What Is Money? A Complete Explanation


Jake Morr


August 30, 2023

Understanding money is foundational for financial literacy, yet most people have no idea what money is.

"It's funny because given just how ubiquitous money is in all of our lives you would think that we would all have a ready answer for this question of "what is money?" And yet the precise definition of money [is] quite elusive... It's a constant preoccupation in all of our lives but very few of us ever stop to consider the larger question of what money is precisely." — Professor Barth, Arizona State University

The following is an explanation of money and why it exists. It explores the very nature of money, its importance, characteristics, evolution, types, and the duality of money as both information and physical objects.

What Is Money?

(1) Money is a widely accepted medium of exchange (MoE) that facilitates trade, transactions, and resource allocation. (2) It serves as a store of value (SoV), allowing people to defer present consumption for future use. (3) It is a unit of account (UoA), providing a standard measure for pricing goods and services.

If you ask the average person what money is, they will likely point to the dollar, euro, yen, etc. But these are not ideal starting points for thinking about money.

In the case of the dollar, it's difficult to understand how paper notes and digits in a banking app, backed only by government decree, can function as the global reserve currency, let alone have any value at all.

So it's best to take a first principles approach and instead think about the how and why of money itself.

Put simply — money is technology — an economic tool essential for exchange. It emerges naturally to overcome the inefficiencies of the "coincidence of wants” problem of direct barter, allowing for the division of labor that enables all of society to function.

Why does money exist?

Without something functioning as money, there can be no division of labor, no complex economy, and ultimately — no society.

"We only have money or violence to get something from strangers…To really have large-scale societies you absolutely need money. It's the only thing that really scales because you can get something from a stranger for money. The only alternative that we have is violence. You can either steal it, or you can go into a voluntary relationship with someone else that you don't trust by default….but you will trust the money. If you can trust the money, then you can trust the stranger." — Der Gigi 

Within a family or a small community, with trusted relationships, it's possible to exchange on a system of credit. But what happens in a society of 1,000? 10,000? New York City alone has 8+ million people. 

Dunbar’s number states that the number of people an individual can have a meaningful relationship with caps out at 150. No matter how hard you try, the 151st person and beyond will be strangers you can’t trust by default. 

What about barter? Why can’t that scale?

Coincidence of Wants

“You make apples and I make oranges. I'd like to have some of your apples, but you don't want my oranges. That's when we have a problem of coincidence of wants. So, what do I do? You want bananas. I need to find somebody who has bananas, give them my oranges, take their bananas, give you their bananas, and then I take the apples. In that case, bananas are a medium of exchange." — Saifedean Ammous

The direct barter of goods is prohibitively inefficient because of the need for a coincidence of wants. It makes specialization of labor impossible at any meaningful scale.

So unless you want to revert to small groups of hunter-gatherers and abandon the benefits of specialized labor in fields like mathematics, engineering, and medicine (i.e. literally every aspect of modernity), the notion of bartering as an alternative to money is, to be polite, nonsensical.

Money is as embedded in human society as fire; with fire being the harnessing of chemical energy and money (including proto-money) being the harnessing of social, economic energy.

To emphasize this long-standing relationship, consider that the earliest evidence of collectibles dates back 3 million years ago with the Makapansgat pebble. And the convergence towards MoE can be traced back to the Neolithic period, evident in caches of flint tools and obsidian trade networks.

Media of Exchange

Many things can function like money, as a MoE, without technically being money. It was bananas in the hypothetical example above, but did you know the origin of the word "salary" comes from "salarium," a salt allowance paid to Roman soldiers? That the informal nicknames for the dollar, “bucks” and “clams”, are in reference to deer skins and wampum shells? Or that the adjective "pecuniary," which means "relating to or consisting of money," is derived from the Latin word for cattle?

But remember, while these examples performed money-like functions, it’s only when a society converges on a MoE does it truly become money. For most of history, this was gold and silver.

How Money Evolves

The evolution of money can be understood through four stages: Collectible, Store of Value (SoV), Medium of Exchange (MoE), and Unit of Account (UoA).


Objects that became collectibles throughout history were secure from loss and theft, hard to forge, and displayed value through simple observation or measurement. This is why jewelry functioned as "proto-money."

Store of Value

As demand grows, the collectible becomes recognized as a means of moving value forward in time; and its purchasing power will rise; eventually plateauing when it becomes widely held.

