Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context, or is easily converted to such a form. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, sometimes, a standard of deferred payment. Any item or verifiable record that fulfills these functions can be considered money.
Money is historically an emergent market phenomenon establishing a commodity money, but nearly all contemporary money systems are based on fiat money. Fiat money, like any check or note of debt, is without use value as a physical commodity. It derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private". Such laws in practice cause fiat money to acquire the value of any of the goods and services that it may be traded for within the nation that issues it.
Money is an essential human creation, and, were all money to disappear, a new form of money would spontaneously arise in its place, such as cows, tobacco, bread, a certain type of nut husk, perhaps, or even nautilus shells.
Today there are other forms of money such as airline miles and bitcoins. Each of which are ways for people to accumulate, store and then spend other intangible things that behave exactly the same as paper Dollars, or Euros, Yen, or Rubles, or Yuan.
Without money, the complex job specializations that we have today would not exist, because barter is so cumbersome and constraining. More importantly, though, is the concept that each type of money system has its pros and cons – each will enforce its own peculiar outcomes by promoting some behaviors while punishing others.
Now, if we crack open a textbook, we’ll find that money should possess three characteristics. The first is that it should be a store of value. Gold and silver filled this role perfectly, because they were rare, took a lot of human energy to mine, and did not corrode or rust. By contrast, the US dollar pretty much constantly loses value over time – a feature which punishes savers and enforces the need to speculate and/or invest.
A second feature is that money needs to be accepted as a medium of exchange, meaning that it is widely accepted within a population as an intermediary, within and across all economic transactions.
And the third feature is that money needs to be a unit of account, meaning that the money must be divisible and each unit must be equivalent. The US “unit of account” is the dollar. And each is identical to any other. Diamonds have much value, but are not good at being ‘money,’ because they are not perfectly equivalent to each other and dividing them causes them to lose value. That is, they fail at being a unit of account.
So what is money, really? I believe in a very simple definition.
Money is a claim on human labor.
With a very few minor exceptions, pretty much anything you can think of that you might spend your money on will involve human labor to bring it there. I say it’s a claim rather than a store, because the human labor in question might have happened in the past, or it might not have happened yet.
As implied in the picture series earlier, literally anything can be considered money – cows, bread, shells, tobacco. A US dollar, like all modern currencies, however, is an example of a type of money called fiat money. “Fiat” is a Latin word meaning “let it be done,” and fiat money has value because a government decrees that it does.
And this brings us to the key question: What exactly is a US dollar?
Once, a dollar was backed by a known weight of silver or gold of intrinsic value. In this example, we can see that the dollar came from the US Treasury directly and was backed by a given amount of silver that was payable to the bearer on demand.
You’ll note that modern dollars have no language entitling the bearer to anything, and that’s because they are no longer backed by anything tangible. Rather, the ‘value’ of the dollar comes from this language right here: The fact that it is illegal to refuse to accept dollars for payment and that they are the only acceptable form of payment for taxes.
It is crucially important that a nation’s money supply is carefully managed, for if it is not, the monetary unit can be destroyed by inflation. In fact, there are over 3,800 past examples of paper currencies that no longer exist. There are numerous examples from the United States, which may have some collector value, such as the Greenback, but no longer possess any monetary value. Of course, I could just as easily display beautiful but no longer functional examples from Argentina, Bolivia, and Columbia, and a hundred other places