Money

Any generally accepted medium of exchange -- that is, anything which is generally acceptable in a particular society as a means of payment or of settling debts arising out of exchanges on credit. Put slightly differently, money is a very special sort of good for which a very large proportion of the demand (at the extreme, all of the demand) is derived from people's (realistic) expectations that it can be quickly and easily re-exchanged for some other more immediately desired good or service (rather than the demand arising from a desire to personally consume the money-good itself).

The earliest forms of money arose spontaneously in barter economies when experienced traders identified certain commodities that were so widely desired for actual use in the society that they could reasonably count on their acceptability as payment in almost any trade. Monetary demand for such commodities was further enhanced if they also had other physical properties making them especially convenient to use for trade -- such as durability, portability, ease of storage, uniformity of quality, easy divisibility, and so on. That is, demand for these goods derived from their desireability as a medium of exchange was gradually "added on" to the pre-existing demand for them as objects of direct utility. Historical monetary systems have flourished on the basis not only of useful metals such as gold, silver, copper, bronze and iron but also on the basis of salt, tobacco, cattle and other livestock, furs and other animal hides, grain, gourds, beads, sea shells, feathers, and even transferable titles to particular coconut trees.

In present day industrialized economies, money normally consists mostly of abstract claims on government or on heavily government-regulated banks ("fiat money") -- claims such as token coins and paper currency or central bank notes or even magnetic tape entries representing one's checking account balance at a government insured bank that theoretically entitles one to withdraw cash on demand. Historically such government sponsored currency usually originated as "IOU's" in which the government (or its central bank) promised to redeem the tokens on demand (perhaps only after some future deadline) with "real money" -- i.e., fixed quantities of gold, silver or what have you. However, government promises of redemption have by the 20th century largely been withdrawn or downwardly adjusted, and these tokens have very little (or no) intrinsic or use value. Nevertheless, in relatively "stable" countries (like the United States, Great Britain, Switzerland, Japan or Germany) fiat currencies remain generally acceptable as a means of payment because people think that they "know for sure" the currency can be used to satisfy their tax bills, because legal tender laws usually require private creditors to accept them to discharge contractual debts, and because people generally have come to believe through favorable past experience that the official government money will continue to be widely acceptable in exchange for an at least moderately predictable quantity of goods and services in the private markets in the foreseeable future. Unfortunately, the confidence with which people hold their expectations about the future value of any given variety of fiat money is extremely fragile. Confidence in the value of fiat money is easily and quickly undermined under conditions of political or economic instability, especially when the government has already been observed reneging on some of its many other solemn promises and obligations and when the money stock is clearly being expanded at an extremely rapid rate -- with the result that a number of such national currencies have become worthless virtually overnight in the course of the 20th century's all too numerous war- and revolution-related hyperinflations.

[See also: barter, transaction costs, money stock, monetary policy, inflation, hyperinflation, deflation, banking]