Short overview: What is Money?

Hello, this is a translation of my post about what is money. You can find the original one right here:

Hello to all of you. I would like to give an overview about “what is money” in this thread. Many of us use it every day, but really know exactly what it is do very few. To also understand the meaning and possibilities of cryptocurrencies one should also understand how our financial system was and is running.

The functions of money:

Money is a medium of exchange, we exchange money for services, things, rights and many more. (I give you 2€ and you give me 1 ice cream in a waffle).

Store of Value
Money is a way to store something. Unlike other goods, money does not spoil, weather, it is preserved for a long time. (A 1€ coin from 2002 is still worth 1€ today).

Money is used by people as a yardstick. We compare different objects with each other by the value of money. (A house is more expensive than an ice cream - I earn more in this job than in the other job).

Unit of calculation
Money is also used in economics as purchasing power, that is, as a unit of account. (Inflation is calculated with it, for example: 5 years ago I could buy for 100€, today I have to pay for the same goods already 120€! → +20% inflation over five years i.e. approx. 4% per year).

These are the 4 functions of money. Our money is no more and no less. Now the question arises, why did we invent money at all?

Why did we invent money?

Actually, it cannot be said that we invented money. Money in its definition as a means of payment has always existed. The form in which we view money today has only changed over time.

At the very beginning there was primitive money. There are many examples of this very old currency (shells, tea, cloth, cocoa, etc.). These currencies arose directly from normal trade because they were among the best stores of value. Of course, cocoa beans could go bad or shells could crumble, but in the comparison of that time, in contrast to fresh meat, they could be kept much longer.
As an analogy, the following situation can be applied from our modern times:
“Children in the schoolyard exchange their fancy new cards of NFL players among themselves.”

After primitive money, coins were introduced. So the governments created their own coins from precious metals. This, of course, greatly improved the function of storing value, since precious metals do not deteriorate or wear out over time. Coins has remained with us to this day, e.g. the €1 coin.

After the coins, governments began to print paper money, as gold or precious metals became rare. Thus, among other things, the precious metal was needed in the war for the arms industry. In order to create a balance then for the coins a paper was issued, which certifies e.g. 100 coins. ("Against this bill you get 100 coins …) The paper money has been preserved until today. One 100€ bill is one hundred 1€ coins.

The next form of the money is the book money. This form of the money is today the most well-known form of the money. Here, property and possession are separated from each other. The purest form and the most vivid example are savings books in book form. I give my money to a bank, which enters it in my book. I remain the owner of the money but the bank is in possession of it. I acquire a right against the bank that the bank pays out the money again. If I transfer money, I transfer in the narrower sense only this right opposite the bank on another person.

A promise is a promise!

Book money is created in principle by a deposit, the bank promises me the option to withdraw it whenever i want to. Another form of the creation is the granting of credit. Any customer can get money from the bank against a promise to repay.
I commit to ## repay the sum including interest in the amount of ####.

Our today’s banks give out to the borrower not only their own capital, they create money artificially, so-called credit money. This money can be created by the central bank as well as by a commercial bank. It is spectacular in the case of commercial banks, because they only have to deposit a fraction. A much higher percentage of the money of a credit is thus only created by the banks. The money of today is worth only a promise, but from whom?

As you see now, a lot of money that exists today is worth only a promise. In this promise everyone must trust, even if you does not understand this system. The alternative to this, from the current point of view, are only cryptocurrencies. Why?

Cryptocurrencies as an alternative

The invention of Bitcoin was not intended to give criminals a payment system or even to promote crime. Every successful technology has its downsides (TNT, weapons, etc.).
The real purpose of cryptocurrencies in today’s world is to replace trust with mathematics. The actual system of money is not changed and it is also possible to apply all the necessary laws to cryptocurrencies, if the creators allow it. What will be improved, on the contrary, is that trust will play little or no role. Any functionality has been mathematically proven and tested. Cryptocurrencies are also at a current technological level of the time.

Personally, I would even say that cryptocurrencies could be the new central bank money. But this on a global, cheaper and more technological level. With the potential of dApps and DeFi, banks could still remain and become trusted providers of SmartContracts or offer other services. Cryptocurrencies and banks don’t have to be enemies, together this could even completely revolutionize the financial world.

*Translated by myself and the translation software on the second of may 2021.

commodity money
demand deposit
money creation