What is Money?
Everyone, or almost everyone, desire to make “money.” This is a perfectly logical desire since all of life’s necessities (food, clothing shelter, etc.) are purchased with money. In addition to the general necessity and desire of money found among all people, the issue of the nature of money is a key foundation for anyone who wants to become a successful entrepreneur and investor. However, we are rarely taught in school to ask, “What is money?” or “What are the functions and characteristics of money?” The answers to these questions are the foundation of both understanding what money is and how to use it to further your dreams and aspirations.
Now I understand, and to a point agree, that some of you will think, “Why are we reading about something that is dry and boring?” I take full responsibility for this and want to help you understand how important these basic concepts are and, more importantly, why the current economic culture benefits from you not knowing these basis characteristics and functions of money. In fact, this is by design (more on this at a later time).
The Definition of Money
Simply put, money is anything widely accepted as final payment for goods and services. So what makes a given item widely accepted by the public as a final means of payment? The answer is simply the agreement upon an idea of what money is by the people of a given location, nation, or culture. Across history, many things have fit this idea of money. Examples include gold, silver, copper, seashells, and even tree bark! Now that this basic definition is established, we can look at the functions of money.
The Three Functions of Money
Money has three simple functions in human commerce.
- Medium of Exchange- Money serves as a medium wherein people and/or businesses are able to exchange resources of economic value.
- Unit of Account- Money also serves as a unit of account wherein people can measure economic activity, set prices, and determine the value of a given commodity, resource, or service.
- Store of Value- Perhaps most importantly, money should serve as a store of value wherein people may save in order to preserve purchasing power for the future. This function of money serves as the foundation of healthy economic development, future investment, and personal economic resiliency.
Six Characteristics of Money
Along with these three functions of money, we have six basic characteristics of money. They are:
- Divisibility- The ability for it to be orderly divided and counted
- It’s Portable- One can easily carry it with herself or himself
- Acceptance- It is viewed and seen as a legitimate means of payment for goods and services.
- Scarcity- It is something that is not overabundant, therefore giving it a sense of value and uniqueness.
- Durability- It is able to stand the physical test of time.
- Stability- A key characteristic is that sound money is stable, meaning that is it a constant value and orderly means of determining prices of goods and services along with determining proper prices of those goods, resources, and services.
This rudimentary and, to be honest, novice understanding of money will be a key pillar for the foundation of one’s personal finances and business endeavors. The question to ponder is whether our current money fits these three function and six characteristics of sound money. This inquiry will have to be delayed until a later time.
To our success,
Joshua Rodning McIntyre