Part One: Definitions and Origins
Money is a great mystery. In my years of teaching economics courses and economic history nothing so confuses students, and their elders, as the subject of money. Or rather I should say the subject of money and currency. Some of this confusion is a result of the failure of economists to agree on standard definitions of money and currency, and thus the two are often confused and conflated in standard works on the subjects as well as by the “talking heads” on financial shows. The failure to nail these definitions down leads everyone to talk past each other. So without further ado, let us begin with definitions.
Money is an abstract concept whereby certain characteristics and functions are attached to an object, but these characteristics and functions may not be exclusive to a particular object. So in defining money, we need to focus first upon these vital characteristics and functions. Something is money if it has all of the following characteristics: a store of value, portability, divisibility, and acceptance as a medium of exchange. Let us have a closer look at each of these. Something becomes a store of value when we are convinced that the object will maintain its utility for future purchases. Thus we “save” the object.
Some economists refer to this as the asset demand for money, or view money in this function as a type of energy that is stored for future use. It is all the same, we collect and save money because we believe it will hold the value it has today into the future as well. When it comes time to use money for investment or purchases, it is most convenient to be able to carry it around, and to be able to divide it, that is to make change. Finally, we hope that sellers will accept our money as a medium of exchange in payment for goods and services; it makes for a much more pleasant evening if we can pay with money an owner of a café for a meal rather than do dishes all night. In general, gold and silver have best performed the functions of money, but other things can and have been used as money in the past: tobacco, cigarettes, sea shells, etc.
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