What is money?
Well, the question is one that needs much more than just a small reflection in order to be answered conveniently. But for the sake of easiness and simplicity, let’s try -humbly- to squeeze things down to under 300 words. Here we go!
When you consider the economy as a whole, its product has a certain value. How much? Well … the value that it has according to the preferences of the participants in that economy!
Ok … but … then we still don’t know how much that is! Let’s introduce a scale!
In order to be able to express the value of the economy, we actually only need to agree on a starting point in time with an initial number that we accept as representative for the value of the whole economy.
Now we know how much our economy is worth. Easy peasy!
Once this is done, consumer preferences and market forces will allocate fractions of that initial reference point to individual products and services. And we can also start measuring economic growth from year to year.
We just created money! Money is a standard that helps us to indicate value in our economy.
Now, the form under which this money exists doesn’t really matter. It could be shells, tulip-bulbs, tally-sticks, gold, paper money or even just a number in an electronic file … which corresponds with the digital money we have on our bank accounts today.
If the form is not that important, its scarcity IS EXTREMELY IMPORTANT! The form we choose for our money should be LIMITED in its supply in order to match the limited character of the value of the economy.
So money is nothing else than a standardized method that enables us to measure value over time and allocate value to individual elements in the economy.
Actually, in its essence, money is not that difficult to understand! 😉