- Something generally accepted as a medium of eschange, a measure of value, or a means of payment
- Wealth reckoned in terms of money
Before I can talk about monetary effects, it’s necessary to define what money is.
The simplist way to define money is to talk about the problems that it solves. The two classic problems that money solves are called “coincidence of wants” and “store of value”.
Coincidence of Wants
Imagine you are a person in a place that has no money and want to trade with someone else. You might have some things of value, for example a pig. You might want to obtain something else of value, for example, braces. In order to make the trade you need to find a dentist who is willing to take pork in trade for dental work. In a pure barter economy, there are 2n markets. If one of the goods is money, and is always one side of any transaction, this number shrinks to merely n markets. The lower number of markets means that each one is much “thicker” than in the barter economy, facilitating liquidity and price discovery.
Store of Value
Imagine you are a person in a place that has no money and want to trade with someone else. You might have some things of value, for example fish. You might want to obtain something else of value, for example, a house. In general, it would take quite a lot of fish to obtain a house. It would be a problem to deliver such an amount fresh at the same time. One could try various schemes to pay over time like layaway or other contracts. Those schemes all have various downsides. One great alternative is if you can trade your valuables for money. As long as the amount of money stays about the same, it’s cheap to detect forgeries, and the money doesn’t deteriorate over time, it’s a much simpler proposition to store value in money than in some other good.
What’s in a name? That which we call a rose by any other word would small as sweet.
Romeo and Juliet
One complicating element to money is that there is no binary distinction between things that are money and things that aren’t money. There are good that are officially money, for example goods that are recognized by legal tender laws or goods with which one can pay taxes.
Official status is no guarantee that a good is money: that it solves the two fundamental monetary problems. Very recently (before they abandoned it altogether) Zimbabwe had a currency undergoing hyperinflation. By definition such a currency is not a good store of value. It also made a poor medium of exchange, as the value of the value of the currency fell so far it took a great many physical bills of the highest denomination to purchase anything. Additionally, the hyperinflation was so extreme that prices had to be re-calcuated frequently, sometimes multiple times per day.
Goods can also be better or worse at either of the two goals than other goods. For example, gold is better than US dollars at being a store of value (this is on purpose), but a worse solution to the coincidence of wants. Both gold and US dollars are better at being money in both ways than corn.