Short answer: Whatever can be used to pay.

Longer answer: We don't really know what money is, but the common view is that money is anything that has a certain set of functions including being usable for payment and being usable to store value.

Long answer:

To really understand the notion of money we must become aware of the fact that it is belief, or more exactly, speculation that makes something money. If enough people believe that a certain good can be used for paying and storing value and if they speculate that this will continue to be the case in the future, then this good is money.

Before I can show that this is the case, we need to clarify a few things.

Firstly: Why would we even ask the question what money is? Do we not already know that? How can we not know what money is? We use it every day.

Secondly: Suppose we do not know what money is. Why discuss this question? Could we not simply look it up, e.g. in a book about economics?

As concerns the first question: There are a lot of things that, on one hand, we are very familiar with, but that, on the other hand, we do not understand. We deal with numbers every day. But can you tell me what a number actually is? We deal with meanings every day. Words have meanings and sentences have meanings. We understand the meanings of words and sentences uttered by other people. But can you tell me what a meaning actually is?

No? Well, this is also true for money. We use it every day, but its not easy to say what it actually is.

As concerns the second question: The idea that "economics" can simply tell us what something (from the realm of economics) really is or how it works, presupposes economics to be a real science. But, much like other disciplines, such as linguistics, psychology or sociology, economics is not yet a real science, but rather a set of different "schools", or, to put it less politely, a set of religious denominations or ideologies.

The denominations of economics include, but are not limited to:

Note that these are not subdisciplines of economics (like mechanics and optics are subdisciplines of physics or like morphology and syntax are subdisciplines of linguistics). These are religios denominations or ideologies. That means that you have to decide in which of these theories you want to believe.

So we cannot simply ask "ecomonics" what money is. We could only ask believers in a certain economic ideology what money is. Or, we could philosophize a little bit, which is what we are going to do now.

Let us have a look at some known types of money in order to understand better what money might be.

In the early days of humanity, the economy was based on barter. One man had a sheep, but needed wood, the other man had wood, but needed a sheep ...

Obviously, barter is only practical up to a certain point. Maybe one man had a sheep and needed wood, but the other man didn't want the sheep. A solution for this could be, and actually was, that the other man, who didn't really need the sheep, accepted it as payment anyway. Why would he do this? Because in the culture in which the wood owner and the sheep owner lived, it had become common to accept sheep as payment. The wood owner knew this convention and he speculated that, although he didn't need the sheep right now, he would be able to use it to buy something else. At this stage, sheep had acquired a new property: Apart from being valuable, because of their uses (milk, meat, wool etc.), they were also valuable, because many people believed (or speculated) that they would be able to use their sheep for payments in the future. Thus, the sheep had become money. Note that many words related to money, such as "pecuniary", are derived from words meaning "sheep", such as the Latin word "pecus".

Once sheep were generally accepted as a "means of exchange", i.e. as a means of payment, they had acquired one of several properties that are usually ascribed to money: acceptability. Another property that money is usually supposed to have is scarcity. If there is an abundant supply of something, you will not be able to pay with it. In a sand desert you will most probably not succeed in convincing anybody to accept desert sand as payment. Sheep, on the other hand, will usually be scarce. They don't just lie around. You have to catch them or breed them.

So sheep have actually been used as money and they had two of the properties usually ascribed to money: acceptability and scarcity. But there are other properties one would expect a good to have in order to qualify as money. These properties include:

• fungibility: Every unit of money must be able to be substituted by other units of money.
• durability: Units of money should not deteriorate.
• divisibility: The money should be divisible into smaller units.
• portability: You should be able to transport the money.

Obviously, sheep are not very good in these categories. They are not really fungible. Some sheep are better than others, for example because they are bigger. Sheep are also not very durable. They get old, they get sick and they die. Sheep are also not divisible. You cannot simply cut off a piece of your sheep to purchase only a small amount of wood. Sheep are also not very portable. You cannot put a sheep in your pocket to buy a beer at a bar.

Here is a summary of what I just said, the money-properties table for sheep:

Note that sheep money differs from what most people know as money today in one important aspect: Sheep are useful in themselves. Or, as many people like to say: They have "intrinsic value". If, for some reason, you cannot use your sheep for paying, you can always use their wool or eat them. This is not true for what many today consider to be the only form of money: "fiat money". "Fiat" means "let ... be ..." as in "let this be money". Fiat money doesn't have intrinsic value. Euro notes as such are not very useful. They only have value, because the state authorities that issued them declare that they have a certain value and because many people believe in this declaration. Because of their intrinsic value sheep can be considered to be "commodity money". Other examples of commodity money are precious metals, grain, conch shells, beads. Basically anything that people in a given culture appreciate and that has the money properties from the above table (to a certain degree) can be money.

