General definition

A general definition given by Bernard Lietaer: Money is an agreement within a community to use something as a medium of exchange.

And by Tom Greco: Money is an information system.

Money features

• medium of exchange
• store of value
• unit of account

Kinds of money

Fiat money

Fiat money or fiat currency (usually paper money) is a type of currency whose only value is that an authority (i.e. government) made a fiat (i.e. decreed) that the money is a (legal) method of exchange. Unlike commodity money or representative money it is not based in another commodity such as gold or silver and is not covered by a special reserve. Fiat money is a promise to pay by the issuer and does not necessarily have any intrinsic value. Its value lies in the issuer's financial means and credit-worthiness. Most currencies in the world are fiat currencies.

Historically, the gold standard (and sometimes a silver standard if gold was scarce or monopolized) traded places in most nations as the store of value and unit of account. These were however inconvenient to use as a medium of exchange or a standard of deferred payment due to the transport and storage concerns. Accordingly, notes began to circulate that a government or other trusted entity (e.g. the Knights Templar in Europe in the 13th century) would guarantee as representing a certain stored value on account. This was the beginning of a long slow shift to representative money.

The first historical examples of fiat money was that of China. Although paper fiat money was associated with China through the writings of Marco Polo, Chinese dynasties resorted to fiat money only in extremely desperate situations, and Chinese experiences with fiat money were that it tended to result in hyperinflation.

Until the late 20th century it was uncommon for governments to issue fiat money. In the situations where fiat money was used, it was difficult for governments to avoid the temptation of printing money which generally led to high inflation. The transition from the gold standard to fiat money occurred in the 1960s and 1970s. Since the end of World War II, the value of the United States dollar was pegged to 1/35 troy ounce of gold and other currencies were pegged to the U.S. dollar. This system, known as the Bretton Woods Accord, caused a massive outflow of gold in the 1960s and early 1970s. Faced by the the possibility that United States gold reserves would completely disappear, President Nixon unpegged the U.S. dollar from gold on August 15, 1971.

It is worthy to note that every fiat system throughout human history has collapsed in value.

Commodity money

Commodity money refers to money whose value comes from a commodity out of which it is made. Examples of commodities that have been used as money include gold, silver, copper, salt, large stones, shells, and cigarettes.
Commodity money is to be distinguished from representative money which is a certificate or token which can be exchanged for the underlying commodity. It is not necessary for the commodity itself to have any intrinsic value although it is necessary that the commodity be somewhat scarce.

In situations where the commodity is metal, typically gold or silver, a government mint will often coin money by placing a mark on the metal that serves as a guarantee of the weight and purity of the metal. In doing so, the government will often impose a fee which is known as seigniorage?. The role of a mint and of coin is different between commodity money and fiat money. In situations were there is commodity money, the coin retains its value if it is melted and physically altered, while in fiat money it does not.

Commodity money often comes into being in situations where other forms of money are not available or not trusted. Various commodities were used in pre-Revolutionary America including indian corn, iron nails, beaver pelts, and tobacco. In post-war Germany, cigarettes became used as a form of commodity money in some areas.

Although commodity money is more convenient than barter, it can be inconvenient to use as a medium of exchange or a standard of deferred payment due to the transport and storage concerns. Accordingly, notes began to circulate that a government or other trusted entity (e.g. the Knights Templar in Europe in the 13th century) would guarantee as representing a certain stored value on account. This creates a form of money known as representative money.

Historically gold was by far the most widely recognized commodity out of which to make money: gold was compact, easy to work into more beautiful jewelry, had decorative and functional utility as a finely strung wire or thin foil leaf, and most importantly, could always be traded for other metals to make weapons with. A state could be described as a political enterprise with sufficient land, gold and reputation for protecting both, e.g. the Fort Knox gold repository long maintained by the United States, could reliably issue certificates to substitute for the gold and be trusted to actually have it. Until 1970, U.S. currency was technically worth exactly 1/35 of an ounce of gold. However, actual trade in gold as a precious metal within the United States was banned - presumably to prevent anyone from actually going up to Fort Knox and asking for their gold. This was a fairly typical transition from commodity to representative to fiat money, with people trading of being forced to trade in gold, receive paper money that purported to be as good as gold, and then ultimately see this currency "float" on commodity markets.

