What is money? The definition of money
The history of credit and banking goes back much further than the history of coins. Nevertheless, the story of the origins of money goes back even further still.
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What is Money?
At first sight, the answer to this question seems obvious; the man or woman in the street would agree on coins and banknotes, but would they accept them from any country? What about cheques? They would probably be less willing to accept them than their own country’s coins and notes but bank money (i.e. anything for which you can write a cheque) actually accounts for by far the greatest proportion by value of the total supply of money. What about I.O.U.s (I owe you), credit cards and gold?
The gold standard belongs to history but even today in many rich people in different parts of the world would rather keep some of their wealth in the form of gold than in official, inflation-prone currencies. The attractiveness of gold, from an aesthetic point of view, and its resistance to corrosion are two of the properties which led to its use for monetary transactions for thousands of years. In complete contrast, a form of money with virtually no tangible properties whatsoever – electronic money – seems set to gain rapidly in popularity.
All sorts of things have been used as money at different times in different places. The alphabetical list below, taken from page 27 of A History of Money by Glyn Davies, includes but a minute proportion of the enormous variety of primitive money, and none of the modern forms.
[i:756d84cb38]Amber, beads, cowries, drums, eggs, feathers, gongs, hoes, ivory, jade, kettles, leather, mats, nails, oxen, pigs, quartz, rice, salt, thimbles, umiacs, vodka, wampum, yarns, and zappozats (decorated axes).[/i:756d84cb38]
It is almost impossible to define money in terms of its physical form or properties since these are so diverse. Therefore any definition must be based on its functions.
Functions of Money
Specific functions (mostly microeconomic)
Unit of account (abstract)
A common measure of value (abstract)
The medium of exchange (concrete)
Means of payment (concrete)
The standard for deferred payments (abstract)
Store of value (concrete)
General functions (mostly macro-economic and abstract)
The framework of the market allocative system (prices)
A causative factor in the economy
Controller of the economy
The table above comes from page 27 of A History of Money.
Not everything used as money as all the functions listed above. Furthermore, the functions of any particular form of money may change over time. As Glyn Davies points out on page 28:
“What is now the prime or main function in a particular community or country may not have been the first or original function in time, while what may well have been a secondary or derived function in one place may have been in some other region the original which gave rise to a related secondary function…
The logical listing of functions in the table, therefore, implies no priority in either time or importance, for those which may be both first and foremost reflect only their particular time and place.”
He goes on to conclude from this that the best definition is as follows:
Money is anything that is widely used for making payments and accounting for debts and credits.