Tuesday, July 26, 2011

What is Money?

Money at it's most basic form is a 2 part commodity.  1, it is a storage of value and 2, it is a mechanism to facilitate exchange of goods and services.  An example of a storage of value would be gold and bitcoins ( see www.weusecoins.com to learn more ) and an example of a medium of exchange of goods and services would be fiat currency and ripple ( see ripple-project.org/ to learn more ).

People often get these items confused, notably because of the grey areas between these two things, for instance gold has been at times used as a medium of exchange and fiat currency has been used as a store of value.  What really differentiates the two, well fiat currency in and of itself has NO intrinsic value, it is a human defined and generally accepted/decreed system to enable bartering without having to bring a goat or pig into your local dell store to get a laptop.  This kind of commodity can come from nothing and can continually be created and destroyed and as long as it maintains a standard level of liquidity it works.  Gold on the other hand has intrinsic value, meaning you can keep gold and later you can turn that gold into jewelry or component parts in say a high tech airbag deployment mechanism which is a marketable commodity.  This kind of commodity has rarity and requires resource expenditure and effort in order to have more ( ie. Mining ).  We can get into the anomaly of bitcoin in a later posting, which in it's current state is a store of value and NO intrinsic value.

What does this mean to you and me?  Simple really, our entire economy lives and breathes because of both of these functions working as they should concurrently.  Every where you look, you see the price of gold, silver, oil etc. priced against the dollar, yen, euro etc.  This is because, economists and consumers need a gauge to know how stores of value can be universally traded for a medium of exchange.  So when you go to the gas station to fill up the Wagon Queen Family Truckster and you end up paying five dollars per gallon, this is the two principles at work simultaneously, the economy has deemed that your gasoline which is a store of value has an exchange rate equivalent to other stores of value equaling 5 fiat dollars per gallon.  What else could we have done to get this gas?  Say you're a farmer and wanted the gas and you have 5 fiat dollars in bushels of corn, could the farmer not have just given his bushels of corn for the gas directly?  The answer is that yes he can but if the gas station owner doesn't want any corn because he/she has a corn allergy and doesn't want to turn around and trade the corn to someone else then we need to have an easier medium of exchange and this is why we have fiat currency.

For discussion, think about this and tell us your thoughts.  In current forms fiat currency has become both a store of value ( in the form of debt - see this video series www.youtube.com/watch?v=vVkFb26u9g8 for more info ) and a medium of exchange.  Gold and Silver have also been used as a store of value and a medium of exchange ( gold and silver minted coins for example ).  Does a successful economy need to have a currency that is representative of a store of value and a medium of exchange simultaneously or can it be functional with the 2 traits of money separated into different forms?


  1. Nice one James, useful and interesting stuff, and a very accessible writing style.

    I'm a British economist (I suppose, I mean I only graduated a couple of years ago, so not got much experience yet) working in Spain, and I heard about this through your Kiva message. If you're interested I'd be up for contributing at some point, though not yet sure on what topic. Economics is a big old subject. I think you've picked a good starting point though.

    Looking forward to more posts


  2. feel free to message me @ garagEconomy @ gmail

    I have some ideas and would welcome any topic you feel passionate enough to want to write about :-D