The money-properties table for precious metals might look like this:

Now, this is obviously an oversimplification, in various respects.

Firstly, a certain type of money is not simply "acceptable" or "scarce". Also, it doesn't simply have "intrinsic value". It all depends on the circumstances. Sheep used to be acceptable as payment in certain cultures, but they are not considered acceptable anymore today. Salt used to be scarce and, therefore, also acceptable as payment (the word "salary" is derived from Latin "sal", which means "salt"), but this is not the case today. In certain cultures conch shells had "instrinsic value", because they were used as body ornamentation. But this means, of course, that the value of the conch shells was, strictly speaking, not "intrinsic". It was the general appreciation of conch shells as a means of body ornamentation that made them valuable. Note that the same is true for gold: If everyone, including the industry, lost any interest in gold, then it wouldn't be valuable.

Secondly, it is probably not a very good idea to only use the two scores 1 and 0 to measure money properties. Maybe, money-properties tables should rather look like this:

These scores are, of course, more or less random, but we might try to justify them: Silver was very acceptable as money, because the state issued silver coins in which people trusted. Silver was scarce, because silver ore was scarce and hard to mine. Silver was quite fungible and divisible, although these properties were undermined by the fact that their fungibility and divisibility was based on rules invented, and sometimes changed, by the state. (Smaller amounts were paid with copper coins and the state established, more or less randomly, an exchange rate for silver and copper coins.) As concerns portability, in some cases silver coins were simply too valuable to be carried around, for example when you just wanted to buy some wine in a bar, and, in other cases, silver was not valuable enough, for example when you wanted to buy a house. Then you would rather use gold coins so you wouldn't have to transport huge amounts of coins.

Note that with this table we introduced a new entity into our discussion of the notion of money: the state. While silver and other precious metals occur naturally and can be used as money without the state interfering, the state actually interfered. For most people it is very difficult to know if a coin is of real silver, gold or copper, or how much of a coin's material is actually silver, gold, or copper.

Here was an opportunity for the state: Already in ancient times states used to mint coins with guaranteed amounts of certain precious metals, such as gold, silver or copper. But that also means that the states had the power to manipulate the coins by adding less and less silver to them, so they could e.g. hire more soldiers for the same amount of silver.

Would something like this really happen? Would the state dare to deceive us and manipulate its own money?

Of course. States would do this, they did this and they still do it.

Hence, it seems, we need to add another money property to our tables. One that is often left out: non-manipulability. The money-properties tables for sheep in the Stone Age and silver coins in the Roman Empire might look like this:

Why did I not give silver coins a zero in the category non-manipulability? The Roman Empire did lower the silver content of its silver coins from time to time and this caused, of course, inflation. However, manipulating the money was not as easy as today. The state had to modify the process of creating silver coins. The old coins with more silver did not simply cease to exist. They could still be used and people would, of course, prefer them to the newer coins that contained less silver.

While gold, silver and copper coins were quite portable, transport was still very difficult when it came to large sums. A solution for this was "representative money". Instead of carrying around heavy coins or bars of precious metal you could carry around pieces of paper that said that you were the owner of this or that amount of silver or gold. The silver or gold still existed and it was what made your pieces of paper valuable. This and most people's belief (or speculation) that they could actually go to a bank and get the amounts of silver or gold that were written on the pieces of paper, made representative money or "paper money" work. However, manipulability obviously increased. Although difficult for most people, you can, in principle, find out of which materials a coin consists. That means with precious metal coins you have more options than to simply trust. With paper money trust is your only choice. An obvious way for the state to manipulate paper money is to issue pieces of paper which are not "covered", i.e. which state claims to gold (or any other commodity) that doesn't really exist.

The question, again, is: Would the state do something like this? Issue paper money for gold or silver that doesn't really exist?

It would and it did.

At the beginning of the 20th century, Germany was preparing for war. The state didn't have enough money to pay for all the weapons and soldiers it wanted. What did the German state do? It printed money that was not covered by gold, although, at this time, each German mark was supposed to represent 0.358 grams of gold. (By the way, many other states did exactly the same thing.)

Representative money is very fungible, durable and divisible, because it is managed. Usually, when a banknote is damaged, you will be able to exchange it for an undamaged one. As concerns portability: You cannot only carry around banknotes, you can also "send" sums by just telling banks (also using phones or computers) that this or that sum is to be transferred to somebody else.