The theory of natural capitalism and of global resource banking have more recently been used to suggest a form of money based on ecological yield. While this would be based on water, air, kilowatts of renewable energy or ecosystem products, some of which have a strict commodity definition, such goods cannot be held directly, and so it is more common to suggest that representative money be issued based on enhancing and extending nature's services, giving one the right to receive the yield as benefit.

Critics of this type of proposal often note that, as with other transitions from commodity to representative money, inadequate substitutes will be made on a "just trust me" basis - as per Gresham's Law? which states that bad money dries out good. Other proposals, such as time-based money, rely on the availability of human labour as a commodity, especially within a community, which is presumably harder to guarantee access to, but also harder to steal. Still others deny the utility of commodifying labour as such, and suggest making free time the standard, since physical capital used for leisure, sport, art, theatre, and other forms of play is commodifiable and possible to control. Amartya Sen in Development As Freedom discussed the relationship between access to commodities, labour, and "the right to live as we would like".

It is hard to imagine a physical commodity which would again serve as money.

Representative money

Representative money refers to money that consists of a token or certificate that can be exchanged for a fixed quantity of a commodity such as gold, silver or potentially water, oil or food. This is to be distinguished from commodity money which is actually made of that real physical commodity.
Representative money is widely believed to have originated in ancient Sumeria where small baked clay tokens in the shape of sheep or goats were used to replace barter in trade. Over time, they were sealed in clay vessels which contained a certain number and had that number written on the outside - but it was only possible to verify the number of tokens inside by shaking the vessel and guessing, or by breaking it. At which point, the number written on the outside originally became subject to doubt. Apparently, however, this system was good enough to have discouraged much counterfeiting - penalties for "short-sheeping" or selling the same goat twice were quite severe, and often such activities in ancient societies were thought to offend one or more gods.

A key feature of representive money is that its value is very directly perceived by the users of this money, who recognize the utility or appeal of the tokens as they would recognize the goods themselves. That is, the effect of holding a token for a barrel of oil must be (to the holder) the same both emotionally and economically as actually having the barrel at hand. This thinking guides the modern commodity markets, although they use screens full of software-based tokens and a sophisticated range of financial instruments that are more than one-to-one representations of units of a given type of commodity. They still, however, guarantee the moving a certain amount of a commodity to, or on behalf of, the owner. This is usually only to a well-known point of delivery.

In the late 19th and early 20th century most currencies were examples of representative money in that they were based on the gold standard in which a currency could be exchanged for a fixed amount of gold, at least in theory. In fact, in many countries, such exchange was discouraged, difficult and likely almost impossible except for a few with access to the commodity markets in major capital cities, or in some cases, any but those in government or with proven foreign exchange needs that were supported by the government.

For example, the United States claimed to have representative money from the U.S. Civil War (when "greenbacks" were first issued) to 1970 when the gold standard was officially abandoned. But U.S. citizens were barred from trading directly in gold, and thus could not go to Fort Knox and redeem their dollars for gold. Such tactics were typical, and characterize the long shift from commodity money to representative money to fiat money.

More recently, some economists have suggested a form of money based on ecological yield. As natural capital yeilds nature's services, investing in it via environmental finance would give one the right to receive the yield as benefit. This is in effect an abstraction of owning land that renders it insensible to damage it.

Other proposals, such as time-based money, reflect a modern service economy, and rely on the availability of human labour within a community, or free time as a standard, as suggested by Amartya Sen in Development As Freedom. These are forms of representative money that give the holder the right to have work done on their behalf, or be left alone to do as they like, possibly with physical capital that is owned by the community. The complex relationship between access to commodities, labour, play, well-being and "the right to live as we would like" renders it more likely that future representative money will have something to do with our human life time in some way, as, this is the only thing that is absolutely irreplaceable in our experience. Michael Benedikt has proposed a theory of value along these lines.

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More terms

gold standard
mutual credit?
open money