This title represents a trick question. Nothing “is” money. Usage determines what we call “money.”
Before I continue any further, I will repeat the definition of “money” that I use:
Money consists of any economic good, or any claim on such a good, that serves as a general medium of indirect exchange and that acts as a final means of payment.
I recently published this article on Substack, Annotated Definition of Money, which covers many of the important points in the definition I provided above. In this article, I will dig a little deeper because many commenters give confusing or misleading explanations about the nature and use of “money.”
“Money[1]” plays a significant role in market economies; people need a clear understanding of what constitutes “money” and what role it plays in economic activities. Despite its importance, I hear a lot of comments that assume either that people already fully understand the meaning of “money” and its role in the economy, or that they will fully understand explanations of the origin and uses of “money.”
A deeper understanding of “money” should play an important role in the thoughts of the very people who use “money” every day and vote for many of the people engaged in the misuse of “money.” I cannot explain everything that someone should know about “money.” I can only raise questions about what role money does and should play in a healthy economy.
No “Money” Quality
I must return to the false question with which I titled this article. “What is money?”
Nothing on this earth has an inherent quality we might call “moneyness.” We use the word “money” to identify things by their use and use alone. People have used a variety of goods and claims on goods as media of indirect exchange. That media only becomes “money” when the majority of people within a defined system accept it as final payment. People in very small communities, for example, have used cigarettes as money. Outside those communities, people probably use those cigarettes for smoking.
Not Debt
I have heard people say with great certainty that “money” IS debt. This claim, however, misses one very important distinction. Debts have a defined maturity. The debtor has no obligation to pay the debt before that maturity, and the creditor has no right to demand payment before that maturity. “Money,” particularly in the form of a claim, has no maturity. The holder of “money” can demand the satisfaction of his claim at any time—now, tomorrow, or years from now. (I will address commodity “money” later.)
Confusion Caused by Bank Accounting
I believe that much of the confusion about “money” and debt stems from bank accounting. Dollars get classified on the bank balance sheet as a liability. Again, unlike other liabilities, dollars do not have a maturity date. On business balance sheets, even short-term liabilities have a maturity.
I also don’t believe that banks can transfer deposit liabilities to another bank without the account holder’s authorization.
Not All Dollars Used as “Money”
People do not use all dollars as “money.” Dollars that someone has mutilated cannot be used as “money.” If a customer tenders a mutilated dollar in lieu of payment at a store, that store has no obligation to accept it. There are other examples of situations where people do not use dollars as “money,” but the concept of all dollars not being used as money is important.
People cannot use the dollars in accounts at The Federal Reserve as money for at least two reasons. First, regulations prohibit private parties from having accounts at Federal Reserve banks. Your bank cannot write you a check on its account with The Fed.
Second, dollars, either at the Fed or in the bank’s vault, cannot act as reserves and “money” at the same time. Bank reserve dollars and bank dollars have very different, even though related, roles.
“Money” Claims
At this point, I should make a clear point about claims as “money.” “Money” claims give the holder only an immediate claim to specific quantities of the good specified in the claim’s denomination. The “money” claim does not give the holder any right to claim any other good or service. The farmer who sells a bushel of his corn to a store for $4.00 cannot return to that store the next day and demand a bushel of corn for $4.00.
Commodity “Money”
The comments that I have made above apply primarily to “money” claims of one sort or another. Even “folding money” acts as a claim. The use of commodity “money” has become virtually extinct, but it is useful to make a few comments about commodity “money.”
There exists no “money” quality in any commodity used as “money.” If people do not accept gold as payment for any reason, it ceases to serve as money.
A commodity used as “money” does not serve as “money” in all circumstances. You obviously would not want someone to ask for your gold tooth fillings as payment. Less obvious: gold at the Fed or in a bank vault cannot act as reserves and “money” at the same time.
Money and Trust
At the core of all “money”—bills, checking accounts, debit cards, gold, and more—have one thing in common: trust. Without trust, monetary systems would not work. The recipient of “money” trusts that someone else in their market will accept that “money” as payment. Trust applies to all forms of money, including commodities like gold and silver.
Conclusion
“Money,” in whatever form, plays too important a role in a market economy for the people who use it to have so many misconceptions about “money”. If you vote, you should have a better understand of “money.” If you own a house, you should have a better understand of “money.” If you invest (directly or indirectly), you should have a better understand of “money.” If you pay taxes, you should have a better understand of “money.” In short, everyone should have a better understand of “money.”
I have addressed just a few assumptions about “money,” but don’t take my word for their validity. Do your own research. Stop the many misconceptions about “money.”
If you wonder why I place quotation marks around the word “money,” I wish to continually call attention to the fact that “money” does not exist as a thing. Nothing has an inherent quality that makes it money. ↑