Money is one of the oldest and at the same time least understood technologies of humankind. It is all around us, yet we think about it surprisingly little. The vast majority of people leave school knowing about genetics, quantum physics or the history of Rome — but with no idea at all of how the money they hold in their wallet comes into being.
Let’s start with a very simple question: what is money for? The answer is surprisingly old. Already Aristotle, in the 4th century BCE, described that money serves three functions.
The three functions of money
- A medium of exchange — it lets you trade things without having to need exactly what your counterpart has.
- A store of value — it lets you defer the purchasing power of today’s work into the future.
- A unit of account — it forms a shared language in which we compare the value of different things.
The properties of good money
For money to perform its functions well, it has to have certain physical and logical properties. Money historians usually name six.
Gold held its place in the competition of money media for five thousand years, because it combined all six properties above average. It was scarce enough, divisible by melting, verifiable by density, and durable forever.
The six properties of money
- Durability — money must not decay.
- Portability — you must be able to move it easily from A to B.
- Divisibility — it must split into smaller and larger units.
- Recognisability — a counterparty must be able to verify authenticity and quantity.
- Fungibility — one unit must equal another.
- Scarcity — and this is the most important one. If anyone could make as much as they wanted, it would have no value.
