What Is Money?

The first is that it should be a store of value. Historically, gold and silver filled this role perfectly because they were rare, took a lot of human energy to mine, and did not corrode or rust.

By contrast, most of the western currencies pretty much constantly lose value over time – a feature which punishes savers and enforces the need to speculate and/or invest.

The second feature is that money needs to be accepted as a medium of exchange, meaning that it is widely accepted within a population as an intermediary within and across all economic transactions.

The third feature is that money needs to be a unit of account, meaning that the money must be divisible and each unit must be equivalent.

Without money, the complex job specializations that we have today would not exist, because barter is so cumbersome and constraining. More importantly, though, is the concept that each type of money system has its pros and cons – each will enforce its own peculiar outcomes by promoting some behaviors while suppressing others.

Money is a claim on human labor. With a very few minor exceptions, pretty much anything you can think of that you might spend your money on will involve human labor to bring it there. It’s a claim rather than a store, because the human labor in question might have happened in the past, or it might not have happened yet.

Literally anything can be considered money – cows, bread, shells, tobacco. An EURO or US dollar, like all modern currencies, however, is an example of a type of money called fiat money. “Fiat” is a Latin word meaning “let it be done,” and fiat money has value because a government decrees that it does.

It is crucially important that a nation’s money supply is carefully managed, for if it is not, the monetary unit can be destroyed by inflation.