Chapter 3: Money
“An accepted or authorized medium of exchange”
“Coinage or negotiable paper issued as legal tender by a government”
“Assets or compensation in the form of, or readily convertible into cash”
“A current medium of exchange in the form of coins and banknotes; coins and bank notes collectively”
“The means of valuation and of payment, as both the unit of account and the generally acceptable medium of exchange”
“A generally accepted, recognized, and centralized medium of exchange in an economy that is used to facilitate transactional trade for goods and services”
“Any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context”
“An economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy”
“Anything which is used as a medium of exchange and has legal sanction of the government”
“The coins or bank notes that you use to buy things, or the sum that you have in a bank account”
“What you earn by working or selling things, and use to buy things”
- Selected “definitions”
If you only skimmed the above descriptions, that’s part of the point.
Modern attempts to define Money have been vague and inconsistent.
A good definition would facilitate classification, but the above descriptions only serve to cause confusion. Can we derive a general meaning from these varied accounts?
“Medium of exchange” was used six times. Government authority or centralization, four times. Seven descriptions lack any physical specifications, while four list things like “coins,” “bank notes,”, or “cash.”
Phrases like “generally accepted,” “recognized,” or “current,” were used six times, and there were two references to “compensation,” or “what you earn.”
Questions remain.
Must the government be involved?
How “generally recognized” does Money have to be? For where and by whom?
Descriptions are sensitive to changing circumstances, but a good definition should remain stable. The only physical items mentioned were coins, bank notes, or cash — but these are still, despite their decline in our digital age, modern forms of Money.
We’ve also used feathers and seashells.
Bank accounts have only existed for about five hundred years, and most humans don’t have one. Coins are much older, but many other forms of Money came before this.
Academic attempts to define Money have emphasized functions.
“Medium of exchange” — an intermediary item that facilitates the sale, purchase, or trade of goods between parties — appears six times. This is undoubtedly a primary function.
When we exchange our Time for Money, and our Money for Food, “goods” are being traded. But professional economists place no special importance on these “trading pairs” of human life. Time and Food are treated as regular goods like any other.
Our species’ intermediation between Time and Food implies the use of Money as a medium of exchange.
But this function doesn’t capture everything.
Economists often cite two other functions when asked to define Money: “store of value” and “unit of account.”
Agricultural Food surpluses were the original “store of value,” but many Foods were best consumed fresh. And since fresh Foods could not literally be stored, Money became a means to preserve access. This was how the Romans fed their armies from a distance.
Our modern world is very different, but some things haven’t changed.
We require Food throughout our lives, but our ability to convert Time into Food (or today, Money) is concentrated within our middle, “working” years.
We begin eating Food well before our first “job” and often continue well past our last.
This mismatch between our continuous need for Food and our relatively limited window for exchanging our Time for Money is what makes the “store of value” function so important to modern human life.
Unlike governments, corporations, or other legal entities, humans are constrained. Our hunger is experienced physically — it is not something just to be managed or exploited.
To secure access to Food throughout our lives, humans have long sought ways to store value.
The “unit of account” function is about keeping track of things.
As indicated by notions of “general acceptability” or “legal sanction of the government,” units of account are typically localized.
For example, the U.S. “dollar,” the Mexican “peso,” and the “euro” are the respective units of account for the United States, Mexico, and the European Union. It may seem like every country has its own Money, but this is not exactly how it works.
The U.S. dollar is transacted with globally, while many European countries share a single currency. Others, like Zimbabwe and El Salvador, rely on foreign currencies (USD) rather than issue their own. But things are slowly changing.
In 2021, El Salvador adopted “Bitcoin” — to be covered later — as an alternative legal currency to operate alongside the dollar within their country. Domestic transactions typically use local units of account, but international transactions may not.
Buying a tanker of oil is different from buying lunch. Dollars have long been the preferred currency for such purchases, but this is also slowly changing. The Chinese Yuan is starting to be used for this purpose and, in rare cases, even physical gold.
Before turning to the history of Money — where gold features prominently — we must briefly explore how these economic functions fit within The Algebra of Life.
Just as Time, Food, and Money must be understood together, so must Money’s three functions. They are similarly interrelated while remaining fundamentally distinct.
The difference has to do with Time.
Transactions of value happen in the present. This is the medium of exchange function. For the store of value function, the value is being stored for future use. The unit of account is critical for record-keeping of the past.
“Medium of exchange,” “store of value,” and “unit of account” are terms formerly reserved for academic specialists. Most humans used only one type of Money — their local currency — so there was little reason to question its characteristics.
But the emergence of alternatives like Bitcoin has caused many humans to begin asking questions about their Money.
Medium of exchange where? And for what?
Generally accepted by whom?
Store of value for how long? And how well?
What do dollars really account for?
What’s the difference between Money and value? And how is value stored?
Can Money “go bad” over Time, like Food?
What is “good” Money?
More than ever before, modern humans are beginning to ask these questions.
The next post will explore what happens when Money fails.