Medium of Exchange

Theoretically, once money stabilizes in purchasing power, it becomes suitable for use as a medium of exchange. In reality, fiat currencies are a MoE by government decree. And in small communities with unstable national currencies (e.g., Nigeria), Bitcoin is functioning as a MoE even with its extreme volatility.

Unit of Account

When money is widely accepted as a MoE, goods will be priced in terms of it, allowing a pricing system to form. This is the final stage in the evolution of money, where exchange ratios against money are available for most goods.

Types Of Money

There are three types of money: commodity, representative, and fiat.

Commodity Money

Commodity money has intrinsic value, meaning that the item being used as money has value in and of itself, outside of its use as money. Examples of commodity money include gold, silver, livestock, shells, etc. When representative and fiat money fails, rational actors flock to commodities.

In the 1920s Weimar Republic, gold prices soared with extreme volatility as paper German marks hyperinflated. During the Covid-19 pandemic, parts of Papua New Guinea, without access to fiat, resorted to traditional shell money for informal barter.

In the present macroeconomic landscape, gold and oil are assuming a more significant monetary role as countries opt for commodities as an alternative to holding the debt of other nations, such as US Treasury bonds.

Gold and bitcoin are commodities referred to as sound money, or hard money, where their key intrinsic value is their “unforgeable costliness” and resistance to debasement.

“A common characteristic of forms of money throughout history is the presence of some mechanism to restrain the production of new units of the good to maintain the value of the existing units. The relative difficulty of producing new monetary units determines the hardness of money: money whose supply is hard to increase is known as hard money, while easy money is money whose supply is amenable to large increases.” — Saifedean Ammous

Representative Money

Representative money, such as banknotes redeemable for commodity money like gold and silver, holds no inherent value. Instead, it represents a claim on a commodity, enabling individuals to trade paper notes (or tokens) for a predetermined quantity of the underlying asset.

Before the emergence of fiat money, most national currencies, including US dollars, were representative money redeemable for gold and silver. For example, the $20 banknotes used to say,

“twenty dollars in gold coin payable to the bearer on demand”

Fiat Money

Fiat money, the global standard since 1971 when Nixon ended dollar/gold convertibility (in what was another soft default by the United States — but I digress), holds extrinsic value imposed by government decree; lacking any relation to intrinsic value. And it can be created or printed at the discretion of centralized authorities. So unlike commodity or representative money, because fiat is not backed by a physical asset, it is susceptible to rapid debasement (i.e. money printing) and fluctuations in public confidence.

In the case of the dollar, demand is generated by issuing dollar-denominated debt. For instance, predatory IMF loans given to developing countries create global demand for dollars, as they are required for debt repayments.

The same principle applies to anyone with dollar-denominated debt. If you have a mortgage, student loan, credit card debt, etc — you need dollars.

So to the question, “what backs the US dollar?” (or any other fiat currency for that matter), the answer is debt. Debt stacked on-top of itself like a house of cards; secured by “men with guns.”

Categories Of Money

Money falls into two categories: physical objects or information.

Physical Objects

Coinage and paper notes provide the advantages of permissionless transactions and inherent tracking of ownership as bearer instruments. However, this comes with limitations in portability. For example, it is costly for banks to exchange physical gold or pallets of paper currency.


On the other hand, information can move virtually instantly. Ledger money is a record of transactions and account balances, which is information-based. Continuing with the bank example above, the advent of the Transatlantic Telegraph Cable allowed banks, separated by an ocean, to transact with each other instantly through ledger entries.

It is easy to see the importance of trust in a ledger money system. It stops working, for example, if one party refuses to pay or defaults on their obligations. Regardless, ledgers are at the core of how money functions in human societies.

In ancient Sumer, clay tablets were used as a ledger-based monetary system backed by commodity crops like grain. On the island of Yap, giant stone coins, valued for the difficulty of their production, functioned as a ledger-based monetary system. Outside of physical cash, the dollars, euros, and other currencies that most people interact with today are actually just digital entries on a bank's ledger.

Tangent: Banks Don't Have Your Money

This is relevant to everyone with a savings or checking account... Banks do not *hold* your money. Your money is not *in* a savings or checking account. When you deposit funds into a bank, you enter into an agreement in which you essentially give the bank a low-interest loan.

They then lend that money out at higher interest rates to make a profit, with the *promise* that you can withdraw your cash upon request.

This promise to pay is backed by another promise from the FDIC, which has a reserve ratio of less than 2%. *Meaning* — if an actual banking crisis occurred, FDIC insurance would only cover a fraction of deposit obligations before the money printer would have to go "brrr" — resulting in further debasement and loss of purchasing power.

