Jun. 30, 2005 - The Characteristics of Money

This is Part III of a five-part series called Money 101. 

There are five key characteristics that make a specific item useful as money at any point in time.  To serve as money an item must be:

• Scarce (limited supply) – An item only works as money as long as it is scarce, difficult to obtain, or its available quantity is tightly controlled.  Gold is highly valued because it is so rare and difficult to find.  Acorns, on the other hand, are not only plentiful but can be easily found or reproduced.  We would not accept acorns as money because we can easily get them for free.
• Recognizable (mutually agreed value) – An item must be recognized as money and its value be commonly agreed upon.  A U.S. five dollar bill is distinguished from all other currencies and printed paper.  Its value for making a purchase is known and accepted.  The same could not be said of acorns.
• Durable – An item must last for long periods of time.  Money is accepted as payment and stored with the expectation that it will still be there and useful at a later time.  If it dissipates quickly or disappears altogether then it is of little value as money.
• Portable – As a matter of convenience, an item must be able to be readily carried about for use in commerce.  Items that are difficult to transport will not likely serve as money.  Can you imagine carrying around bags of acorns to spend?
• Divisible – Goods and services are not sold in quantities of equal value.  If they were, then we’d only need one denomination of currency (i.e., everything is sold in multiples of $5.00 so all we need is five dollar bills).  This is not realistic or practical.  For convenience, therefore, an item used as money must be divisible into any quantity (i.e., dollar, quarter, dime, nickel, and penny).  This allows sellers and buyers to agree upon any price for a particular quantity of a good or service.

As noted previously, many different items have served as money throughout history by fulfilling these characteristics.  Money is not defined by the item but by the characteristics that make an item useful as money.  The particular item is irrelevant.

Homework Assignment

Now here's some homework for you.  Think about ways in which you might teach your children these basic characteristics of money.  One idea might be to consider various common items and discuss their suitablility to serve as a currency.  What are their strong points and weak points of each?  Another example might be to create a household currency for buying/selling within your family.  Select an item that meets the above characteristics and see what happens.

Better yet, why don't you dream up some ideas and share them with all of us?  Or maybe you've come across other tried and true methods.  Leave a comment and let us know!

Now we will look into the spiritual aspects of money as we consider that money represents time.

Other posts in this series:

• Part I - Money 101 An Introduction
• Part II - The History of Money
• Part IV - Money Represents Time
• Part V - Money Represents Priorities