What is Money ?

Money seems simple enough until you try to explain it to a child. It has taken various forms across thousands of years. Some examples of early forms of money include Rai stones - large circular stones cut out of limestones used by the people in the island of Yalp. Such large stones show some practical considerations of what would male a sound money.

In ancient India, cowrie shells were one of the earliest forms of money used. This was probably caused by the proximity to the sea.

Money is generally considered as a store of value, a medium of exchange and a unit of account. Its use in recorded history has come out of the need to address the limitations of the barter system. If I grow vegetables and need to buy fish, in a barter system I need to go around looking for a perfect match - a person who needs vegetables and have surplus fish to offer me. Its easy to understand that such a system is not efficient or scalable. This need for abstracting the value owed or earned out to a item that is separate from the goods or services being exchanged, led to the idea of money.

Naval Ravikath the co-founder and CEO of Angelist and Coinlist has provided a description of money that has deeply influenced me. According to him Money is a story that we tell each other. It is that story telling ability that has helped us build civilizations based on communities that expand beyond the boundaries of blood reactions and tribes. When I give you money, I'm really saying I'm taking credit for work I'd done in the past and I'm passing you that credit.
Example: X bakes bread, so X did good for the world. X sold that bread and got money and the money is basically the world saying 'hey, we owe you something for baking this bread'.
And then when X gives Y money for something X says 'hey, for Ys advice and help X is giving Y the money'. Now the debt the world had to X, X now gives to Y, so now the world owes Y that value or money.

Naval has also said that Money is the bubble that never pops. However the part that it never pops, is not entirely true as hyper inflation and corrupt governments have caused several state currencies to fail. When money fails, an entire generation looses everything.

In general a sound money should have the following properties -

• Stable - the value should not change too much over time (volatility) as this would badly affect the use of money as a store of value.
• Portable - It should be easy to carry around to enable commerce. Remember the Rai stones ?
• Divisible - Money should be divisible to smaller units for ease of accounting and enabling trade.
• Not easily destructible - You would not want to store money in a form that can get easily destroyed. Hence milk is not a good example of money. However, people in Italy use rolls of cheese as a store of value - a form of money.
• fungible - Money meant for one purpose should be easily interchangable with any other specimen of the same money of equal value. The value is the only factor that matters and not the individual specimen that is being used.
• scarce - money will not have value it it can be easily obtained through any means. Metals like gold are mined using a significant effort and are not easy to find. This is one of the main reasons it has value.
• wide acceptance - for money to have a meaningful purpose for use in trade, there has to be a sufficient network effect caused by people using it.