DESCRIBE MONEY
Our lives and economies depend on money to function. Here is a crucial guide to comprehending money and its function in the modern economy.
INTRODUCTION
Since we use money every day to purchase products and services, the majority of us take it for granted. We continually deal in money, think in terms of money, and work to accumulate more of it. Few people, though, truly comprehend what money is, and those who do frequently have very different perspectives on it.
Some people contend that money is a transformable sort of energy that can be traded. Others regard it as a piece of technology that makes trade and commerce easier. Others contend that the concept of money is a social construction that is influenced by cultural norms and values. Since the idea of money is far more complex than how it is typically understood, all of these points of view may be true.
Our opinions on how we utilize money are shaped by how we view money. Physical tender, precious metals, bank deposits, credit, and, more recently, bitcoin are all examples of several forms that money can take. Physical currency, which includes government-issued coins and paper notes, is the most widely known type of money in use today.
SO, WHAT IS MONEY?
Money serves primarily as a medium of exchange for the acquisition of goods and services. The term "medium of exchange" is frequently used to describe this function. It is a good that you obtain solely as a means of acquiring another benefit, not for its own purpose.
Money is a market good, something you buy in order to buy other things. The market (sellers) must accept it as a form of payment for this to take place.
❌ Money is not a consumption good, which are items that primarily meet the needs and wants of consumers. (Examples include a clothing, some shoes, some bread, some soda, etc.)
❌ Money is not a capital good, which are the tangible resources that a company utilizes to create goods and services that customers will use in the future, such as buildings, machinery, tools, and cars.
Different schools of thought have developed regarding the nature and purpose of money as our conceptualization and understanding of it have changed over time.
Carl Menger, the founder of the Austrian school of economics, defined money as the relative ability for goods to be sold in a given market at a given time and price — a good's "salability." Karl Marx would argue that money is the result of a commodity economy, where the source and nature of money are based on the labor theory of value. The good selected to enable indirect commerce based on the lowest rate of diminishing marginal utility is the most salable good.
According to supporters of the Austrian school, the money supply is either extraordinarily stable compared to current production, as it was during the gold standard, or it is exceedingly unstable. Another viewpoint holds that money is determined exogenously by a government agency. Many modern economists who were trained in a predominantly Keynesian framework hold this viewpoint. Government or gold have historically been the options.
Since the breakdown of the last temporary link between money and gold in 1971, the world economy has undergone considerable changes. As a result of the fiat standard, which allows central banks to generate money at their discretion, there has been inflation and currency depreciation. New potential for increased international trade and investment were brought about by digital money, but this also increased competition and created economic uncertainty. Untethered money offers a variety of benefits and drawbacks that have shaped the economic environment of today.
WHY DO WE NEED MONEY?
Money is essential for a civilization that wishes to trade because it makes exchange easier, helps us to meet our fundamental needs for food, shelter, and clothes, and allows us to maintain certain levels of security and safety.
People would still use barter or keep credit and debt ledgers if money hadn't been invented. When the needs and resources of two parties coincide, barter is effective because it allows for a direct exchange of goods without the use of money. The coincidence of wants or the double coincidence of wants is what this is known as.
It is instantly clear that a barter economy limits trade because it necessitates that participants have items (ideally non-perishable) that they are willing to trade. Finally, you must want the stuff they own in addition to their finding other people who desire your possessions. A scalable monetary system cannot be supported by the coincidence of wants.
The answer lies in society, or the market, deciding on an effective good that will allow for the exchange of goods and services between all market players. Money eliminates the need to locate a specific individual to barter with while providing a market to swap your goods or services for a standard form of payment. You will utilize that medium to make purchases from people who accept it as payment for goods and services.
Money is the most natural mechanism to save for the future since it offers the opportunity. The growth of trade and commerce makes it possible for economies to flourish; modern economies would not be possible without money.
Our liberties and time are constrained when we have minimal access to money since we must spend the majority of our time working to accumulate the funds required to pay for the needs. Access to more money empowers us because it enables us to make more educated decisions about the number of hours we need to work and the products and services we consume, including where to live, what kind of car to drive, where to eat, and even what kind of medical care to get.
