We all use it, most of us would like to have more of it, but what is it really?
Money’s most basic purpose is to support the exchange of goods and services; it enables broad, rapid, complex exchanges that are not possible with the gifting or barter practiced in small simple economies. Money is used to measure and represent value. When you work to provide a product or service to an employer, client, or customer, you are giving them something of real value. When you accept an otherwise worthless piece of paper or bank account entry as compensation, you do so based on agreement and trust. You both agree that that piece of paper or account entry represents value that can carry over time and distance. You accept it because you trust that it will be accepted by someone else in exchange for something you consider valuable.
Putting all this together, we could say that money is a human invention based on agreement and trust and used to represent value in the exchange of goods and services. It is used to measure exchange value, similar in some ways to how inches or centimeters are used to measure length, and gallons or liters are used to measure volume.
WHAT MONEY DOES
Money functions as…
- A medium of exchange; it is a tool.
- A unit of account to measure value.
- A store of value over time and distance.
- A formative influence on societal developments.
CHARACTERISTICS OF MONEY
There are many different kinds of money systems. We have a choice. All kinds of money have six characteristics in common:
- Community-wide agreement to use it in exchanges.
- A token of some kind. Sometimes one money system has multiple forms of the token, such as a coin, a paper, and an accounting entry.
- Authentication. Typically some authority certifies the authenticity of the money token.
- Trustworthiness. There must be confidence that the money will have continuing value.
- Creation. A supply of money must be created by someone and entered into an economy. This is the most important characteristic of a money system. Whoever has the power to create the money supply has a dominant power over society.
- Destruction. Money can also be destroyed or removed from the economy. The amount of money created or destroyed affects the purchasing power of individual units of the current money supply.
Knowing money’s basic functions and characteristics provides a basis from which to evaluate the money system we have and consider alternatives. Our current money system is deeply dysfunctional, particularly with respect to how money is created and destroyed. For an explanation of the money-creation process used in the U.S. and throughout the world, see How is Money Created Today?
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