People often confuse currency (dollars, pounds, yen, etc.) with money. Money is actually an abstract concept, with a few attributes, that currency sometimes can satisfy. It is more accurate to say that money is a language that people use to represent, store, and transmit value.
For something to be money, it has to possess (or be able to possess) several attributes.
- Store of Value: A money must be able to store value. As part of being able to store value, money functions as a way of transmitting value both through time (into the future) and space (across distances). Historically, gold has been a good store of value through time, but not all that great through space (it’s heavy!). The US Dollar has been great at transmitting value through space, but not time (inflation!). Other things (art, collectibles, real estate, cattle, etc.) also function as stores of value. Usually, a money starts as a store of value.
- Medium of Exchange: A money must be able to be accepted in exchange for other goods. Various things have functioned in this manner throughout history, to greater or lesser degrees.
- Unit of Account: Finally, a money must be able to act as a general unit of account.
In addition to the minimum requirements above, there are several attributes that improve a good’s utility as money.
- Divisibility: It is important, but not absolutely necessary, for a money to be able to be divided into small units. Cattle was once a form of money, but it may be impractical to buy a sandwich with a steer.
- Recognizability: One big problem with some forms of money is being sure that what you’ve received is actually the money! For instance, the difference between a 100% gold coin, and a 90% gold coin may not be easy to determine without special skill or equipment, but it makes a huge difference in the value!
- Fungibility: Money is ideally fungible, where any unit of the money is indistinguishable from any other unit, and therefor has the exact same value as every other unit of the money. Real estate, for instance, does not have this property, since even identically sized lots may have significantly different properties (and hence values).
- Durability: Grain was once used as a money, but it is not ideal, since over time it can rot. Cattle die. Ideal money will exist in its current form through time, and won’t decay due to time. You will note that inflation causes the Dollar to fail at this!