What is money?

Money is a means to exchange goods and services.

The Problem

Worker: I will give you my time and energy for the day, and you give me food for my family.
Carpenter: I need your time and energy, but I don't have any food. You should go see a farmer.
Worker: I will give you my time and energy for the day, and you give me food for my family.
Farmer: I have food, but I don't need your time and energy, what I really need is some carpentry.

The Solution

Worker: I will give you my time and energy for the day, and you give me money.
Carpenter: I took your time and energy, here is some money.
Worker: I will give you money, and you give me food for my family.
Farmer: I took your money and gave you food. I will give this money to the carpenter to get some carpentry.

Now in this very simple scenario, the three people could form an exchange circle and satisfy everyone's needs. But in a more complicated scenario, money is a way to exchange something with the promise that you will get something for it at another place or time.

Anything that holds the promise of exchange is valid money.

Leaves can be used for money. But because they are plentiful, they don't hold much value. How many leaves would you demand to give away your hamburger? So while anything can be used as money, it's scarcity that gives the money value. One of the scarcest forms of money on Earth is gold. But gold is not very convenient. It's heavy and akward to carry. While trade used to be done with metals like gold and silver, it was inconvenient. That is why governments began issuing paper certificates that could be exchanged for a certain amount of the metals. We trusted the government that they would exchange those certificates for the metals. The British Pound, also known as the "Pound Sterling" was literally a "pound of sterling silver".

Today, the governments no longer promise to exchange the certificates for metals though, and yet people still trust that the certificates have value.

© 2022 The Crawford Family
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