What is Money?

When you think of money, I bet your US Dollar note or Cambodian Riel note should come to your mind. Well, it is partly true. Your note is one of the form of money called fiat currency. Money is more than just the paper you put in your wallet. Back in the past, people used to use gold or silver as money. Money can come in any type of form as long as it is generally accepted in the exchange of goods and service. This article from the Guardian paints a much better picture that money can just be anything. Prisoners used to accept cigarette as money within the prison economy (have you watched the classic movie called Shawshank Redemption?) then mackerel can and now ramen. So what are the functions of money?

The first essential function of money is that it is a medium of exchange. Money is used to facilitate the exchange of goods and service. Imagine a world without money. It would be a nightmare to buy or sell stuff in the economy. Say you are corn farmer and want to buy 2 kg of meat from a seller but the seller will only sell the meat if you have 5 kg of apple. In order to buy the meat, you will need to find other sellers who are selling apple and is willing to exchange 5 kg of apple with your 5 kg of corn. You would have to chase other sellers if the apple seller only settles for other goods. This kind of system that the exchange of goods is made with other kinds of goods is called "barter system". Therefore, money which is accepted by all parties will reduce the inefficiency of having to chase apple and other produce to buy 2 kg of meat. Meanwhile, prisoners can also exchange all sort of goods and service in the jail which makes life a lot easier.

Money also function as a unit of account. In a plain word, it means that money indicates to others the measure of value of goods and service. Money makes it easy to under its value. For instance, 1 kg of meat cost 10$, 1 kg of corn cost 1$ and 1 kg of apple cost 5$. Therefore, we can know for sure the value of meat, corn and apple. Wouldn't it be more complicate if we only know that 1 kg of meat equals to 10 kg of corn and 1 kg of apple equals to 5 kg of corn. How about the relative value between meat and corn or beef, veggie and so on? It is a lot easier to have a common unit in terms of money for those produce.

Another important function of money is that it has to store value. If we hold 100$ note today, we are almost certain that 30 days later the value of the dollar note is still 100$ and people will accept our 100$ note (let's get inflation out of the equation for simple explanation). The fiat money works well as money in the economy because it is light, durable (unlike gold or silver which is super heavy) and will hold its value in the future. This reasons also explain why prisoners choose cigarette and now ramen as a form of money. Ramen can last a very long time. It is not very heavy to carry around or store it. Other stuff might not be a great form of money. For example, milk is a terrible choice for money. It can get spoiled easily. One needs to always store it in a fridge. The value of milk today should worth nothing in a month time because the milk is spoiled and no one is going to accept it in the exchange of goods and service.

One thing to take away from this article is that when you think of money, it can be more than just a piece of paper. Well, it can be the noodle that you eat when you run out of cash at the end of the month.