Characteristics of Money

What qualities a commodity must have to become used as money

There are 7 common characteristics that favor the use of a commodity as money - medium of exchange.

Knowing what it takes for a good to become a money we can understand why various commodities were chosen as money in the past. And more importantly - what can be used as money in the future!

How money originates

✦ Commodity that is used to obtain other goods;

✦ Originates in free-market;

✦ Valued and demanded as a good before becoming used as money.

To better understand why a commodity needs to have these 7 qualities, we must look at how money originated.

It is crucial to understand that money is just like any other commodity, the only difference being that it is mainly used to obtain other goods.

Secondly, money must originate by the free-market process, when people freely choose what to use as money. That is the only way to choose the best medium of exchange.

And finally - the commodity must be already demanded and valued for its own use, before it can become used as money. Otherwise we would not know how to value it and it could not become money.

Widely marketable

Highly demanded and valued good, that is widely accepted. Thus making sure that we’ll be able to use it any time, any where. Gold is in greater demand than pianos and more valuable per kilo.

Money needs to be widely accepted and demanded, because we need it to sell and buy goods. If only few people want the good, then it will be hard to trade.

For example, I would be better off if I had a bushel of grain than violin. Because more people want grain than violin. If I am a violin-maker, I want to exchange my violins for goods that are in greater demand, so that I can acquire what I need.

This is the main prerequisite for a good to become money. The rest of these factors are important as far as they contribute to a good being widely marketable.

Transports easily

The whole point of money is to make life easier. Thus convenience of use is very important. Cattle may walk, but it is easier to carry around coins.

If we want to use a commodity as money, we need to be able to get that money to market. In this case - smaller and lighter is better. :)

Agricultural societies often employed livestock, especially cattle, as a medium of exchange. That was money that not only talked but walked as well. :)

Boulders would not make a good money, because it would be extremely hard to bring them anywhere.

Relatively scarce

Scarce and demanded good means high value in small quantities. Sand is abundant and cheap. Gold & silver are very similar, except gold is about 15 times scarcer and more valuable.

This characteristic is closely related to the previous one.

If the good used as money is abundant, you’ll need a lot of it to make your purchases and it will be hard to move around.

For example, if we used sand as money, we would all need trucks instead of wallets to go shopping.

Relatively imperishable

We want to be able to use our money for future purchases. That’s why we need durable money. Fresh fish or flowers won’t do the job. Precious metals and gems last forever.

We don’t want our money “going bad’‘ a couple of hours or days after we get it. The longer we can hold our money, the more opportunities will come around for a good deal.

This is why food - milk, eggs, meat, and so on - are not suitable as money.

Precious metals and gems clearly stand out in this aspect.

Easy to store

Porcelain would be too fragile to use as money. Ice cubes, too, would be a poor choice for money. Gems and precious metals are a good choice.

Our money not only has to be durable, but easy to store as well.

Unstable chemical compounds, liquids, paintings will never be used as money. Because it would create more problems than benefits.

In earlier times cattle could be used as medium of exchange in societies that were primarily agricultural and had plenty of open land nearby. Nowadays it would be very inconvenient to keep a cow in an apartment.

Precious metals and gems are winners again.

Easily divisible

Would you want to buy a pack of bubble gum with a 100$ bill and not get the change? Gems can be even destroyed in the process of dividing them.

Imagine trying to buy a loaf of bread with a 100 $ banknote and not being able to receive change. You get the picture. :)

Livestock clearly is not a good choice as money in this aspect. Once we divide it up, it’s not going to walk anywhere. And it becomes much more perishable.

Gems are weak here also - it is difficult to divide them without destroying much of their value.

All units are similar

We don’t want to take courses in distinguishing and estimating the value of our money. For example, it takes an expert to evaluate gems.

You don’t want to keep fussing around checking out the quality of your money and adjusting the exchange ration based on this quality. For one thing, someone else might judge this quality differently than you do. Diamonds, while in many ways suitable as money, are problematic in this regard - it takes an expert to judge the value of any particular diamond.

The divisibility problem with diamonds is related to this. You can’t get the price of a whole diamond by adding up the prices of its pieces once it is cut.

Precious metals, on the other hand, are very homogenous. Meaning - every ounce of pure gold is exactly the same as any other. Thus it has the same value anywhere in the world.

Best choice-gold & silver

Valued for their use;

Easy to transport;

Scare and valuable;

Lasts forever;

Easy to divide;

All units are similar.

As we can see, based on these 7 characteristics that a commodity needs to become used as money - precious metals fulfill them all.

No other commodity comes even close. It is true that various different goods have been used as money throughout history. But ultimately all developed societies have come to using gold and/or silver as money.

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