Properties of Money

TLDR: There are good and bad forms of money. The properties that good money are good at are durability, divisibility, portability, recognizability, and scarcity.

Money is subjective. What you or I think of as money is most likely different from what someone who lives on the other side of the world thinks of as money. Just try buying a burger with Chinese RMB in Texas. You may be arrested. Because money is any good that is used to express price, technically nearly any good can be used as money. Even when gold was widely accepted as the world’s currency, there were likely some countries and cultures that used other goods as money instead. Despite its subjectivity there are certain properties that make for good money… or bad money. History has shown that people will coalesce to transact with goods with durability, divisibility, portability, recognizability, and scarcity. The most widely accepted monies have had all those properties.

Durability is the property that is most important in fulfilling a good’s function as a medium of exchange and a store of value. In a small town there can be upwards of 300,000 monetary transactions on any given day. Therefore any good that is used for exchange must be able to completely maintain its integrity while being moved, handled, and stored thousands of times daily. There would be a continuous decrease toward zero in the value of any good that was transacted thousands of times but was not resistant or impervious to degradation. Gold has been used as a store of value in the world economy because it is one of the few precious metals that can be hot, cold, wet, dry, moved and held stationary without the risk of corrosion. The internet gives us another means of creating goods that are even more durable than gold.

Divisibility or fungibility is another property that is common to the best forms of money. Divisibility can best be demonstrated when we look at the example of diamonds. Although diamonds have been used to transact in small communities, they have never reached global status as a medium of exchange or unit of account because they are not fungible(divisible). Diamonds cannot be broken down into equal units of measure even if that measure is weight. Each diamond has certain characteristics that contribute to its value, so my 1 carat diamond could be worth less than yours. What’s more, if my 1 carat diamond is broken in half, there is no known way to put the pieces together again. The best money is fungible. They can be broken into small units and brought together again into large units. This property contributes to the ease of use and mass adoption of a given good as a medium of exchange and a unit of account.

As the world economy grew and nations became more globalized, it became more and more expensive to move large quantities of gold between countries. One of the reasons gold has failed to be a medium of exchange in the post-industrial economy is because it falls short in the category of portability. For physical goods, the cost of portability will increase in correlation with the increase in volume. Digital goods offer a unique advantage in portability over any physical good that has ever been used as a medium of exchange. A digital asset can be moved one mile or one hundred miles with no marginal increase in cost.

Society will choose what it uses as money. Despite what we are taught to believe the government, central banks, or economists do not get to choose what money is. Instead we as a society decide over time what we will transact with. Fiat currencies (like the US dollar) are lacking in almost every property that makes for good money except for recognizability. When enough people have become accustomed to and trusting of fiat currencies, any switching cost will seem too high. Fiat currencies are allowed to be inferior goods simply because we are comfortable with them. Recognizability means that all users involved in transacting with a good recognize its value and have little need to authenticate its worth. While fiat currencies fall short in nearly every other category, they were unrivaled in recognizability until the invention of Bitcoin.

Lastly, the most important property of good money is scarcity. Dirt has very little monetary value because there is just so much of it. Any good with an infinite supply or that can be infinitely produced will not be widely accepted as money. Where fiat currencies excel in recognizability, they are one of the least scarce goods that have ever been used as money. With the click of a finger central banks and their governments are able to create trillions more fiat dollars. With each dollar “printed” the dollars in your pocket lose a little value. Scarcity is vital to money’s function as a store of value because if the good you choose to store value(save) in is continuously being deteriorated, eventually you will choose something else to store value in. The deteriorating goods will slowly stop being a medium of exchange.