Historically, what has made gold, silver, fiat currencies or any other unit acceptable and usable as legitimate money?
What makes money “money”? This is a question whose answer is clear for almost nobody even after approving the usual 11 or 12 years of basic education in practically any country in the world. Why has gold served as money? Why are Dollars and Euros, or Yens, money? Why are supermarket coupons not called “money” too?
In History class, however, they did explain to us that many tangible hard substances, in different sizes and shapes, have had the role of “money”, either in virtue of an official edict proclaimed by a king or an emperor, or simply due to the action of the natural forces of free markets: supply and demand. Money tends to be born spontaneously in any age. Livestock, land and crops have been accepted widely as money.
A disturbing modern idea is that a currency, in order to constitute true “money”, has to be issued by the political institutions of the State: central banks or the banking system. This aberration is not a scientific approach naturally. For thousands of years, human beings have invented and developed money, as a social phenomenon. In recent centuries, States have decided they need to monopolize the issuance of money. However, like for any technology, for the emergence of useful, legitimate and valuable money, the State is not an indispensable actor.
There is a scientific school of thought, the Austrian School of Economics, which seems to focus on “real value” – for instance, some “intrinsic value” that a majority of people tend to perceive in a determined object -, to explain how this social perception can be used to transform an object into true “money”. Austrians teach that many “things” are seen as valuable, but, that only some can be elected to serve as money.
Being valuable is not sufficient for some object to become money. Society decides, among the many valuable objects that exist, which are good to be used as money. Therefore, in order to become a good candidate to occupy the position of “money” for a community, valuable objects must meet a series of requirements. This list of requirements constitutes, in a sense, an implicit social definition of “money”, or what makes money “money.”
1. MONEY MUST BE PORTABLE
Cows, boats, sacks of seeds and, of course, real estate, have been used as money in previous centuries. However, societies have tended to substitute these forms of money for smaller and lighter ones. Money needs to have the lowest possible weight so that it can be transported easily though long distances. The smaller and lighter, the better!
2. MONEY MUST BE DURABLE
It is not convenient to use grapes, cocoa seeds or flowers as money, although these can prove to be valuable. People ceased using this type of money, because it deteriorates soon. Money needs to be implemented in a material or in a medium that does not corrupt or lose physical integrity over the years. Money is better if it lasts for centuries or even millennia!
3. MONEY MUST BE DIVISIBLE
A substance can be very valuable, but, if it cannot be broken into small units, it will not work as good money. Money must be made of many small “grains”. The more you can divide it, the better!
4. MONEY IMUST BE FUNGIBLE
Each and every unit or particle of money must have the same value and must be indistinguishable from each other. It is no good that some grains – some units – are special or different, since this can affect value.
5. MONEY MUST BE MEDIUM OF EXCHANGE
A valuable object that pretends to become money, must be useful as a means to exchange goods and services – the most common modern use of money -. Users of a form of money must be able to buy things or labor force with it.
6. MONEY MUST BE UNIT OF ACCOUNT
Each of the units or composing particles, need to have a certain mathematical value. And this value must function as an arithmetic unit. It should be serve for accounting and be useful for mathematical operations such as addition, subtraction, multiplication and division.
7. MONEY MUST BE STORE OF VALUE
Money must be useful to save value for future leverage. In other words, a valuable object is not a good candidate to be accepted as “money” if it tends to lose value over time. Money must be like land or good wine in many countries: the older, the more valuable! Or, at least, it should not lose its value. Inflationary money is popular in the modern world, but, it is not legitimate money, since people have to spend it immediately. They cannot save it during long terms.
8. MONEY MUST BE SECURE
Societies invent money. And, in every century, they tend to leave old easy-to-steal types of money and substitute them for more and more secure iterations. Money that can be easily taken away from people, has no future. People seem to care a lot about the level of control and security they have over there own holdings.
9. MONEY MUST BE UNFALSIFIABLE
Gold has been one of the oldest and most lasting forms of money in the entire history of mankind. One of the reasons for its validity to be imperishable is that humans have not been able to discover a way to turn stones or wood into gold. Nobody can create gold from other materials! It can’t be faked! An object that can be copied is not a good candidate either. It does not deserve to be elected as money.
10. MONEY MUST BE SEEN AS TECHNOLOGICAL DEVELOPMENT
Money is simply a recipe, like grandma’s cake recipe. And, as a recipe, every society and every civilization can improve it thanks to science and experimentation. Defining what money is will never be like defining what “water” is, or what a “protein” is. Money is not a real thing! It is just a recipe invented and modified by humans!
IN FREE SOCIETIES, PEOPLE DESIGNATE WHAT WILL BECOME MONEY!
It is crucial, therefore, that we do not forget that money will always be what we – all of us as free people – want it to be. All these requirements or characteristics are simply conditions that societies impose through the free markets, not natural or intrinsic properties of the object. And object, like a stone or a piece of paper, is money just because you accept is as such. And it has value because people decide it has it. Money is a language and people can decide what kind of language it will be.