As investors, there’s one thing that we’re all after: money. Even though most of us want that money for reasons like security or generational wealth, we have to start with the economy’s fundamental components to reach our stated objectives. But what is money, and how did we get from hunting and gathering to bills, coins, cards, and crypto?
Cash.
Getty Images provided the image. What is currency? Money can be anything as long as it can serve as a store of value, a unit of account, and a medium of exchange, according to the International Monetary Fund, a reputable organization with a thorough understanding of the currency. That means that almost anything can act as money as long as we all agree that it has a specific value.
The dollars in your wallet have a value. Beaver pelts, silver bars, and even enormous stones have all been used in the past. Money might make the world go ’round, but it’s not exactly a concrete concept that has remained static.From the barter system to money: transferability and divisibility
Barter was the primary mode of human thought when economic systems were first conceptualized. I’ll trade you my goat’s milk for your basket of turnips, my six chickens for your bale of hay, and so on. Bartering works at a very limited scale, but it’s sometimes difficult to find the person who wants your turnips and has goat milk to trade.
In a more advanced society, where a man fixes wheels on oxcarts in exchange for what farmers have to offer, this leads to a world in which financial chaos is the norm. People can only pay for services with what they have, so prices change constantly. You also have to deal with surpluses of things you don’t even know how to sell. How many eggs before you’re out? How do you make change for a goose when your regular price is two chickens?
Because of this, money became a thing. Rather than requiring bartering items with unstable values and where demand may not be as universal as hoped, money possesses both transferability and divisibility, even if that money is in an early form — what’s called “commodity money.” Commodity money is somewhere between random baskets of eggs and paper cash.
Commodity money and fiat currency
Commodity money was the first real stab at money as we know it. Instead of accepting goods or services in trade for very different goods and services, people found certain objects that had wide appeal, were easy to store, kept for a long time, and could be easily traded and divided, in case you needed less than one beaver pelt worth of flour.
In the early United States, beaver pelts were a popular commodity currency because they were plentiful, useful, and simple to trade. But over time, the beaver trapping world fell away, and mining became a more common trade, birthing metal as currency in the U.S. (and, of course, the Romans did this long before we ever did). Bills and other forms of metal-backed paper money were based on silver and gold standards. Finally, currency evolved into the paper money and digital money we use today.
That unbacked paper money was a huge change in how money is thought about and marked the move from commodity money to fiat money. The value of fiat currency is defined by the economic environment and the faith of the people using it, nothing more. Some will try to say that this means all money is an illusion, but the truth is that we just decided that one piece of paper is worth the same as five beaver pelts, and the vast global economy keeps the belief in that idea alive.
Defining money by its properties
There are a few very strict properties that money should have if you want to talk about it by its properties rather than its history: Fungibility. Fungibility means that every dollar is the same as every other dollar, more or less. They might be different years or have different serial numbers, but every George Washington can be directly swapped for another George Washington without any loss of value or utility.
Durability. Your money needs to be long-lasting and able to withstand time and multiple washes in the washing machine. Back in the old barter system, decay was the enemy of stores of value like fruit, which had to be bartered quickly before losing all its value. Money has value for the amount of time it exists, so it must exist for a long time.