What is Money?

Most people think of money as pieces of paper they exchange for goods and services or digital numbers in a bank account that can be converted to paper notes to be spent. This is not false, but as a Chinese proverb says...

"The beginning of wisdom is to call things by their right names"

This is often where a common confusion occurs. Discussions often mix the terms and use the word "money" when really they mean "currency" and/or "credit". What most of us think of as money is more accurately described as currency and currency is frequently different to the classic definition of money.

Currency vs Money

To be a currency, a good must have two characteristics...

  1. Be a unit of account - homogeneous units to aid economic calculation.
  2. Be a medium of exchange - to facilitate a more complex system that supercedes barter.

Money on the other hand must also have an additional characteristic that differentiates it from currency.

  1. Be a store of value

Many things have been currency and/or money but they all share a single characteristic - they are universally accepted. All monies evolved in the marketplace of human beings swapping their produce for the produce of others. Currency is what circulates as a medium of exchange and can be money or a claim on money, much like a dry-cleaner's receipt is a claim on dry-cleaning. Therefore, money can be currency but currency isn't necessarily money, unless it is payment in full and not a claim on payment in full. It's an important distinction to make.

To really get to grips with money and currency we need to take a look at how they evolved.

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