As parents can purchase better food, better education, and a better means to pass on their riches, provided that the money can keep its value over time, which is one of the three widely acknowledged functions of money, it also presents advantageous prospects for our children.
FUNCTIONS OF MONEY
Over the years, money has taken on various forms, including gold and silver, glass beads in Africa, or wampum used by Native Americans. It has always been true that money must serve as a medium of trade, a unit of account, and a store of value across all continents and throughout history.
1. Medium of exchange: When money makes it simple for people to exchange products and services without having to barter, it acts as a medium of exchange. This streamlines transactions and boosts the effectiveness of business.
Money is an appropriate medium of exchange because it acts as a middleman between the goods or services people desire to exchange. Money is obtained for its salability rather than its intrinsic qualities. Saifedean Ammous, "The Bitcoin Standard,"
2. Unit of Account: The ability to compare the value of various commodities and services is made possible by the standard measure of value that money provides. People can gauge the market value of products, services, economic activity, assets, and obligations when prices are stable. The price serves as a proxy for the market value of a good in comparison to competing products on the market.
Buyers and sellers are able to immediately assess if a transaction is profitable when prices for commodities, services, assets, or salaries are listed in a recognizable unit of account. Prices represented in units of account enable market participants to make choices on how to carry out intricate tasks, build up capital, or perform economic calculations.
3. Store of Value: Money acts as a store of value, enabling people and organizations to accumulate wealth through time without it losing any of its value. The potential of something to be a good store of value is determined by current expectations about the supply and demand for that asset in the future.
A durable good with a constrained supply issuance must qualify as a store of value. Consumables like milk and capital items like machinery or cars are poor value stores because they can deteriorate, corrode, lose value over time, or expire.
Long-time Bitcoin instructor Andreas Antonopoulos makes the case that modern technologies and network structures may have given rise to a shadowy side of money. He added a fourth feature:
4. System of Control: The manipulation of money to further political objectives is referred to as using money as a system of control (external link). Financial services firms now serve as system delegates as a result of this. They enjoy some privileges as deputies, such as never doing time in jail, but this has resulted in corruption and economic isolation.
Money's ability to act as a medium of commerce and a store of value are corrupted when it is utilized as a system of control. Abuse of money in this way benefits corrupt governments and tyrants because it makes it possible to effectively restrict political criticism by limiting transactions or preventing purchases.
Governments monopolized the issuance of money in the 20th century and consistently undercut its function as a store of wealth, spreading the myth that it is primarily a tool for trade. A civilization that has money that doesn't hold value over time is one that is less concerned with the future.
In contrast, sound money is characterized as having a purchasing power set by markets, independent of governments. If left to their own devices, market participants will naturally choose a form of payment that best serves the three purposes of money. It must possess significant monetary properties in order to get this position.
This is why, after tens of thousands of years of free market experimentation utilizing different commodities as money, gold gradually became the exclusive global monetary standard. Simply put, gold was the hardest material to produce more of, making it the most trustworthy way to keep your hard-earned money safe.
PROPERTIES OF MONEY
Money has six commonly recognized properties, and this has been the case for millennia. An item is a strong contender to become money as long as it possesses these qualities. The de facto unit of trade is likely to be whatever monetary alternative has the greatest score against these qualities.
STANDARD PROPERTIES:
1. Reusable – Money needs to be reusable so that it can be distributed and used repeatedly without risking wear, damage, and a subsequent decline in value.
2. Transportable – To be used in commerce, money needs to be portable, both physically and digitally. Small sums of cash and gold can be moved about, but larger amounts might be difficult to transport over long distances or past border checks.
3. Divisible – Money needs to be able to be broken down into smaller pieces. A $10 dollar, for instance, can be converted into two $5 bills without losing any of its (combined) value. On the other hand, a cow or a stone cannot be divided.
4. Fungible – Money should be totally interchangeable, with one dollar always being equ
al to another, just as two $5 bills can be used in place of a single $10 bill.
