A casino chip and a gift card for a large online shop are both worth something. Only one of them is money in the full sense, and it is not the one you would guess. The difference is not the material, and it is not that somebody printed a number on it. It is three specific jobs that a thing either does or does not do. By the end you will have a test you can run on anything.
The three jobs a thing has to do
The first job is being a medium of exchange. You take it even when the person handing it over has nothing you want, because you know the next person will take it from you. It is the only one of the three that does not depend on you but on everyone else, and it is the first to go.
The second is being a unit of account. It is the ruler that everything else gets priced in. Without a common ruler you would have to know how many bars of soap a loaf of bread is worth, and how many pencils a bar of soap is worth, for every pair of things in the world.
The third is being a store of value. You put it away today and spend it in six months, and it does not melt in your hand in the meantime.
The idea is already in Aristotle’s Nicomachean Ethics; William Stanley Jevons tidied it up in 1875 in Money and the Mechanism of Exchange, though he listed four functions — the three-item list taught today came later, by merging two of them.
The test, on six things around you
Start with the loyalty points from the shop where you buy groceries. They hold a little value, because tomorrow you can spend them in there. But nobody else takes them, and no price anywhere is quoted in points. Verdict: not money, one and a half jobs.
A gift card for a large online shop goes a step further: that you really can spend, and it keeps its value for as long as the shop exists. But you can spend it in one place only, and prices stay written in a different unit. Verdict: almost money, but only in one place.
Airline miles are worth something and they trade for something. But only for certain things, and only for as long as the programme’s rules hold, which can expire them. Verdict: not money, and proof that being worth something is not enough.
A casino chip turns the intuition over. Inside the building everyone takes it, prices in there are quoted in chips, and you can keep it in your pocket until tonight. Three jobs out of three. Verdict: full money, in a small territory.
Monopoly money looks close and is not. Inside the game it measures prices, but inside the game you buy nothing real, and outside nobody takes it. Verdict: not money, and what is missing is exactly the job that involves other people.
That leaves the balance in your banking app. Everyone takes it, prices are written in that unit, and you can leave it there until next year. Three out of three, and it is not a pile of banknotes inside the phone. Verdict: money — and it is a line somebody wrote.
| thing | medium of exchange | unit of account | store of value | verdict |
|---|---|---|---|---|
| loyalty points from the supermarket | no — nobody takes them outside | no — no price is measured in points | partly | not money: one and a half jobs |
| a gift card for a large online shop | almost — inside that shop only | no | yes, for as long as the shop exists | almost money, but only in one place |
| airline miles | partly, and only for certain things | no | fragile: rules can expire them | no, and it shows that being worth something is not enough |
| a casino chip | yes, inside the building everyone takes it | yes, prices in there are in chips | yes | full money, in a small territory |
| Monopoly money | no | yes, but only inside the game | no | no: the job that involves other people is missing |
| the balance in your banking app | yes | yes | yes | yes — and it is only a line somebody wrote |
Where the line actually falls
Read down the verdict column: the line does not fall between things made of precious material and things made of paper or nothing, but between what a group of people accepts and what it does not. The chip says it in the shortest way — money inside the building, coloured disc on the pavement outside. Nothing about the object changed, what changed is who is around.
Which explains the two cases that sound absurd. When the group gets small, it makes its own money: in a German prisoner-of-war camp prices ended up quoted in cigarettes, and loans were made in cigarettes too, as R. A. Radford, an economist and a prisoner there, wrote down. And when the group agrees, the object can even disappear: on the island of Yap one of the great stones used as wealth sank while it was being moved, and the family stayed exactly as rich, because everybody knew whose it was.
So why does money feel like the object
If money is an agreement, it is worth asking why we keep picturing it as a thing. Because for thousands of years a thing really was there, and it was heavy. The earliest known coins were struck around 600 BC in the kingdom of Lydia, in what is now western Turkey, from electrum, a natural alloy of gold and silver. Real paper money appeared in China in the eleventh century, under the Song dynasty: first receipts issued by merchants, then, from 1024, by the state.
