What is Money? 5 properties of good money

Money. We hear this term so often, yet very few people actually understand its meaning. Most people think of paper notes or coins, some maybe even gold coins. The truth is that money is not tied to a physical commodity, but is a technological concept that solves the deepest problem of human civilisation – how to enable people to trade with each other unhindered, instead of stealing other people’s property. Money is therefore the idea that allows civilisation to flourish.

In this essay, we will review the basics of monetary terminology, the history of money and try to foresee the development of monetary technology in the 21st century. century. Let’s start with an overview of the basic characteristics of money.

MONEY IS TECHNOLOGY

Like other inventions of human civilisation, money is just technology. It is the idea of how best to meet certain human needs. Money thus does not refer to a specific product or activity, but to the mental idea of how to improve the efficiency of the exchange of goods we exchange with each other in order to meet our needs. We want money not because it can directly satisfy our needs, but because it indirectly enables us to satisfy them. To analyse the question “What is money?” we need to explore its main characteristics. This can be done by dividing monetary technology into the three main roles it plays:

EXCHANGE AGENT

Money is a tool we humans invented to facilitate trade with other members of a primitive economy. Before the invention of money, the dominant form of trade was direct or barter. This meant that each individual had to find someone who was willing to exchange what they owned and wanted to get rid of, in exchange for their goods. Since an exchange always involves unequally valued goods from the point of view of the two exchangers, it must be the case that each of them values the other’s good more than his own, otherwise the exchange would not take place. The problem arises when the owner of the good we want to acquire does not want to receive in return the good we are offering. As we can see, direct trade is a very disadvantageous way of trading, as it is based on the mutual contingency of needs.

Money is the tool that solves this problem by establishing a medium of exchange, i.e. the use of a means to facilitate the exchange of goods. In addition to goods intended for immediate use or investment, we have thus included in the economy a special type of goods that serve only indirect exchange and that we do not want to consume or use in production processes. Money is not accepted to be consumed or to satisfy other needs, but because it is the most desirable means of facilitating future exchanges to secure goods for consumption or for use in production. This brings us to the first feature of monetary technology – the exchange agent.

STORE OF VALUE

Another characteristic of money is that it preserves the value of our work over time. The more durable and resilient money is, the better it holds its value. Bananas are a poor store of value, as they rot and perish. Precious metals, on the other hand, are highly resistant to decomposition and therefore retain their value for longer. Good money is money that keeps its value over time. The problem arises when money is not just a victim of decomposition, but increases in quantity with new production. For example. Steel, despite its remarkable resistance to decay, does not serve the role of money as well as gold, one of the rarest metals in the Earth’s crust. If the amount of new units of money increases each year, it means that our share of the units in the total stock is getting smaller and smaller. This means that we can buy fewer goods with the same amount of units of money than we could in the past, because each new unit of money in circulation increases the price of other goods expressed in units of that money. This phenomenon is called monetary inflation, and it involves an increase in the quantity of units of money compared to the existing stock, which lowers an individual’s share of the total stock. In this way, those who produce new units of money benefit, while everyone else loses. So what is actually happening in the process of monetary inflation is a redistribution of individual wealth within the economy. Those who have the power to increase the amount of money thereby devalue the shares of all those who are unable to do so. This phenomenon is called the Cantillon Effect, and is now known as inflation in the broader sense of the word. Since we do not consume or use money in production, increasing the stock of money does not increase our welfare, but merely changes the ratio of purchasing power of individuals. It is an excellent way of stealing wealth and impoverishing the population.

UNIT OF ACCOUNT

The last role that money plays is that of price calculation. Through the widespread use of the medium of money, prices for goods are developed in the market, calculated in units of money. Money also serves the purpose of accounting for goods in one universal unit, rather than having to constantly convert them from one unit to another. In its absence, transactions would require an infinite number of prices in units of all possible goods, e.g. 1 apple = 2 pears = 3 bananas, etc. The problem is not just the quantity, but the constant traceability of the converters of the different units, which means that all these ratios would fluctuate from day to day, making efficient conversion and thus trade impossible. The problem stems from the fact that the supply of and demand for various goods change every day, and so do their prices. This is because the value of goods is entirely subjective, with each individual assigning a different value to goods. Value is therefore derived from the behaviour of individuals within the economy, who value goods on the basis of their current needs, which are constantly changing.

Prices in units of currency also fluctuate on a daily basis, but are still expressed in units of a single currency, which makes things easier for the everyday buyer. Uniform prices allow individuals to do the economic math, i.e. make economic decisions based on their purchasing power, which is reflected in the relationship between the prices of goods and the amount of their wealth. This lets you know how much you can afford that day, so you can optimise your spending and set your savings level.

Inflationary money, which loses its value rapidly, continuously pushes up the prices of goods on the market, making it harder for individuals whose purchasing power is depreciating over time to become economically productive. Deflated money lowers the price of goods, which means that buyers have more purchasing power over time and can afford more goods on the market. This allows them to economise their consumption and invest some of their wealth in larger-scale production processes that produce more and better quality products. The charm of gold as a medium of exchange was that the price of goods on the market, expressed in units of gold, was constant or gradually declining, allowing buyers to afford a larger quantity of goods when they saved in gold. Saving is a precondition for consumption.

FIVE QUALITIES OF GOOD MONEY

An asset that effectively serves all three of the above roles of good money must have the following characteristics:

  • Sustainability (resistance to decomposition and external influences)
  • Portability (the difficulty of moving money through space)
  • Divisibility (divisibility into units small enough to allow microtransactions)
  • Convertibility (units of money must be homogeneous and not differ from each other)
  • Scarcity (money must have a sufficiently high ratio of stock to inflow. The stock refers to the total existing stock of money in the hands of individuals, while the inflow refers to the annual amount of newly produced units of money.)

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