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What is Money?

question-mark-with-dollars.jpgI have a simple question for you. What is money?

Not long ago I was asked that question by financial futurist Dick Wagner, CFP®. My response was, “energy.” Wrong. Dick responded, “Rick, you just described a function of money. What I am asking you is, ‘What IS money?’”

In the April issue of Financial Advisor Magazine, Dick brilliantly answered the “What is money?” question in a manner even I could understand. He listed some of the responses he had received from financial planners: money facilitates the exchange of goods and services; it is a storehouse of value; it is an accounting tool.

He also wrote that some “will tell you with straight faces and wistful new-age gazes that money is ‘energy.’” Oops. I had to laugh. I must admit I’ve never thought of myself as having a “wistful new-age gaze.”

All of these answers, Dick explained, would be correct if he had asked for the function of money. Yet he found no one who could tell him what money was.

Actually, his definition of money is simple. Money is an agreement. Money is whatever a community, society, or country says it is. As Dick said in his article, “Without agreement, money simply does not work. Proof? Consider all the objects that have served as money throughout history. Try taking any of them to the aforementioned grocery store. Select something. Get in line. Attempt to pay. See what happens.”

In past societies all sorts of things were used as money. Some examples are salt, wampum, maize, beaver pelts, iron nails, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, gold, silver, copper, paper and candy.

I imagined myself at Safeway with a cart full of groceries, attempting to pay for them with a sack full of salt. No? How about glass beads? They apparently worked for Peter Minuit, who bought Manhattan with them. Imagine the response I would get from the checker. Heck, I could offer her a fist full of Euro bills or a gold bar and still not walk out of the Safeway store with a thing. In Rapid City, South Dakota, “money” means dollars—paper bills with specific green, black, grey (and now orange) printing and design work. Nothing else will work.

As Wagner put it, “If you and the grocer do not agree about the money, no matter how much energy it represents, no business takes place.” Touché!

Money is simply what we, as a society, say it is. If a bunch of folks agree to use a particular item as a vehicle of exchange, that item, within that group, is money.

Okay, this is all interesting stuff, but why should we care? First, money knowledge has become a 21st century survival skill. If you don’t understand money, (how to get it, spend it, use it, and invest it) you are going to have a painful existence on the planet. Money touches everything in our lives. It would seem natural, then, that the first step in obtaining money skills is to fundamentally understand what money is.

dollar-bill.jpgOnce we understand that money is an agreement, it’s easy to understand what money isn’t. For example, some folks will tell you that money is “good” or “bad.” How can a bag of salt, a pile of beaver pelts, or a briefcase full of paper dollars be inherently good or bad? After all, it’s just stuff, just inanimate objects.

Certainly, what we do with money could be considered “good” or “bad” The money itself, however, is neutral. Printed paper, gold, salt, or skins, money is whatever we agree it is.

If you’re interested in reading Dick Wagner’s full article, click here.

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One Response to What is Money?

  1. Mike Haubrich June 11, 2008 at 2:35 am #

    Great article Rick. I will have something to think about today as I process this concept of the definition of money.