What is money?
What exactly is money? It seems obvious. There are coins, banknotes, credit cards – wait, a credit card isn’t money, it’s just a means of transferring money, just like a cheque or an early modern bill of exchange. So what is it then? What functions must money fulfil in order to function as money?
The four functions of money
The fact that money can be used to pay for things and saved are just two of the most important functions that money has today. We will look at all four functions that a medium of exchange must have in order to function as money.
Means of exchange
The best-known function of money is that it serves as a means of exchange, which differs from all other goods used in barter in that it does not directly satisfy a need of the exchange partner, but can be used for further exchange due to its general acceptance.
This means that not only coins, banknotes or digital bank balances can be used for payment, but anything that is generally desired. For example, cigarettes. Do you remember the post-war period? Back then, (almost) everyone smoked because smoking satisfied their gnawing hunger. There was a high demand for cigarettes, while state money failed as a medium of exchange due to a lack of demand.
Object of hoarding
Money has a third important function: it serves to build up credit, a treasure, if you will, which is why we speak of an object of hoarding. This word comes from the Greek thesauros, meaning treasure. This takes us back to ancient cities, where this function represented the most important and greatest advance. No one was dependent on earning their daily bread anymore. Instead, they could live off what they had earned in the previous weeks, months or years.
Standard
Almost more important is the function of money as a standard. What do a telephone call, a sandwich and a visit to the hairdresser have in common? Quite simply, the ‘value’ of all services can be measured in money. But be careful. Unfortunately, ‘value’ is also used in a moralising way. And as Oscar Wilde so aptly put it: Today, we know the price of everything and the value of nothing.
Atonement
Almost forgotten is the fourth, perhaps most original form of money, namely its ability to make amends for damage caused without spilling blood. Incidentally, this was the original meaning of the Old High German word ‘gelt’, from which the German word “Geld” (money) is derived. Since the 8th century, ‘gelt’ has been used to pay what was owed to divine or state authorities. An example of this is ‘Wergelt’, the amount that, according to Germanic law, was owed to the family of a person who had been killed in order to avoid blood feuds.
Money still has this function today, whether we use it to pay for speeding fines or when the surviving dependants of accident victims sue for damages.
The five characteristics of money
Money not only has functions, it also has characteristics. Even though we now think that coins, banknotes and, above all, our electronically stored money are the typical forms of money, these are merely manifestations of money that are typical of our time and have proven to be particularly practical in our modern society. There have been many alternatives in the past, both in Europe and beyond.
Generally desired
Money must be desirable, and desirable to everyone. The moment a state loses its creditworthiness, its currency is worthless. Conversely, in the past, desirable goods have repeatedly served as money.
We have already mentioned the German cigarette currency. One could also think of the small sweets that circulated in Italy in the 1970s instead of 10 lire coins. Remember cowrie shells, salt bars, tea bricks, cocoa beans, pieces of silk, manillia and kissipennies.
No natural decay
All of the objects mentioned have the advantage that they are not subject to natural decay. This is why only very few foodstuffs are suitable as money, namely those that have a long shelf life, such as salt or tea. This is why metal became the predominant material for money. Societies that did not have access to metal developed alternatives. Think of the cowrie shell, whose shell is so small, stable and durable that it lasts a long time.
Easy to transport
This brings us to the next characteristic of money. It must be easy to transport. That is why our electronically stored money is so popular today. It is always available to us in large sums without being a major burden. This was not usually the case in the past. That is why the bill of exchange became such a successful model for the increasing trade of the early modern period.
That is why a Yap stone is not money in the modern sense, because it cannot be transported. On the island of Yap, it served completely different purposes than our modern money does today. Yap stones were part of family prestige. When a woman got married, a large property was sold, or an atonement was made, a Yap stone was transferred to the new owner. And this was done without moving the stone from its place. The (small) community of Yap’s inhabitants knew exactly who owned which stones.
In cases where not all functions and characteristics of money are fulfilled, we now speak of pre-monetary or primary forms of money. The earlier, somewhat disparaging term ‘primitive money’ should be removed from your vocabulary. Neither the money nor the people who used it were primitive.
Easily divisible
Another important characteristic of money is that it must be easily divisible. It was only the small obols that made the Greek tetradrachms money in the modern sense. This is because money only becomes a universal means of payment when it can be used to settle even small amounts. This is why bullion coins, even though they are called coins and have a nominal value, are not actually real money. They serve exclusively for the purpose of hoarding.
Standardised
The uniformity of money is also important, of course. A unit must always be standardised. That is why a manille, a kissy penny or a tetradrachm always consists of the same amount of metal. This is why cigarettes worked so well as currency: they were all the same size thanks to automated production.
This is also why precious and semi-precious stones never developed into means of payment. They were not standardised, varied in quality and, of course, could not be divided. Gold nuggets, on the other hand, worked wonderfully. They could be converted into grams and their value could thus be determined.
Consistent, limited quantity
Last but not least, the roughly consistent quantity of money is crucial. Have you read The Hitchhiker’s Guide to the Galaxy?
In the book, there is a brief attempt to use leaves as currency. Of course, it doesn’t work. Because there are far too many leaves. But too little currency doesn’t work either. See the missing 10 lire coins and the small sweets in Italy.
Means of payment must therefore be available in limited but sufficient quantities. Today, this is ensured by the national banks. Or let’s say they should ensure it. Politicians, on the other hand, sometimes have different ideas about the role of a national bank.
As you can see, our modern money is a highly developed means of payment, but it has only evolved into what it is today over the last two centuries. The coins from before 1850, which we collect with such enthusiasm today, are a stage in the development of modern money.
Text & image : Ursula Kampmann
