What is money?
There was a cold breeze swinging in from the west. Cool ocean air moved quickly through the valley and brought in much-needed fresh air after a long, hot summer. Melody had just gotten off work and was excited for her Starbucks treat, as she would need the coffee and the sugar to continue on her next project, exam preparations. She gets in line, picks her order, and as she daydreams, she almost doesn't hear the teller ask, "Card or cash?" It's been a while since she's last held cash, as all she uses now is her credit card. She throws a curveball at the teller, "Starbucks points, please!" She pulls out her phone and opens the app to pay with her accumulated credits. She overhears an elderly person from behind her, saying, "What is money anymore? I remember when I held gold in my hand, then paper. Now, it's digits and Starbucks credits. Soon, bitcoin is going to be considered money."
So, what is money? Many of us will remember the messy plastic, leather, or cloth wallets we had with greenbacks filled in them. We carried $20s when making large purchases, $10s to go out with friends, and $1s when we wanted to donate or buy ourselves a small treat. Besides the considerable inflation surge that we have experienced in a short time, money has also changed a lot. It is no longer counted by the bills in our hands but by the digits on our bank account or the maximum limit of our credit cards. Others say the old tried and true gold has always been and will always be money. New religions have sprouted evangelizing the coming of the blockchain, the digital codes, such as bitcoin, as the new currency to live off. But just as Melody might ask, what is money? Would you be able to answer her question?
If you are as curious as Melody and decide to pull up the Merriam-Webster website for definitions, you'd get the following for the definitions of "Money," "Currency," and "Fiat."?
Money is "something generally accepted as a 'medium of exchange,'" a "measure of value," or a "means of payment."?
Currency is (an item that is in) "Circulation as a 'medium of exchange,'" "General use, acceptance or prevalence," "Paper in circulation," or "Common article for bartering."?
Fiat: an authoritative or arbitrary order
Money is a tool with a measurable value generally accepted as a common medium of exchange (bartering or buying) and is expected to be stable over time. And I will use these words interchangeably.
Currency is the standard unit of money in circulation in the local, global, and or digital systems, and fiat, or fiat currency, is a decree stated by the government that officiates a specific monetary currency to be accepted for government dues, such as fines, fees, taxes or other. Even under a fiat currency, the markets within can accept other currencies if they so choose to.
There are many ways to define or standardize what money is, but we will explore a common way to evaluate money. The criteria that we will explore with Melody are Medium of Exchange, Salability, and store value. Each category has 2 or 3 subcategories, and then we will explore why they are essential.?
Medium of Exchange
Medium of exchange, as defined by Merriam-Webster, is something commonly accepted in exchange for goods and services and recognized as representing a standard of value. Three main ideas fall within the medium of exchange, and they are general acceptance, portability, and desirability. Widespread acceptance is a straightforward concept; people need to have a perceived value of that item, or they will not accept it. Depending on where you live, a currency may be more or less valuable. As a visual, Melody traveled to Turkey this past summer. In the US, Turkish Lira is generally not accepted as currency, as our commerce runs the US dollar. In Turkey, as Melody soon learned, the USD and the Euro are acceptable currencies as they are both used heavily by tourists, and to allow ease of commerce with tourists, tourist cities allow for the exchange of USD and the EURO for everyday items. Other smaller cities do not accept USD or the EURO, as they are rural and have a more challenging time accessing exchange brokers. This made it simpler for Melody. She could hold a small amount of Turkish Lira for her travels into small towns but continue to use her dollars in the big cities and not worry about exchange rates.
MoE_1: Unit of account. A unit of account is a standardized method of deciding money. In currency, these may generally be in bills of one-hundred, fifties, twenties, tens, and ones. There are others for different applications, and it would depend on the country printing these units of account. In the digital world, most are in terms of decimals of up to 100th of a dollar, though not always held. Suppose Melody wanted to hold physical fiat currency. In that case, she may hold a 20-dollar bill and a few ones to spend in Turkey but would hold a few hundred Lira bills, as the value of the Turkish Lira is far less per a single Lira “unit” when compared to a single dollar “unit”.
MoE_2: Perceived value. As noted before, the value of currency in relation to products or services is a crucial foundation of how much we are willing to accept that currency as money. If you were selling your iPad and someone offered you $200 in USD, you may be inclined to search for another buyer if you perceived it to be more valuable. If someone offered you .15 ounces of gold at the current market price of about $200, some individuals may perceive it as more valuable than the $200 because it is perceived to be far more stable than the USD.?
MoE_3: Desirability. Using the Turkish Lira Melody exchange in Turkey as an example, Americans do not want the Turkish Lira. It is not used in the US; it holds no purpose in essential transactions, such as taxes, which are required in USD, and the banks lend in USD. The Turkish Lira also has a lower perceived value. Surprisingly, in Turkey, even in the rural areas where exchange brokers are hard to find, some individuals are more willing to accept USDs and the EURO, as their Turkish Lira is currently experiencing inflation north of 80% per year, as Melody found out trying to buy small trinkets at a gift shop. Thus, the USD and EURO have a greater perceived value and are expected to be more stable. Therefore, more people desire the USD and the EURO and are willing to negotiate with those external currencies than with their local currencies.?
