What Is Money?

What is money? In summary: medium of exchange and store of value.

Money solves the problem of rare double coincidence: how often does the shepherd want 250 eggs, and the chicken ranger want a lamb, at the same time and place?  Not very often.  Gold and silver alleviates the necessity of double coincidence as the shepherd can trade lamb chops for this much silver, lamb shanks for that much, and by the time the market day is over, sell off the lamb parts to ten different buyers, and then in turn trade some silver for bread, some for wine, some for eggs.  Not only does it facilitate trade, it promotes division of labor, the essence of true wealth in society.

Money emerges from a known commodity, and is a store of value inasmuch as it is still a commodity. People mistake “a store of value” for “an absolute in price stability.”    They want something magical from money, and when it is not there, they prefer a king fight their battles for them, and accept the pretense of an absolute store of value in fiat currency.  Odd that, since without exception, every fiat currency in history has failed.  As will the USDollar in time.  No telling when, but it will.

Aristotle got the ball rolling in defining money as:

1.) It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.

2.) It must be portable. Money (must) hold a high amount of ‘worth’ relative to its weight and size.

3.) It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be ‘fungible’. 

4.) It must have intrinsic value. 

Please note that no piece of paper nor any binary electronic record fits that definition.

Number four gets to the issue of money why comes from a commodity.  Money has a value even if not used as money. There is nothing that says the intrinsic value as a commodity  must be stable, but that human desire to have what cannot be causes much of the mischief around money.

So you can see why gold and silver have traditionally been money, given Aristotle’s definition.  And you can see why Aristotle defined money as he did by observing why gold and silver were commonly money.

Others have tried add to the definition of Aristotle, but note the error, the definitins get to circumstances around money, and not money itself:

1. Acceptability.  If it emerges as a medium of exchange, then the acceptability is already there.  Acceptability is not talking about money, but about circumstances.

2. Limited supply or scarce: simply not so...  the arguments for scarcity fail to apprehend portability means concentration, and whatever the supply of money is necessarily perfect.  If a ball of gold from space dropped spectacularly onto Siberia immediately doubling the known above-ground amount of gold, the the next day all prices would simply double.  Contracts in gold would be repudiated given the “act of God” and there would be some disputes, but a doubling would have little impact.  But never mind this, it has never happened.  What does happen, as Spooner noted, when the price of gold drops, there is more plate, decoration and jewelry, when it rises, that plate, decoration and jewelry gets melted down into coin.  (And this is why jewelers have traditionally been bankers.)  Talk of scarcity is grounded in a misunderstanding of money.

3. noncounterfeitability.  Again, if it was counterfeitable, then it would not have emerged in the first place.  Gold and silver as commodities are almost impossible to counterfeit.

4. Money  is uniform. Each denomination should be the same everywhere in the country. Gold and silver do this, and even worldwide. And this argument let’s the camel’s nose in the tent.  To whom do we trust to define uniformity?  Why, the State of course.  This definition is not only dishonest, it is malevolent.  Federal reserve notes, for example, and not only fraudulent, they are backed by violence.

There is a definition I’ll add, that Aristotle could not have noticed, a characteristic I noticed: money is disinfectant.  Since money is usually used in international trade, while the goods laden on the vessel or camel are transferred to another conveyance, the merchant captain and the broker actually trade metal (gold or silver).  The disease on the hands of the traders are killed by the medium of exchange.  What is interesting is as new metals are discovered, the ones that are antibiotic are made into coins and the others are not.

So what is money?

1.)  durable. 

2.) portable. 

3.) divisible. 

4.) intrinsic value. 

5). disinfectant.

As mentioned in a previous post, warehouse receipts are not money.  Fiat currency is not money. They are warehouse receipts or fiat currency.

Tallies of credit allotted are not money.  Tallies are not money.  Credit is not money.

if you do not mind being wrong in your analysis, then think in sloppy terms.  If you want to be sharp and tight and arrive at correct conclusions, as Mish has on the universally expected hyperinflation, then get your definitions right.

Why have my heroes all got it wrong on the definition of money?  I think because they all allow “interest” (usury) as acceptable in economics, and are confounded for their perfidy.  I too was perfidious on this point, and repented of it to good effect.

Keep the definition of money tight and you’ll benefit.

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