Money, money, money. People around the world work for it, trade with it, and to a certain extent, need it. Humans measure value with it, are often incentivized by it, and some are even willing to steal for it. Most of us are too busy chasing money that we’ve never actually asked the ultimate question: what exactly is money?
What does money do?
In 1875, Professor William Stanley Jevons identified the 4 functions of money in his book Money and the Mechanism of Exchange:
Medium of exchange. People buy and sell things every day. Each of these transactions have something in common: money is what’s being traded for. Bob may give $10 in exchange for a book from Jane, and Jane will give the book in exchange for $10. Both parties have a universal common denominator from which the exchange can take place. This is in contrast to the barter system’s “coincidence of wants”, where 2 parties each hold an item that the other wants, opening the possibility of a direct exchange. The obvious problem is that these instances are often rare, thus preventing trade from occurring in the first place.
Measure of value. Say you’re in a clothing store, and you see 2 t-shirts. One is selling for $5, whereas the other is selling for $100. Knowing this, we can infer that the 2nd t-shirt is far more valuable than the first one. We know this because of money - it allows us to measure the market value of goods and services. Without this common denominator, we have no way to properly quote and bargain prices.
Standard of deferred payment. Say you want to acquire a good or service but you don’t yet have enough money for it. Well thanks to money, the seller can now value a debt that you are entitled to pay him sometime in the future. The delay of payment allows people to get what they really need now and pay it off later.
Store of value. Money must be worth something that you get today and are able to use later. This means that its value must remain stable overtime (which is why some people argue that inflation diminishes this role).
This is why our society has money. But in order to fulfill these purposes, money must first satisfy certain properties that allows it to operate:
Portability: how easy it is to carry money from place to place.
Durability: yes, literally. If you forget to remove your change from your pocket before doing the laundry, chances are that money would still be worth the same.
Divisibility: being able to split up your money into smaller units (i.e. a $10 bill into two $5 bills).
Scarcity: there can’t be infinite money because then money has no value and thus can’t be traded or store value. With the money supply being limited, value remains constant.
Accepted: this is the most important one. People need to agree on what money represents thereby creating a sort of universality of value storage and means of trade. If only a handful of people accept a certain kind of money, how are they supposed to interact with other participants in the economy?
The types of money:
When people think of the word “money”, what often comes to mind is piles of cash. But this is just one out of the many ways money exists, namely paper money. These were originally issued by commercial banks, who redeemed the notes for gold or silver coins during the gold standard. National bank notes, however, eventually came to replace commercial banknotes in which central banks were the issuers of. Here are some of the other forms of money:
Commodity money:
This is when money consists of objects that have both intrinsic value and their value in buying goods. Think beans, teabags, shells, cacao, silk, and copper. There’s actually an interesting story of this concept in action: during his stay in incarceration in a German prison, allied soldier Robert Radford observed how his fellow prisoners used cigarettes as a form of money. He even wrote an article about it, in which he describes how t-shirts for example, could be bought for 80-120 cigarettes whereas a cup of tea would set you back 2 cigarettes. In fact, this system even had its own inflation and deflation depending on how many cigarettes were in circulation.
Checkable deposits:
These are balances in bank accounts and which only serve as a medium of exchange. If you want to buy something, you pay with a check or a debit card, both of which do the same thing. If you have $100 in your bank account and you use your debit card to pay $10 for something, you’re essentially ordering the bank to transfer ownership of your deposit - that $10 will be transferred from your account to the seller’s account.
Digital money:
The name says it all: any currency or money stored or exchanged on digital computer systems. These not only include state-backed fiat currencies (such as the US dollar) but also cryptocurrencies (such as Bitcoin). As the world is becoming increasingly internet-based, several countries are investing in this technology with hopes of more efficiently storing their assets. In fact, with the way things are headed, in the future one may expect for physical cash to be largely abolished in favor of a completely digitized money system.
Perhaps money’s most interesting trait is not its wide range of forms it can take - beans, gold pieces, bills, even just 1s and 0s - but rather, the amount of trust people collectively put into it. Everyone simply accepts money as a valid way to perform various functions: act as a medium of exchange, measure and store value, and take on debt. Such a fascinating thing for people around the world to lose their minds over.