What's Money Anyways? (Part One)

Moolah, bling, dough, greenbacks; rappers can’t seem to get enough of it nor can the media stop blabbing about it these days. Whatever you call it, do you really know what money is?

Most of us think of money as a measure of wealth but from an economist’s standpoint, money refers specifically to the stock of assets that can be used at any time for transactions.  Money is used primarily in three ways (and I’m not referring to clothes, eating out and iTunes): as a store value, unit of account and most importantly, as a medium of exchange. The first simply refers to savings which allow us to spend money we earn now at a later time. Though most people save as a means of financial security, money is not accepted as ideal for a store value due to inflation.

We are all accustomed to money as a unit of account or the use of currency to quote prices, balances or debts. For example, when we go to buy a house we may receive a quote of say $300,000 rather than a potentially equal but far more complicated value of 120 leather couches. This notion of money as a denoted and comparable value goes hand-in-hand with the final use as a medium of exchange.  This function applies to our everyday lives because it just denotes the use of money to buy goods and services. Without a “medium of exchange” transaction would require us to find someone in possession of what we want, who wants something we possess (and both parties are willing to give this up). This type of a lucky accident is called a double coincidence of wants and admittedly cannot be expected every time we want something. Unless you’re a prospective home buyer who just happens to have 120 leather couches on hand and stumble upon the realtor in dire need of a 120 leather couches. Thus, money enters the picture.

There are two forms of currency. The first is fiat money which like the dollar and most currency around the world, is government issued and has no intrinsic value. The key to fiat legal tender is the trust that it will be accepted in exchange (liquidity). This may seem trivial in the US where the dollar has always been a fairly strong currency, fully backed by the government (printed is “This note is legal tender for all debts, public and private”); yet a failure in trust for any reason can cause economic ruin and has in the past. A notable example of such an occurrence dates back to World War II. During this period the German Mark became so inflated by depression and wartime spending, citizens simply could not use it and as was reported, were better off burning Marks than buying firewood. This is illustrated today by the Zimbabwean dollar which though once more valuable than the USD, is now hyper-inflated to the point that currency exchanges often have to update the country’s exchange rate every half hour or more and $100 billion legal tender is printed.