Look at the direction. Stone, metal, paper, a written mark. At every step the object weighs less and the agreement weighs more.
The day the last thread was cut
The last thread was cut on a specific date. On 15 August 1971 the United States suspended the ability of other countries to convert dollars into gold: the system in place since 1944 had fixed the rate at thirty-five dollars an ounce. The word used at the time was “temporary”, and it was never restored.
The part that matters is the next morning. In people’s pockets nothing had changed: the same notes bought the same bread. What had changed was only what stood behind them. And by then the note was already the minority: the Bank of England wrote in 2014 that in the United Kingdom 97% of the money held by the public is bank deposits, not cash. That is one country and one year, but it tells you the direction.
When the agreement ends
An agreement can also end, and it does not take a century. On 16 January 2009 the central bank of Zimbabwe issued a one hundred trillion dollar note: on the first day it was worth about thirty US dollars, within weeks it was worth nothing, and by June the country abandoned its currency. Same paper, same ink, same signature.
This is where the objection usually arrives: so it is all fake. No. Agreement is not the opposite of real. An agreement that millions of people keep every day without ever having discussed it is among the most solid things we have built. It is not solid like a brick: it is solid like a language, which nobody signed and which you cannot stop speaking on your own.
Run the test again
You have the test now, and the last thing on the list was yours. The balance you see when you open your banking app does all three jobs and is not made of anything you can hold: it is a line, written by somebody, that everyone around you treats as true. It works for exactly the same reason the casino chip does. The only difference is the size of the building.
In short
- Money is not a substance. It is an agreement, and the object is only where that agreement gets written down.
- Something is money when it does three jobs at once: medium of exchange, unit of account, store of value.
- The hardest job is the first one, because it does not depend on you but on other people accepting.
- A casino chip is full money inside the building and coloured disc on the pavement outside. Nothing about the object changed.
- The balance in your banking app passes all three tests without being made of anything you can hold.
Frequently asked questions
What are the three functions of money?
Medium of exchange, unit of account and store of value. Medium of exchange means other people take it in return for goods and services. Unit of account means prices are quoted in that unit. Store of value means you can keep it and use it later.
Why is a banknote worth anything?
Because the people around you accept the agreement it stands for, not because the paper is worth anything. You can see it when the agreement ends: the paper, the ink and the signature stay identical, but nobody will hand you anything for the note any more. The object outlives the function.
Is a casino chip money?
Inside the casino, yes, in the full sense: everyone accepts it, prices in there are quoted in chips, and you can keep it and use it later. On the pavement outside it is not money any more, and the chip has not changed. It is the shortest proof that money depends on the group that accepts it.
Are airline miles and loyalty points money?
No, neither of them. They hold some value and they trade for something, but only for certain things and only with whoever issues them, and no price anywhere is measured in miles or points. They also depend on programme rules that can expire them. They are worth something without being money.
Is the balance in my bank account money if it is not physical?
Yes. The balance in your banking app does all three jobs of money: it is accepted as payment, prices are quoted in the same unit, and you can hold it and spend it later. Money does not need to exist as an object. It can be a record — a line somebody wrote.
Does money have to be made of something valuable?
No, and history shows it in both directions. Great stone discs served as wealth even while sitting still or sunk at sea, while perfectly printed banknotes have stopped buying anything within weeks. What decides is not the material, but whether a group of people accepts the thing.
Sources
- Bank of England — Money creation in the modern economy (2014)
- R. A. Radford — The Economic Organisation of a P.O.W. Camp (1945)
- Milton Friedman — The Island of Stone Money (Hoover Institution)
- Federal Reserve History — Gold Convertibility Ends (1971)
- Smithsonian — Zimbabwe 100,000,000,000,000 dollar note