What is money?

Dig into your pocket, pull out your wallet and extract those pieces of paper called money and let’s find out what they really are.



“What is this?” I ask.
“Don’t be silly,” you respond, “It’s a dollar bill.”
“Yes, that’s what we call it. But what is it? Would it mean the same thing to a tribesman in Zimbabwe as it does to you and me?”

When we take a look at a physical dollar bill, what do we see and hold? It is a piece of paper with printing on it. The paper was made in such a way so it can withstand multiple handlings and various indignities (sock money anyone?). A one dollar bill has a circulation life of about eighteen months.

The printing is such that you can easily tell that it is a US $1 and not an Australian or Canadian $1. It is serialized so it is unique and if you know how to read the various codes on it, you can tell when and where it was printed, even what position it was on the 10x10 sheet when it was printed. It also was printed in such a way that counterfeits can easily be spotted because the false bills lack the security strip in the paper, watermarks, iridescent printing, microprinting and several other technologies.

In the end, you can easily see that it is a currency bill issued by the United States and you can easily determine most of the time if it is genuine or not.

But that’s not what money is. Money, regardless of the amount, value or who issued it, is a medium of exchange, a measure of value and a means of payment. Say what?

Before there was money, there was barter. If I had an excess of chickens and needed a cow, I would find a guy with an extra cow who wanted chickens, then we would work out how many chickens I would give him for the cow. This system worked for thousands of years because there were very few products you could barter with and for. Weapons, pots, grain, meat, cloth and maybe a few more things.

Of course, the exchange rate would vary according to what one party already had. If the guy who had the cow I wanted to acquire already had too many chickens, he wouldn’t be interested in more chickens for his cow. He might appreciate some cloth so his wife could make them clothes however. So I would have to see if the weaver wanted chickens, then negotiate with him to exchange chickens for cloth to give to the Cow Guy for the cow.

As the number of products grew, it became increasingly difficult to barter, as you might have to barter several things to get the one product you need. Today, barter would be impossible. I personally have many abilities, primarily I fix electronic and electromechanical equipment and build web pages. My grocery store needs no services I can provide. So, bartering for food would be impossible.

When barter started falling apart because of too many goods and services, this is when someone came up with the idea to use precious metals as an exchange. “Precious” at this point meant more “pretty” than rarity. It started with lumps, then bars of metal. This is when the touchstone came into use, so you could test the quality of what you were buying. Rub some gold (or whatever) of a known quality on your touchstone, then rub what you’re trying to buy next to it. If the marks matched, you have a deal. If not, he’s probably trying to stiff you.

Then governments started getting into the act, the good news here was a standardization of the quality and weight of the metal. So a gold coin had the same value as any other gold coin (that had that leaders face stamped on it).

Just because the quality of the money was standardized, did not mean the prices were stable. It was an exchange of things that both sides had to agree to. After all, it would be a couple thousand years before the concept of MSRP (Manufacturer’s Suggested Retail Price) would come about. A person selling chickens for three copper coins on Monday might ask for five coppers by Wednesday. If the prospective buyer wouldn’t pay five coppers but would pay four, it was up to the seller to accept or reject the four coppers for the chicken. No matter what, though, this was an exchange of two things of value. The chicken had a value of food (eggs/meat) to one, the metal also had value in and of itself. If you really needed to, the coins could be melted down the coins to make something (you generally wouldn’t, but you could).

Then someone who was rich got very tired of towing large (and heavy) amounts of gold behind them constantly. This is when banks (to store the money) along with paper money (certificates from the bank promising that amount of gold when presented) were invented. I have two old US “Silver Certificates”, one says “This certifies that there is on deposit in the Treasury of The United States of America One Silver Dollar payable to the bearer on demand” while the other one says “One Dollar in Silver.” The printing of these notes ended in 1957 and redemption for silver stopped in 1968.

If you ever heard about “the Gold Standard,” it was used for exchanging paper money for physical gold and exchanging paper money with other governments that also had their own gold standard. The US got off the gold standard in 1934. Since that time the value of the dollar fluctuates, based on many factors that are beyond my knowledge and the scope of this article.

Today, the basic worth of a dollar bill is your faith in the US economy and the US government. It has value because you and everyone else believes it is worth something. That’s it. Sorry to bust your balloon, but the value of paper money exists only in our collective consciousness.

One last thought: over 90% of the dollars in circulation right now are digital. That means they exist only as 1’s and 0’s in a computer somewhere. If an EMP (Electromagnetic Pulse) goes off over the US, it will destroy most, if not all of the computers. When the computers in your bank become just hunks of metal, all those dollars in your bank accounts, 401(k), trading accounts and so on, they will go *POOF* and disappear, never to return. Amazingly enough, after such an event, for the short term, we would probably go back to a barter system.

That should keep you up at night for a while.

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