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Home » Monetary Literacy 101

What is money?

Submitted by on September 17, 2010 – 7:00 amNo Comment

Most people tend to regard money as “a thing” because that is usually the way it appears to us (as paper, coins, checks, credit cards etc).  And yet, stranded on a desert island, we would quickly discover that while our knife remains useful as a knife, whatever cash or checks we carried would now be totally useless.  It would remain paper, but it would no longer be “money.”  For any “thing” to act as money, it requires a community to agree that a particular object has a certain value in an exchange.

Money can be defined as an agreement, within a community, to use something as a medium of exchange.  As an agreement, money lives in the same space as other social constructs like marriage or lease agreements.  These constructs are real, even if they only exist in people’s minds.  The money agreement can be made formally or informally, freely or by coercion, consciously or unconsciously.  Most of us do not consciously agree to use U.S. dollars, euros, or yens, for instance, nor do we consider their nature.  We just use them, unconsciously entering into an unspoken agreement with our banking system.   Any monetary agreement is only valid within a given community. Some monetary agreements are operational only among a small group of friends, like chips used in card games; for certain periods, like the cigarette medium of exchange among front-line soldiers during world war II; or within a larger community, like the citizens of one particular nation.   A community can be geographically disparate, such as Internet users, or can include large segments of the global community, as in the case of the U.S. dollar in its role as international reference currency.

The key function that transforms the chosen object into money is its role as medium of exchange.  There are other functions that today’s money tends to perform, such as unit of account, store of value, tool of speculation, and so on.   However, these other functions may be considered secondary, as there have been effective and functional currencies that did not perform some or any of these other roles.

In summary, the magic of money is bestowed on something as soon as a community can agree to use it as a medium of exchange.  Our money and monetary system are, therefore, not de facto realities like air or water, but are choices, like social contracts or business agreements.

“Money” is used throughout this work as a generic, overarching term.  Specific types of money are referred to by the term “currency.”   There are two general subcategories of currencies: national currencies and complementary currencies.  We are accustomed to considering only our national currencies as ‘real’ money.   However, national currencies have been designed for specific purposes only, and cannot fulfill certain social objectives (such as fostering trade and cooperation, or ecological sustainability). Some currencies already operational today or being proposed for the future are designed to fulfill such objectives, and operate best when they are used in tandem with the national currencies.

Why is it important to understand that money is not a thing, but an agreement?

If we regard money as a thing,  it becomes a given, and we lose our ability to change it in any way.  We are treating money as if it is God-given, like rain or the number of planets in the solar system.   But it is not a given.  If you don’t like the quality of rain, you cannot do much about it. If you don’t like your money system, on the other hand, you can do something about it.   When we understand that money is created by a set of understandings and practices, we can begin examining the terms of these agreements to see whether they actually serve our collective aspirations and objectives.  Currencies can be redesigned to better meet our needs.

Bernard Lietaer on the definition of money