To a certain extent, the risk is worth the ability to be interoperable with the fiat system. Banking has the obvious real-world benefits of debit cards, credit cards, and not keeping cash under your mattress. However, when it comes to your long-term savings, it's worth considering the risk that banks can fail; they can deny access your money; and your savings account is already not outpacing inflation.

This is what drives many people towards self-custodying an allocation of Bitcoin — holding a percentage of their net wealth, whatever fits their risk profile, in a commodity outside the traditional banking system. This approach provides an alternative store of value independent of central banks and their inflationary policies, offering greater financial autonomy and the potential for long-term wealth preservation.

Bitcoin: Digital Commodity Ledger Money

One of the most challenging things to grasp about Bitcoin is how it serves as both ledger money and a commodity like gold. Although not physical, its proof-of-work consensus mechanism creates an "unforgeable costliness" as if it were part of the physical world.

It represents a significant advancement in monetary technology —combining the best attributes of physical gold with the best aspects of digital dollars (i.e., ledger money).

The Characteristics of Good Money

Historically, societies chose market goods, like gold, silver, salt, and shells, as money because of specific properties and characteristics. Understanding these properties can help make sense of how gold (a shiny rock) was the apex predator of money for thousands of years. And why Bitcoin (specifically Bitcoin, not crypto) is monetizing right before our eyes — "gradually, then suddenly."

“The magic of Bitcoin isn’t the transfer of money to someone 10,000 miles away – it is the transfer of money to someone 10,000 days away.” — Michael Saylor


An ideal store of value should not be perishable or easily destroyed. Apples can’t be money because they rot quickly. Gold — on the other hand — is a chemically stable metal that does not rust, tarnish, or deteriorate. In this sense, gold is ideal for moving value through time.

Government fiat currencies, like the dollar, are not durable. Their purchasing power deteriorates with debasement (i.e. money printing). Bitcoin’s durability comes from the fact that it is a digital asset that cannot be debased.


A medium of exchange should be easy to transport and store. Digital fiat (i.e., dollars over Visa/Mastercard) excels here. On the other hand, gold is the least portable due to its physicality. This is why representative money, paper notes redeemable for gold (like US currency before 1933), emerged as a dominant form of money.

This is the fundamental flaw of gold. In short, exchanging gold for redeemable paper notes introduced significant counterparty risk as gold became centralized in banks.

The most notable example of this problem is Franklin Delano Roosevelt's Executive Order 6102, which seized gold deposits and forced citizens to exchange their gold-redeemable certificates for non-convertible dollars. The following year, the gold exchange rate was altered from $20.67 to $35, resulting in a devaluation of the newly converted dollars by approximately 69% — a rug pull on American citizens and soft default by the United States.

In regard to portability, Bitcoin is infinitely superior to gold. It can move any amount of value, anywhere in the world, virtually instantly and for free, without the need for trusted third parties. This includes real-time streaming of micropayments, something even Visa/Mastercard can’t do.


Money needs to be fungible to function as a UoA — meaning one unit is interchangeable with any other unit. Diamonds, for example, are a poor form of money because each diamond's value depends on its quality. Gold, on the other hand, is perfectly fungible. When smelted down, one ounce of gold is chemically identical to any other ounce of gold.

Bitcoin is similar in that one bitcoin = one bitcoin, and one satoshi = one satoshi.


In order to function effectively as a MoE, money should be easily divisible. Coinage historically provided divisibility to precious metals, i.e., gold, silver, and bronze, which could be smelted and shaped into coins of various sizes and weights. Fiat currencies, like the dollar, also offer divisibility — as a dollar can be divided into 100 cents.

Bitcoin excels here. One bitcoin consists of 100 million satoshis, or sats, enabling micropayments as small as a fraction of a penny.


Money should be easily authenticated. Modern paper currencies incorporate security measures to prevent counterfeiting. Sir Isaac Newton, when he was Master of the Royal Mint, designed the ridges on the side of coins to combat coin clipping. These made it easier to verify that the coins consisted of the actual weight of silver they claimed to be.

And while verifying the purity of physical gold is technically possible, the process is not feasible for merchants — pointing to another flaw in its monetary status.

With Bitcoin, the entire system — from the protocol to every individual transaction — is verifiable. As a ledger-based monetary system, the blockchain (which is just a way to run a database — unfortunately, the term has be co-opted as a marketing buzzword for crypto grifters and VCs) serves as a pseudo-anonymous, public, and immutable record of bitcoin ownership, with bitcoin acting as the native currency and UoA within the ledger.