I put question marks in the acceptability row and in the scarcity row. Representative money is only acceptable as long as you can trust the entity (normally a state) that issues the money. Once uncovered money is created, the money becomes less scarce and, hence, less acceptable.

Note that the U.S. dollar also used to be representative money. One U.S. dollar used to represent 1.505 grams of gold. After World War II many currencies were "pegged" to the U.S. dollar, and therefore, indirectly, also to gold. To peg a currency to another currency means to establish a fixed exchange rate between the two currencies. An example: The Panamanian balboa is pegged to the U.S. dollar with an exchange rate of 1:1. That means that one Panamanian balboa is worth exactly one U.S. dollar.

While the U.S. dollar was officially pegged to gold, unofficially the United States printed more dollars than there was gold. In 1971 the USA decided to no longer hide this fact and the U.S. dollar and all currencies pegged to it stopped being covered by gold.

Some people think this was a very bad idea.

When a currency is no longer covered by gold or another good, it stops being representative money and becomes "fiat money". Basically all currencies today are fiat money. They cannot be exchanged for something that has "intrinsic value", such as gold, silver, oil, sheep, corn, or the like. They only have value, because the entity issuing it (usually a state) claim they have value and because many people believe this.

We said that money is anything that has certain properties such as being usable for payment and for storing value. We did not include the ability to store value in our money properties tables, because, first, this is usually not done, and, secondly, the point of the money properties tables was to list criteria for deciding if a good might be usable as money or not. But fiat money is not actually a "good". It doesn't occur naturally like sheep or gold. It is completely artifical. It is an invention. You cannot use it for anything but for paying. And it only has value or keeps its value because people believe that it has value. So to make fiat money comparable to other types of money, we should add "ability to store value" to the properties in our tables.

I gave fiat money a zero in the category "non-manipulability", because all the state has to do to manipulate its fiat currency is create more money.

Obviously, different countries make different use of the manipulability of fiat money. Some countries, such as Switzerland, manipulate their currency in a rather moderate way. Other countries, such as Venezuela, have a tendency to spend a lot more money than they have and then get rid of their debts by printing money.

This raises the question why currencies of countries like Venezuela work at all. How can a currency such as the Venezuelan bolivar exist? Why would anybody want to hold bolivar if he could also hold Swiss francs or gold?

The answer is simple: The state threatens its citizens with jail in case they don't pay taxes. And taxes have to be paid in the country's currency. That means that also invoices, from private or from public companies, will be in the country's currency. That means that the whole economy of the country will be based on the country's currency. Therefore, the citizens usually cannot avoid holding the country's currency, no matter how bad it may be.

As I discussed in another posting, there is no way not to speculate. But citizens of countries with very bad fiat money are forced by their government to speculate even more. Because any money they earn will very quickly lose its value. So they have to invest, or, in plain English, speculate. Citizens of countries with very bad fiat money are often already very poor. The need to speculate makes their situation even worse, because for every trade (e.g. buy gold, sell bolivar), you have to pay a fee. Besides, to speculate means to take risks and the poorer you are, the less you can afford to take risks.

The fiat money system enables certain state authorities, usually called "central banks", to invent prices. More specifically, they invent prices for borrowing money, also known as interests. This can lead to dangerous bubbles such as the one that caused the global crisis of 2008. As a reaction to this fact "crypto currencies" were invented.

Just like fiat money, crypto money does not usually represent any goods with intrinsic value. Then what is the point? How could crypto money be better than fiat money?

Crypto currencies are usually non-manipulable by design and they usually do not have inflation, also by design. That means that, if the algorithms a crytpo currency is based on are correct (and they can be reviewed by everyone), then holders of the currency can be sure not to be dispossessed by their government, their central bank or anyone else.

That sounds great. Does that mean that crypto currencies are the future?

They are certainly a good idea. But they obviously also have many disadvantages for investors:

Crypto currencies have one disadvantage that we have not yet noticed in other types of money: dependence on technology. To make crypto currencies comparable to other types of money, let us add the category "independence of technology" to our tables.

Let us have a look at the money properties of crypto currencies:

It is not yet clear how "acceptable" they are. Obviously, crypto currencies are, in a certain way, accepted by many people, otherwise they wouldn't have become so valuable in such a short amount of time. But, as of today, it is still very difficult to use them for paying in most places. And the category "acceptability" is supposed to mean "acceptability as a form of payment".

