But a fiat currency's "unit of account" is flexible. The purchasing power described by one hundred units—the "store of value"—will not necessarily be the same years later. Two liters of water will still be two liters in the future, but $500,000 today will not have the same value as $500,000 in five years.
The Unit as a System of Logic and Operation
The Unit of Account Extends the Reach of the Medium of Exchange
The "medium of exchange" represents an access right, an extension of national sovereignty. When a sovereign state claims an economic territory, anyone wanting to enter must convert their currency into the "medium of exchange" adopted by that government—a强势 (strong) mandate on the tool for transaction. For instance, within India, transactions must use the Indian fiat currency, the Rupee. The expansion and perpetuation of this access right rely on the existence of a unit of account.
A "unit" is a habit. It is not only difficult to change, but the cost of change is also very high. For example, the global trading system uses the US dollar as its unit of account. Everyone uses the same unit to think, contract, and design trading systems. Changing this habit is extremely difficult, a phenomenon known as the "network effect" or inertia; the longer it persists, the harder it is to disappear.
The "unit of account" gives the "medium of exchange" expansiveness and longevity. The world's financial systems use the dollar for accounting, and information systems are designed around it. Even if the US might not remain dominant forever and its national power declines, the unit of account has become a habit ingrained in people's lives, controlling their mindset and prolonging the life of its access right.
How Governments Steer Economies Using the Monetary Unit
Simply put, a unit like "ten dollars" is deliberately created—a new currency, a unit of account. It does not represent value itself. But by硬是 (forcibly)捆绑 "price" and "value" together, the unit "ten dollars" itself comes to represent both "price" and "value."
Therefore, governments can create fiat currency to describe the value created by human productivity. This value is recorded using the unit of account, allowing people to state how much money they have saved. It records past productive efforts in units of account.
Government Manipulation of the Monetary Unit and Inflation
Once productive value can be recorded, people work hard. As more people accumulate wealth, some may choose to stop working. This was seen during the early pandemic: booming stock markets made investing highly profitable, leading some to leave the workforce. National labor wasn't fully utilized. Low unemployment coupled with a labor shortage signals a problem.
In this scenario, the government can devalue the unit. Savings that could have lasted ten years might now only last five. Alternatively, raising electricity prices or general price inflation reduces purchasing power. The amount of money doesn't decrease, but the purchasing power described by the unit diminishes. This恶性的 (vicious) inflation erodes purchasing power, compelling people to return to work.
Blockchain Decouples Value from the Unit of Account
How Blockchain Technology is Redefining the Unit of Account
Governments can wield power through the units of account they issue. However, blockchain technology offers the possibility of decoupling value from state control, creating units no longer tightly bound to a single sovereignty.
For example, DAI, a US dollar-pegged stablecoin issued by the decentralized autonomous organization MakerDAO, is a decentralized stablecoin synthesized using blockchain technology. Its reserves are primarily in Ethereum, making it feel like using US dollars but without being controlled by the United States.
Although the unit of account still suffers from strong network effects (everyone is accustomed to using the dollar), and a sudden shift is impossible, we now have a "unit" that isn't as tightly bound to US sovereignty.
In fact, the unit of account used by every country is directly prefixed by the country's name. Take the world's most dominant currency, the US dollar: "dollar" is the unit, but when it's a "US dollar," it is controlled by the United States. It is no longer a "pure" unit. A DAI, holding the value of one dollar, represents a step towards a "pure" unit.
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Frequently Asked Questions
What is the difference between a medium of exchange and a unit of account?
A medium of exchange is the instrument used to facilitate a transaction, like cash or a digital payment. A unit of account is the standard numerical unit used to measure and value goods, services, and assets. While often the same currency fulfills both roles, they are distinct functions.
Why isn't Bitcoin considered a good unit of account?
Bitcoin's high price volatility is the primary reason. A reliable unit of account must provide stable valuation over time to facilitate long-term contracts, pricing, and accounting. Bitcoin's fluctuating value makes it difficult to use for consistently pricing goods and services.
How does government monetary policy affect the unit of account?
Governments and central banks can influence the value of their currency unit through monetary policy, such as adjusting interest rates or controlling the money supply. Increasing the money supply can devalue the currency unit, leading to inflation and reducing its purchasing power.
What is a 'pure unit' in the context of blockchain?
A 'pure unit' refers to a unit of account, like a decentralized stablecoin, whose value is maintained by algorithms or collateral on a blockchain without being directly issued or controlled by a single sovereign government or central authority.
Can a unit of account exist without a medium of exchange?
In theory, yes. A society could agree on a standard unit for measuring and comparing value (unit of account) but use various commodities or assets for actual transactions (medium of exchange). However, in modern economies, a single currency typically serves both purposes for efficiency.
What are the advantages of decoupling value from the unit of account using blockchain?
Decoupling through blockchain can create units of account that are more neutral, global, and resistant to manipulation by any single government. This can lead to greater financial inclusion, more stable stores of value for people in economies with high inflation, and more efficient global transactions.