There is a lot of uncertainty in the world these days. However, I am confident money and its role in the world has not changed since its invention. Furthermore, most people don’t understand what money really is and what it represents.
Civilized man has been using money to exchange goods and services for a very long time. Aristotle himself put a lot of thought into the defining characteristics of money back in the 300’s B.C. Adam Smith, the found of Austrian economics, spend a good deal of time writing about what money is, why we use it, and what it represents.
So what is money? Aristotle defined money as having five key characteristics:
- Durable: it shouldn’t fall apart in your pocket nor evaporate when you aren’t looking. It should be indestructible. Therefore we don’t use fruit or wheat for money. If it can rot, be eaten by insects, and so on then it does not last
- Divisible: it needs to be convertible into larger and smaller pieces without losing its value or basic characteristics, to fit a transaction of any size. This is why we don’t use things like porcelain for money—half a Ming vase isn’t worth much and it is not the same when put back together again.
- Consistent: it is something that always looks the same, so that it’s easy to recognize: each piece identical to the next. Hence, we don’t use things like oil paintings for money; each painting, even by the same artist, of the same size, and composed of the same materials is unique. It’s also why we don’t use real estate as money. One piece is always different from another piece.
- Convenient: money packs a lot of value into a small package and is highly portable. As such, we don’t use water for money, as essential as it is—just imagine how much you’d have to deliver to pay for a new house, not to mention all the problems you’d have with the escrow. It’s also why we don’t use other metals like lead, or even copper (except for trivial units of account). The coins would have to be too huge to handle easily to be of sufficient value. And value is important because…
- Intrinsically valuable: good money is something many people want or can use. This is critical to money functioning as a means of exchange; even if I’m not a jeweler, I know that someone, somewhere, wants gold and will take it in exchange for something else of value to me. This is why we don’t—or shouldn’t—use things like scraps of paper for money, no matter how impressive the inscriptions upon them might be.
Hopefully this helps you understand what makes for good (sound) money. In another post, I’ll explain how money is not the same thing as wealth. In the meantime, let me know your thoughts on these properties of money.
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