Nov 2014

What Is Money?

The need for money comes from the idea that we live on a planet with finite resources. Human desire is not limited, yet resources vary by scarcity and availability. Therefore, it is necessary to have a medium to exchange those resources which are not perfectly abundant. This medium must be generally accepted to be useful as money.

A unit of exchange is necessary to allocate scarce resources among a population with theoretically limitless desire. Money itself is neither good nor evil, but rather a necessary tool in a properly functioning economy.

Money is a unit which can be used as a:

  1. Medium of Exchange
  2. Store of Value
  3. Unit of Account

Aristotle, the Greek philosopher, defined the characteristics of a valid currency comprising of four core aspects:

  1. Durability
  2. Money must remain in the same state it was originally created in. It cannot change or be destroyed by the forces which use it.

  3. Portability
  4. Money must be able to be moved easily.

  5. Divisibility
  6. Money must be able to be divided into smaller units.

  7. Fungibility
  8. All units of money in circulation must be identical.

Trust that the money supply will be accepted makes up the most important factor when it comes to its survival. When this trust erodes, the tender is in danger of being debased. There are many reasons why money loses its trust among its user base. Money could then be described as a collective agreement.

When there are enough people who settle on what holds their trust, that which they agree upon becomes secondary. History has provided us of countless examples of this being true. Whether it be cigarettes among a prison society, animals among farmers, precious metals among kings, and now computer code, money remains a collective agreement established by its user base.

Money is a proxy for labour. Think of money as a bearer instrument with which you can redeem services from society. It is essentially stored labour product, and therefore, can be seen as stored energy.

The entire money supply, and the financial system it operates within, is a vast network of information on who owns and owes what to whom.