The most basic question that one can probably ask regarding all things finance, economics, and money is “What is money?” We all know that a US Dollar Bill or a Euro is considered money, but most people have never really given thought to what the properties of money are and what makes something actually money.
We can begin by going back in history before there was anything that could be considered money as we know it today. Let’s go back 10,000 and look around at what we see. In that distant and difficult world, most individuals provided everything for themselves with almost no specialization as we know it today. However, there was some trade occurring – maybe one farmer or a group of farmers would trade some cattle with another group of farmers. They would give cattle and receive some sort of fruit in return. This could have occurred for a number of reasons (eg. maybe that fruit didn’t exist readily where the farmers with the cattle lived), but that’s beyond the scope of this discussion.
Now, we just witnessed an exchange (cattle for fruit), but would we call either cattle or fruit money? No, we wouldn’t. We may not be sure why, but we intuitively understand that neither cattle nor fruit nor any animal can properly be considered money as we know it today. To be properly classified as money, an item (or set of items) must possess the following properties:
Unit of Account: We should be able to keep count with money. This is possible with things such as grain or salt because we can weigh them. It is surely possible with US Dollars or other paper or metal currency because they are inherently designed to be a unit of account. US Dollars exist in three forms, either in paper, in metal coins (fraction of US Dollars), or in digital form, all of which lend to easy counting. Counting might be possible with animals, but it’s much more difficult to do it accurately and in a sophisticated fashion (eg. large cow vs. small cow – are they the same?).
Durability: Money must be sufficiently durable to act as (1) a store of value and (2) a means of exchange, two crucial sub-properties of money. Money must not perish quickly and must maintain its shape, structure, and form for sufficiently long periods of time. US Dollar Bills are pretty durable while a coin is obviously even more durable. A fruit, such as a head of cabbage or a banana is exceedingly fragile because each will perish quickly and cease to be recognizable or useful. People are willing to accept an item for payment because they are confident that they will be able to use that item at a later time for a purchase of their own. If an item is fragile, then it will be useless as a store of value or a means of exchange.
Divisibility: Money must be able to be divided. US Dollars, both in paper, coin, and digital form can be divided into increments as small as pennies. Salt piles and grain piles can be divided by weight. Gold, silver, and other precious metals can also be divided by weight as well. An animal is very hard if not impossible to divide. If you only have one cattle but want to purchase something that is only worth a quarter of a cattle, you’re in a bit of a dilemma.
Fungibility: To be fungible is to possess the property of mutual interchangeability. In simple terms, an item is fungible if you don’t care about the quality of the item. For example, whether you have a very used US Dollar Bill or a brand new one, you still have a US Dollar Bill and should be indifferent among the two (accept for aesthetic purposes). As long as the purity is the same, all gold or silver in the world is exactly the same. Things such as diamonds, however, are not fungible because diamonds come in different clarities. One diamond cannot perfectly replace another like one Silver Eagle can perfectly replace another Silver Eagle. Animals are also not fungible because each is unique in terms of gender, size, health, or even disposition.
Non-counterfeitability: Good money should possess properties so that you can easily tell whether it’s real or whether you have been presented with a fake or counterfeit. US Dollars are very difficult to counterfeit although it’s obviously possible to make fake dollars of sufficient quality to fool an unsuspecting individual. Gold and silver are difficult or impossible to counterfeit as long as proper tests are done by the recipient to make sure that the chemical makeup of the item is actually that of gold or silver. Art might be counterfeited moer easily and it is much costlier to check it to make sure it is original. Currency that is poorly designed or that doesn’t contain any anticounterfeit measures within it will be poor money because it will be very difficult to tell if it is real or fake.
These are the main properties of money, although some texts and economists might label them differently or add or remove a property. What we can take away here is a fundamental understanding of what money is and what it isn’t. This very basic understanding might not prove useful right away, but such an underlying knowledge will help to inform you as you learn more about money, finance, investing, wealth building, and other topics for your personal and financial development. The development of money is a crucial part of why humanity has progressed so far (without money modern trade would be nearly impossible) and this post has barely scratched the surface of what money is, its history, and it’s central role in humanity rise from darkness into prosperity.