Money

Money is any marketable good or token used by a society as a store of value, a medium of exchange, and a unit of account. Since the needs arise naturally, societies organically create a money object when none exists. In other cases, a central authority creates a money object; this is more frequently the case in modern societies with paper money.

Essential characteristics of money

Money has all of the following three characteristics.

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1. It must be a medium of exchange

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When an object is in demand primarily for its use in exchange -- for its ability to be used in trade to exchange for other things -- then it has this property.

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This characteristic allows money to be a standard of deferred payment, i.e., a tool for the payment of debt.

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2. It must be a unit of account

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When the value of a good is frequently used to measure or compare the value of other goods or where its value is used to denominate debts then it is functioning as a unit of account.

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A debt or an IOU can not serve as a unit of account because its value is specified by comparison to some external reference value, some actual unit of account that may be used for settlement.

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For example, if in some culture people are inclined to measure the worth of things with reference to goats then we would regard goats as the dominant unit of account in that culture. For instance we may say that today a horse is worth 10 goats and a good hut is worth 45 goats. We would also say that an IOU denominated in goats would change value at much the same rate as real goats.

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3. It must be a store of value

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When an object is purchased primarily to store value for future trade then it is being used as a store of value. For example, a sawmill might maintain an inventory of lumber that has market value. Likewise it might keep a cash box that has some currency that holds market value. Both would represent a store of value because through trade they can be reliably converted to other goods at some future date. Most non-perishable goods have this quality.

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Many goods or tokens have some of the characteristics outlined above. However no good or token is money unless it can satisfy all three criteria.

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