What is money?
Whether we are happy about it or not, economic conditions are significant driver of social behavior. Money sits at the center of this system in ways that don't boil down to a mere unit of exchange.
So what is money?
Most people think of money as an item that is generally accepted as payment for goods and services. To be more precise, we can define it through three primary functions:
- Medium of exchange - facilitates trade by eliminating the need for barter
- Unit of account - provides a common measure to compare the value of different goods and services
- Store of value - allows wealth to be preserved over time
To understand how these functions work in practice, let's examine three assets that might be considered money:
Bitcoin
- Store of value: Yes - has been appreciating over time, though with high volatility
- Medium of exchange: Limited - growing adoption but still far from mainstream usage
- Unit of account: No - too volatile for reliable pricing
Gold
- Store of value: Yes - the longest track record in human history
- Unit of account: Limited - not used day-to-day, but useful for comparing prices across long time periods
- Medium of exchange: No - physical gold is impractical for most modern transactions
US Dollar
- Unit of account: Yes - international trade and contracts are commonly denominated in USD
- Medium of exchange: Yes - widely accepted for transactions globally
- Store of value: No - purchasing power erodes over time, especially in our debt-based monetary system
What's striking about this comparison is the conclusion: there is no money in today's world that fulfils all three functions effectively. If you think that dollars or your local currency constitute good money, think again.
The dollar's failure as a store of value is particularly concerning. In our debt-based monetary system, new money is created primarily through lending, which increases the money supply and dilutes the purchasing power of existing dollars. This structural inflation makes dollars poor long-term stores of value.
Should we be looking for new money? Should we expect a future where Bitcoin serves all three functions? Perhaps.
The other possibility is that we accept a world where no single asset performs all three monetary functions - where we use different tools for different purposes. But this fragmentation comes with its own costs and complexities.