It is important to understand the history of our monetary system in order to understand how our current financial system came into existence. You will see money is subject to many changes, and what society now perceives as ‘money’, can be completely different tomorrow. Money is a continuously evolving process. In this series, this subject will be exposed on the basis of a weekly article. In this week’s subject: ‘What is Money?’.

What is money?

The definition of money is complex. Countless books have been written about it. A lot of different materials have been used as money in the past. From shells and salt to scarce precious metals and paper notes.

Money has three different functions regardless of its form. First, money can be used as means of exchange – a means of payment with value in which everyone (read the largest part of society) has confidence. In any case, enough confidence the same amount of services and products can be bought with practically the same amount of money. Second, money is a unit of account with which the price of goods and services can be determined. Last, money is a store of value. (ECB, 2015)

Economist Karl Polanyi, known for his heterodox views and his studies of economic phenomena in their social, cultural and historical context made a distinction between “general purpose” and “special purpose” money (Ravies, 2016). The conditions in which “general purpose” must be met according to Polanyi are: portability (easy to transport), divisibility (easy to divide into smaller denominations), convertibility (easily exchangeable), generality (generally accepted), anonymity (used without the owner having to identify himself) and legality (the guarantee of value by a government agency) (Ravies, 2016). Questions can be raised about whether the last two conditions, anonymity and legality actually are a requirement of money. The digital fiat money you see on your bank account is not anonymous at all. Banks must meet their Know your Customer (‘KYC’) policy. They know exactly from whom the money is and where it came from. This in contrast to cash money. In addition, we have noticed money does not necessarily have to be issued by governments to serve as a means of payment.

Eager to read more? See you next week!

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