What is currency? Money can be anything as long as it can serve as a store of value, a unit of account, and a medium of exchange, according to the International Monetary Fund, a reputable organization with a thorough understanding of the currency. That means that almost anything can act as money as long as we all agree that it has a specific value.
From the barter system to money: transferability and divisibility
When humans first started conceiving of economic systems, they did so on a barter basis. I’ll trade my six chickens for your bale of hay to feed my goat, my goat milk for your basket of turnips, and so forth. Bartering works at a very limited scale, but it’s sometimes difficult to find the person who wants your turnips and has goat milk to trade.
In a more advanced society, where a man fixes wheels on oxcarts in exchange for what farmers have to offer, this leads to a world in which financial chaos is the norm. People can only pay for services with what they have, so prices change constantly. You also have to deal with surpluses of things you don’t even know how to sell. How many eggs before you’re out? How do you make change for a goose when your regular price is two chickens?
Because of this, money became a thing. Rather than requiring bartering items with unstable values and where demand may not be as universal as hoped, money possesses both transferability and divisibility, even if that money is in an early form — what’s called “commodity money.” Commodity money is somewhere in the middle of paper cash and random egg baskets. Commodity money and fiat currency
Commodity money was the first real stab at money as we know it. When you needed less than one beaver pelt’s worth of flour, people preferred to trade certain items that were popular, easy to store, lasted a long time, and could be easily traded and divided instead of accepting very different goods and services in exchange. Beaver pelts were actually a popular form of commodity money in the early United States since they were abundant, useful, and easy to trade. But over time, the beaver trapping world fell away, and mining became a more common trade, birthing metal as currency in the U.S. (and, of course, the Romans did this long before we ever did). Bills and other forms of metal-backed paper money were based on silver and gold standards. Finally, currency evolved into the paper money and digital money we use today.
That unbacked paper money marked the transition from commodity money to fiat money and marked a significant shift in how money is viewed. The value of fiat currency is defined by the economic environment and the faith of the people using it, nothing more. Some will try to say that this means all money is an illusion, but the truth is that we just decided that one piece of paper is worth the same as five beaver pelts, and the vast global economy keeps the belief in that idea alive.
Defining money by its properties
If you want to talk about money by its properties rather than its history, there are a few very strict properties it should possess:
Fungibility. Fungibility indicates that each dollar is approximately equivalent to the previous dollar. They might be different years or have different serial numbers, but every George Washington can be directly swapped for another George Washington without any loss of value or utility.
Durability. Your money has to be durable and able to stand up to many rounds in the washing machine, as well as time. Back in the old barter system, decay was the enemy of stores of value like fruit, which had to be bartered quickly before losing all its value. Since money only has value for as long as it exists, it must have existed for a very long time.
