What is Money?

These characteristics eliminate a number of commodities from being used as money. For instance, cotton is not uniform. Steel is not valuable enough given its weight. Diamonds cannot be easily divided. Tools have limited value and food is not durable.

To qualify as money, a commodity must be...

• a store of value,
• a medium of exchange, and
• a unit of account.

Each of these characteristics is examined as it relates to society.

How Did Money Develop.

When a society has trade, it becomes wealthier. There are more goods and services. There is more leisure time. There is greater abundance. Initially, all societies trade in a system of barter. Barter is the direct exchange of commodities or services.

The Farmer and the Fisherman.

Suppose you have a farmer and a fisherman. The farmer may produce more corn than he wants if he can get fish. The fisherman may produce more fish than he wants if he can get corn. So, the farmer and the fisherman meet and exchange corn for fish. They both have more than they had before and both benefit from the trade. This is barter.

What if the farmer does not want fish but the fisherman wants corn? Then no trade can occur. This is the limitation of barter. If both sides of the trade do not get what they want, then it cannot happen. This "coincidence of wants" is the problem with barter. However, if they could decide on another commodity they both want, then they could use this commodity to complete their trades, whether or not the fisherman wants corn or the farmer wants fish.

The farmer sometimes wants fish but not all the time. The fisherman always wants corn. They both use wood in their homes. Since no lumberjack is present, they decide to use wood from the local forest to complete their trades. If the fisherman cannot trade his fish, he can use wood. If the farmer cannot trade his corn, he can use wood. When the wood commodity is used in trade, with no "coincidence of wants" it becomes money.

The wood is not the purpose of the trade. It is simply a convenience by which the farmer and the fisherman trade among themselves. It is used to get either corn or fish. That is the purpose of money. It serves to increase trade, allowing everyone to benefit.

Man and Money.

Throughout history and throughout the world, gold and silver have been used as money. They allow societies to trade and to benefit from having a commodity that can be used when a trade does not immediately benefit both sides. Typically, to set the weights and measures of the money, the government would mint and stamp them. It was a beneficial and uncomplicated system that worked.

The reason gold and silver work as money is because they meet the attributes so well. They are an excellent store of value. They are small and light. They can be divided without losing their value. Finally, they can be used to set the value of items in trade. This makes them an excellent medium of exchange.

What Is NOT Money?

There are very clear requirements for something to be called money. Money is a commodity. This means it has value apart from its use as money. It cannot be dictated, ordered, or forced. It is created from the natural development of those involved in trade. It has value no matter where the trade takes place or who is involved.

If you are still unsure, ask yourself, "Does what I call money have the same value today as it did 50 years ago, or 50 years from now?" Think of it another way. A gold coin today is a gold coin 50, 100, or 1000 years from now. Can the same be said for what many call money today? Can you hold or feel your money? Does it have value if the banks did not accept it?