As concerns scarcity, indivdual crypto currencies, such as Bitcoin or Monero, are usually designed to be scarce. That is why I gave them a 10 in the category scarcity. Crypto currencies as a type of money, on the other hand, are not scarce, because new crypto currencies are constantly being invented. But this is not what "scarcity" means in the current context.

At first glance, crypto currencies are very fungible. An amount of money in a crypto currency is just a numerical value. So it seems the Bitcoin you own is exactly like the Bitcoin I own. They can perfectly replace each other. However, your Bitcoin may have been owned by a criminal before and it may have been involved in crimes. And, as Bitcoin is not really anonymous, your Bitcoin's history can be uncovered. Suppose my Bitcoin does not have a criminal past. Then my Bitcoin would be better than yours. In this respect, crypto currencies are not really fungible. To my knowledge the only real exception to this is Monero. Due to the design of Monero, the history of individual Moneros and parts of Moneros can not be traced. Hence, Monero is the only crypto currency that really deserves a 10 in the category fungibility.

What does "durability" mean with respect to crypto money? It should probably not mean "durability of crypto money as such", nor "durability of a given crypto currency". If we want to use this category in the same way as we used it for the other types of money, then it should probably mean "durability of individual amounts in a given crypto currency". If you take good care of your crypto money, e.g. by using proper passwords and by making proper backups, it should be rather durable. However, I think it is still quite unclear what it means for crypto money to be durable. That is why I added a question mark.

Crypto money is usually perfectly divisible, because it has been designed to be perfectly divisible.

Crypto money is even more portable than fiat money, because payments do not need to be checked or processed by banks. You cannot carry crypto money with your bare hands, but we already introduced the category "independence of technology" to cover this fact. Whenever you are able to use the necessary technology, crypto money is, obviously, very portable.

If the algorithms a crypto currency is based on are correct, it can not be manipulated by anyone.

I think their dubious ability to store value and their high degree of dependence on technology are the major drawbacks of crypto currencies. Crypto currencies may disappear altogether for many reasons. Better technologies may emerge. States may make them illegal. So just like any other good, crypto currencies are speculative.

We looked at different types of money. What have we learned? What is the essence of money? Is there better money and worse money? Which money is the best?

I think we have seen that our initial statements were correct: Money is anything that can be used for paying and storing value. Money gets its value from speculation. If enough people speculate that they will be able to use a certain good for paying and that this good doesn't lose its value (too quickly), then this good is money.

Although it is often said that certain types of money have "intrinsic value", strictly speaking, there is no such thing as intrinsic value. Gold is often said to have intrinsic value. And it is actually used in the industry and for making jewellery. But can we be sure that gold will always be appreciated, independently of the circumstances? Obviously not. The industry may come up with replacements for gold. People may stop finding gold jewellery beautiful. Gold might also lose its scarcity, e.g. because better mining technology is developed. Like other goods gold gets its value from speculation: People believe that gold will keep its value, so it keeps its value. The same is true for fiat and crypto money. Once people lose trust in a certain fiat currency, such as the Swiss franc or the Venezuelan bolivar, it loses value. Once people lose trust in a certain crypto currency, such as Bitcoin or Monero, it loses value. Major events such as wars, coups or simply government decisions can make fiat currencies disappear altogether. Major events such as government decisions or technological progress can make crypto currencies disappear altogether.

Is there better and worse money? I would think so. One approach to tell apart better and worse money would be to say:

The better money is the one that the people prefer.

People prefer Swiss francs to Venezuelan bolivars, so Swiss francs are better. Another approach would be to say:

A type of money is the better the higher it scores in the different money properties.

I think the two approaches are consistent with each other and both correct, if we interpret them properly. In the short run, people may prefer a type of money that doesn't actually score well with respect to the different money properties. For example because there is a hype about a new type of money that is actually not as good as the hype makes them believe. Also, people may "prefer" an actually bad money, because the state threatens them with dire consequences, if they do not use it. However, when the people have a real choice and enough time for trial and error, they will probably prefer the money with the best properties. In other words, in a free society the good money will always win out in the long run.

Is there such a thing as the best type of money? Under a given set of circumstances, we can decide using different criteria that one type of money is the best. But we cannot be sure if the money that is the best money today will also be the best money tomorrow or next year. Because we cannot be sure which set of circumstances we will have tomorrow or next year. After a major catastrophe sheep may be an excellent type of money and nobody may be interested in gold, because you cannot eat it. On the other hand, new gold-based representative crypto currencies might be created and, suddenly, gold might be the best money. We do not know the future of anything and that includes money. All we can do is speculate.