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Salability
Salability, according to The Bitcoin Standard, is the ease with which a good can be sold into the market whenever the holder desires while experiencing the least loss or risk. Salability is defined as three things: ease of marketability, divisibility, and cognizability (or recognizability). What does any of this have to do with money? Money is a good, a good you wish to trade for another consumable good or service. Money needs to be “sold” quickly or bartered for the same good or service as any good or service you wish to buy. An example of good salability is the ease with which the USD is able to be obtained in the exchange markets with a low risk of loss. While in the case of Melody, poor salability is when she tried to exchange her remaining Turkish Lira and experienced a decline of 13% in value in less than one month of holding the Turkish Lira. (I.E. June 1, 20X1, 1,000 TL:50.5 USD), June 23, 20X1, 1,000TL:43.5 USD)
Sa_1: Ease of marketability is the ease of exchanging it in the market for the exchange of a product or service. Gold is a great store value, as it tends to maintain its value over time, but it is not well marketable. It is easy to lose, hard to store, quick to steal, and hard to replace. Thus, storage and transport may become an expensive burden. If Melody didn’t mind, she could take her gold out of storage, visit a coin exchange shop, negotiate the price of the shiny metal, and then go to the tailor to pay for the suit. It is far too many steps instead of just handing a credit card that will quickly be paid by Friday.
Sa_2: Divisibility is the ability to break a unit down to purchase smaller amounts. Using gold, buying wholesale, may make sense, as buying in bulk is cheaper, and the large quantities of goods make it easier to use gold, but for a single purchase of coffee, gold makes no sense. Melody’s specialty coffee costs $4.75 or .025 ounces of gold. That is such a small amount that it would not make sense to carry a gold coin and have Melody scrape milligrams every time she wanted to make her Starbucks purchase, in addition to losing her points. Thus, the everyday use of the USD.?
Sa_3: Cognizability or recognizability is another crucial factor. Today, we don't need to "recognize" the dollar. Some of us are old enough to remember when the teller would mark the $20 to see if it was fake. Today, banks verify transactions between accounts and other banks. Otherwise, we don't verify our currency any more. Using gold would be impossible for the untrained eye. Is it gold, iron pyrite, or some other fake metal?
Store Value
Store Value is the ability of the money or currency to hold its value, relative to goods and services, over time or at least remain stable. The US government has come under a lot of pressure due to high inflation. Thus, many Americans are either purchasing what they need in the future, today, buying gold or bitcoin, or looking to purchase real estate, but are any of these options valid? Each person has to make that decision, but when considering the store value of a currency, there are three aspects to keep in mind: hardness of money, durability, and scarcity.
SV_1: The hardness of money is defined as money that is hard to increase supply. Melody might be able to convince the US Government to increase the USD in circulation through the Federal Reserve Banks' ability to "print" USDs into existence. Still, Melody would not be able to convince Mother Nature to produce more gold or satoshi to create more Bitcoin. Thus, relative to the USD, bitcoin and gold are hard money since they are much harder to produce or expand the supply as both require substantial resources to mine more of either.?
SV_2: The durability of money is defined as the ability of the currency to stave off degradation. USD, though made of "paper," does not degrade quickly over time, albeit Melody could rip it, burn it, or damage it severely. Gold is durable, as it does not degrade over time, though if Melody decided to carry a pouch of gold, the soft metal would clash with itself and can deform. Melody can start her own Bitcoin mining operation, but the rules of Bitcoin limit the amount that she can mine at any given time and only decrease the more she and the other set-ups mine Bitcoin.
SV_3: Scarcity is the simple concept of how much supply there is in relation to its use. If Melody was president of a nation with a population of 1 million while having all the gold produced in history, she could decree that gold be distributed to everyone evenly. However, gold would still be a scarce resource, as it still would not be abundant for the population. With an approximation of 300 million people in the US, 198,000 metric tons of gold have been mined for use in jewelry, bullion, and industrial uses, or approximately 23.28 ounces per person. USD, counting only nationally circulating dollars, we have 2.2 trillion, or roughly 7,000 per person in the US. This does not include dollar-denominated debt in the US, the USD in the Eurodollar system, or Eurodollar-denominated debt worldwide. So, the scarcity of gold is much greater than the USD, as the 198,000 metric tons of gold are distributed worldwide, not just in the US, while the 2.2 trillion dollars only counts the USD circulating in the US.?
At this rate, you might be like Melody. This long launder list of requirements just to make money, money, and it still doesn’t make sense. The takeaway from this reading is not each of the requirements of currencies and how they establish themselves in global markets, but to simply begin to look at currency, money, and markets differently. Money does not become dominant from one day to the next. When the US was established, no country accepted the US dollar, as it was young with small markets, and it had not proven its ability to pay its debt. Over time, the US became the leader in global markets, and the world now accepts the USD. Fiat currency may be able to be coerced by the governments, as many already do, mandating it to pay taxes, fees for government services, and the unit paid by the government, but the markets dictate what will be the market’s currency as in the example of the Turkish markets.