In contrast, a Chase bank customer lacks access to the Chase ledger, not to mention the entire global fiat system.


History shows us that scarcity and having an "unforgeable costliness" (meaning it cannot be easily obtained or produced) is a vital attribute of money. For example, despite both having an intrinsic value, why did gold monetize and not aluminum?

The answer is that aluminum, as the most abundant metal on Earth, would experience a rapid increase in production and supply if given a monetary premium, undermining its ability to serve as a store of value. This is also why gold beat out silver as the global monetary standard.

Having an unforgeable costliness also safeguards against exploitation. 

One of the most egregious examples in history is the case of glass aggry beads in Africa. This currency had disastrous consequences when industrial glass production in Europe eliminated the costliness associated with producing aggry beads.

“Money is a tool for trading human time. Central banks, the modern-era masters of money, wield this tool as a weapon to steal time and inflict wealth inequality. History shows us that the corruption of monetary systems leads to moral decay, social collapse, and slavery. In ancient western Africa, aggry beads (small, decorative glass beads) were used as money for many centuries. By counterfeiting these monetary beads, Europeans executed a multi-decade plundering of African wealth, natural resources, and — ultimately — time. Aggry beads would later become known as “slave beads”; as newly impoverished Africans became desperate, some were forced to sell themselves or others as slaves to their European usurpers. Slave beads became instrumental in the multi-century trans-Atlantic slave trade." — Robert Breedlove

Debasement is an inherent risk of having a centrally controlled monetary system.

Currency debasement contributed to the fall of Rome. Hyperinflation in Weimar Germany played a role in the rise of the populist Nazi Party. Zimbabwe and Venezuela both experienced hyperinflation (devastating the lives of ordinary people at no fault of their own). Argentina and Turkey are currently grappling with extreme inflation. And there’s a non-zero chance Western countries, typically unscathed by such events, could face similar inflation as the world navigates the impending global sovereign debt crisis.

Whether it stems from malice, hubris, ignorance, or necessity, the unifying element in these events is human corruption and the inability to resist temptations to manipulate the money supply. At the core of this issue is the Cantillon Effect, in which individuals closest to the proverbial (sometimes literal) money printer benefit at the expense of those farther away. It's easy to see the feedback loop of moral hazard this can create.

“The root and source of all monetary evil is the government’s monopoly on money.” ― Friedrich Hayek

Bitcoin's achievement of digital scarcity is arguably its most important feature. It is a mathematical certainty that there can never be more than 21 million bitcoin. No individual, group, nation, or group of nations can alter the predetermined issuance schedule of Bitcoin. 

This breakthrough means that for the first time in human history, everyone on the planet has equal access to a global monetary asset — a store of value and long-term savings vehicle — shielded from debasement.

So What Is Money, Anway?

Money is technology; an accounting tool; a way for the division of labor to form and societies to scale; a market good desired for its ability to transfer value through time and space; not arbitrarily chosen but instead emerging naturally in a game-theoretical competition of properties and characteristics.

Through this first principles lens, you can better compare and contrast ways to preserve your stored time and energy, invest in your future, and empower your overall financial health.

Personal Anecdote

When I first heard money described this way, my mind was blown (partially because I had just smoked a joint). But the questions that followed were:

  • Why was I never taught this in school?
  • How does the economy work?
  • How and why does Bitcoin work?

Two years later and I’m still tumbling down the rabbit hole. But I’ve reached a point of comprehension to start synthesizing some of the things I’ve learned along the way. I hope this helped add some wrinkles to your brain.



Nostr | Twitter | YouTube

Source Material: See YouTube Playlist

  • The History of Money (In 10 Minutes)
  • History Of Money Course (Professor Barth)
  • The Bullish Case For Bitcoin (Vijay Boyapati)
  • What Is Money (Robert Breedlove)
  • Bitcoin = Money + Time + Energy + Information (Der Gigi)
  • Freedom Money: Der Gigi l Episode 1
  • Lex Fridman Podcast (Saifedean Ammous)
  • Lex Fridman Podcast (Robert Breedlove)
  • Lex Fridman Podcast (Michael Saylor)
  • Michael Saylor x Ross Stevens Interview
  • Why Storing Money In Banks Is a Mistake (Michael Saylor)

Source Material: Reads

  • Shelling Out (Nick Szabo)
  • The Bitcoin Standard (Saifedean Ammous)
  • Money, Bitcoin and Time (Robert Breedlove)

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