What is Money?

TLDR: Money is a good with the primary purpose of expressing price. In order to fulfill that purpose, money must function as a medium of exchange, a store of value, and a unit of account.

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I learned how to shoot dice when I was in middle school. After some of the older kids started to gamble their allowances during free periods, the game became more and more popular. Soon it seemed as though the entire school was either playing, making side bets, or spectating these exciting little games of chance. Who knew that gambling could be so addictive.

I remember a particular game involving my friend Peter where he was literally being taken for his lunch money. After he had lost all of his cash, Peter did what any self respecting gamesman would, and decided to bet the next best thing he had of value. He reached into his backpack, pulled out a tin case of pokemon cards then held up a holographic Charizard. For those either too young or too wise to understand the value that card had, it was the middle school equivalent of betting his car’s pink slip. The kid that Peter was playing against dispassionately accepted the wager, and they continued to roll.

At the beginning of the school year it was common for us to stake pokemon cards, giftcards, cash, candy and whatever else that we knew our classmates would value. By the time winter rolled around, our school had reached a consensus about what was appropriate to stake when playing dice. Everyone played with either cash or pokemon cards. For reasons unknown to us at the time, we decided that in our school’s economy cards were the same as fiat currency. Those cards became money.

Everyone knows what dollars are. Everyone knows that dollars are money. But, like most people I have worked to earn more money without even knowing what money is. And without knowing what money is, we never think to ask what money should be. In a previous paper, I attempted to explain the importance of price. Put more concisely here, price is the single greatest tool we have to share qualitative information. Money’s primary value is its ability to express price. The better a “thing” is at expressing price the more people will adopt it as their money. The economist Dr. Saifedean Ammous states money must function as a medium of exchange, a store of value, and a unit of account. I believe these functions all have the ultimate outcome of effectively expressing price.

In order to express price, money must be a medium of exchange. A medium exchange is any good that can be reliably traded for something else of value with most other people in any given economy. In our school’s small economy, we were able to use pokemon cards as money, because we either valued them ourselves or knew others would value them. However, it would be unlikely for anyone outside of our circle to use the cards to transact. Through history different tribes, nations, and societies have used many different and disparate forms of money to transact. As the world became more and more globalized it required a medium of exchange that would be effective across borders. For many reasons, gold became that medium. “A good that assumes the role of a widely accepted medium of exchange is called money.”1

Imagine a world where apples were used as money. Because they age and die, it would be nearly impossible to express prices in a way that was widely accepted. In that world, one vendor would only accept an apple if it was picked within the week, while another vendor would only accept an apple picked within the day. The price of 1 apple would be completely arbitrary information. To effectively express price, money must also be a store of value. In order to store value a good has to be salable across time. “For a good to be salable across time it has to be immune to rot, corrosion, and other types of deterioration.”2 Gold became the money accepted globally in large part because it was one of the few scarce medals that did not corrode or deteriorate over time.

Money also functions as a unit of account meaning money has to be ledger. When our school decided to use pokemon cards as money, it would have been complicated to transact with students from school B who decided to use baseball cards as their money. The complexity would increase by orders of magnitude if there had been a third school, school C, whose students used pogs as money and wanted to transact with both our school and school B. (When governments depegged their fiat currencies from gold, they created economic complexity and convolution on a global scale.This is one of the reasons money in one country is not considered as money in others, but that is a story for another paper.) When there does not exist a good that is a widely accepted medium of exchange there is no accurate ledger of value created, transferred, or destroyed. Goods that are a store of value and a medium of exchange become a unit of account. As a unit of account money can fulfill its primary purpose of expressing price.

What is money? Money is any good that we choose to use to express price. To express price a good has to be a medium of exchange, a store of value, and a unit of account. We as a society decide what constitutes money. When we know what money is and what it should do, we can make better decisions about what money should be, and that allows us to recognize the goods that make for better money.