5. Scarcity – Another crucial characteristic of sound money is scarcity, or limited quantity. Nick Szabo, a computer scientist, defined scarcity as "unforgeable costliness," which means that it is impossible to falsify the cost of production. If there is an abundance of money, it will eventually lose value because more can and will be produced and more will be needed to make a purchase of a good or service.
6. Verifiable – Money must be a verifiable record that is recognized as a medium of exchange in a particular nation in order to pay for goods and services or to settle debts. In order to retain value for use as money and to be accepted by sellers, it should be simple to identify and difficult to counterfeit.
The functions of money are supported by each of these characteristics, which Erik Yakes summarizes here and in his series on the dimensions of money. Owning a valuable, hard-to-find item is undoubtedly an excellent way to preserve value over time. But in order for something to be valuable, it must also be appealing, accepted, and transportable if it is to be used as payment for other products and services. As long as it is fungible and divisible once this is accomplished, it can be used as a unit of account.
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| Author of The 7th Property: Bitcoin and the Monetary Revolution Eric Yakes's chart |
Three new monetary characteristics that have emerged since the creation of digital money, including established history, censorship resistance, and programmability, can be taken into account. These characteristics have had a big influence on how we view and use money in the digital age.
ADDITIONAL PROPERTIES:
1. Provenance – According to the Lindy effect, the longevity of some non-perishable things, such technology or ideas, is closely correlated with their age. In other words, these entities have a better probability of surviving and remaining relevant in the future the longer they have existed. They have a higher likelihood of surviving over time because of their longevity, which suggests resilience to competition, change, and obsolescence.
2. Resistance to censorship – Decentralization makes sure that no one, anywhere, can have their money taken away or prevented from being used. A more recent monetary property for individuals who seek to ensure that their wealth is untouchable is censorship resistance.
3. Smart/Programmable – Usually used to describe blockchain-based systems that need a set of requirements to be satisfied before money may be spent. A computer program can be used to specify the automated behavior of that money using this approach.
Money just needs these attributes to be valuable; it doesn't need to be "backed" by anything else. Paper money was previously redeemable or "backed by" gold, where inherently worthless fiat money piggybacked onto gold's value characteristics, which is why the idea that money must be supported by something exists.
The evolution of money will continue with the introduction of Bitcoin. It is based on the same characteristics that made gold the de facto medium of exchange for centuries; however, these characteristics have been strengthened by the inclusion of great mobility and fungibility, which allowed fiat to displace gold throughout the previous century.
Bitcoin is designed for the digital age, in contrast to gold and cash. Its users enforce its tight regulations, which are governed by its code. It is a set of rules without rulers that enables transactions to be sent around the globe in a matter of seconds and settled in a matter of minutes without requiring the astronomical costs and approval commonly connected with conventional financial systems.
For the first time ever, we have a monetary system built on a decentralized, irreversible technology that is transparent, objective, programmable, and perfectly adapted to transfer economic value across time and space without the need for a reliable middleman and central bank issuance. Rather than relying on third parties for transactions, Satoshi Nakamoto invented peer-to-peer electronic cash that was unchangeable by other players.
It's a common belief that gold is the king's money and fiat is the currency of the state. If so, bitcoin is unquestionably the currency of the people.
Read More... What is Bitcoin?
FINAL THOUGHTS
Many people who speculate on the origins of money think that this connection to a commodity or the belief that ruler support is what establishes monetary value makes them think that money is a product of the state.
Money has a long history and has undergone many changes. The last fundamental change brought about the demise of the gold standard and the advent of fiat money. The soundness and sovereignty of money were ultimately destroyed by the state through central banks. These characteristics made it possible for value to be transmitted down the generations.
Within this context, the emergence of Bitcoin should be understood. It supports personal autonomy as a means of commerce, a universal unit of account, a repository of value, and a worldwide, online mechanism of settlement.
Bitcoin was developed as an alternative to governmental controls over the money supply and restrictions on how people can move money. The demand for bitcoin will expand as long as those presumptions hold true.
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