Defining money is harder than you think. Here’s why that matters.

What is money?

Simple question, right? The anthropologist A.H. Quiggin explains the issue in her classic 1949 book, A Survey of Primitive Money: The Beginnings of Currency:

Everyone, except an economist, knows what ‘money’ means, and even an economist can describe it in the course of a chapter or so, but it is impossible to define with rigid outlines.

The opening photograph in her book features a collection of primitive forms of “money,” predominantly beads collected from New Guinea, Uganda, and West Africa. But the collection doesn’t end there. Quiggin also features salt and iron bars used as currency in Nigeria; snail shells traded among the Congolese; the “knife-money” circulating during the Zhou dynasty in ancient China (actually, brass cast in the shape of knives).

Quiggin points out that a definition is elusive now because pinning down what money is has always been evasive. At the time of writing, the Old English Dictionary defined money as “current coin” and currency as “that which is current as a medium of exchange.” (In fact, currency and current both derive from the Medieval Latin term currentia; both denote a form of flow, be it water down a mountain or value through society.)

“That which is current,” however, was often at odds depending on which side of the deal you were on. For example, Quiggin writes that two parties with conflicting interests could be at odds defining what currency meant. If an object being traded was religious in nature, the other participant might only view the transaction as monetary, while the believer sees it as a sacred exchange.

Beyond the ethereal, many objects were utilitarian. Salt could be purchased as a flavoring, but it could also be given as a dowry, therefore assigning it a greater social value. Shells on one island were, well, just shells, while on another a collection of the very same shells could give the owner access to a variety of rare and valuable resources.

Quiggin notes that in her field of anthropology, primitive societies lacked the infrastructure and technology that we use to move currency through the world today. Even still, a modern definition isn’t easily forthcoming. And so she landed on “fixed” fundamental characteristics that have held up since the dawn of modern civilization: portability, durability, divisibility, distinction.

So again: What is money?

Quggin quotes Stuart Chase’s exceptionally-titled book from 1938, The Tyranny of Words:

Neither you nor I nor anyone else knows what ‘money’ means or how it works. We know what it means where and when we use it, for here we are performing little personal operations. But its general laws, if any, are unknown to even the wisest banker or the profoundest economist.

Quiggin attempts to give money form by limiting her definition to that which serves “the threefold function of a recognized medium of exchange, a standard of value and a symbol of wealth.” Failing any of those three could make the form a currency, or merely evidence of wealth. But then she notes that wealth is also a relative and elusive term…

Perhaps she comes closest to a definition when she again quotes Chase:

The most important thing about money is the human willingness to accept it.

So, then, money is, at least in part, about belief.

Credit and clearing

In his book, Money: The Unauthorized Biography, economist Felix Martin distinguishes between currency and money, writing,

Currency is not itself money. Money is the system of credit accounts and their clearing that currency represents.

To highlight this, Martin looks at Yap, a Pacific island in Micronesia that remained relatively untouched until both the Germans and Spanish occupied it in the mid-19th century. (Spain eventually “sold” it to Germany for $3.3 million.) Despite its seeming simplicity—the only “products” were fish, coconuts, sea cucumbers, and pigs—Martin notes that the islanders had created a complex monetary system designed around fei, thick stone wheels between one and 12 feet high that had been carried on boats from the island of Babelthuap, some 300 miles away.

Since the inhabitants of Yap would be challenged to move a 12-foot rock weighing a few tons, this money was often exchanged without ever leaving the property of the original owner. One of the most valuable stones, in fact, laid at the bottom of the sea, having never made it across the ocean. Even though the islanders never saw it, the story of the stone—effectively, its mythology—provided enough value that the “owner” would cherish bartering for it.

Stone money makes for more than a curious trivia response, however. Martin points out that this form of exchange flies in the face of the deductive logic used by thinkers from Aristotle to Adam Smith: that money is derived from barter as a “medium of exchange.” Twelve-foot stones aren’t actually exchanged, nor is the shipwrecked stone at the bottom of the sea.

That’s because, he writes, fei isn’t really money. Martin turns to the writing of American financier Thomas Smith, who pushed back against Adam Smith’s notion that money is a medium of exchange. He believes money is really an example of trade that’s accounted for in local currency. Returning to the Yap, Martin concludes,

The fact that any net balances that remained between them might then be discharged by payment of some commodity or other to the value of the debt did not mean that that commodity was ‘money.’ To focus on the commodity payment rather than the system of credit and clearing behind it was to get things completely the wrong way round.

In this light, he calls the Yap’s monetary system rather simple: fei merely served as tokens to keep track of the underlying system of credit accounts and clearing for the trade of coconuts, fish, sea cucumbers, and pigs. Put simply,

Coins and currency are useful tokens to record the underlying system of credit accounts and to implement the underlying process of clearing.

Why does the economy of a 19th-century Micronesian island matter to our understanding of money today? Well, Martin states that 90% of national money in the US and 97% in the UK has no physical existence. Like stones at the bottom of the ocean floor, money is effectively beholden to our imagination, provided the underlying system remains intact. And Martin believes this has profound implications for our understanding of economics.

But first, how did so many thinkers get it backwards?

The flow of currency

In a rather humorous passage, Quiggin writes that “it must frankly be admitted that many objects are called ‘currency’ which are never current.” As with the Yap, she’s pointing to artifacts not used in trade—that only serve as symbols of wealth, mostly because enough people believe the artifact has value.

Still, the conventional view that money itself is a commodity persists. Martin believes this is for two main reasons:

• Historically, money was often represented as coins, constructed of resilient metals that have stood the test of time. Forms of money like fish or salt have not held up, being used in the process, whereas coins were stored away due to the belief of their value. And so we’ve concocted a picture of physical money as being the mechanism of value, not the underlying system.
• Objectivity is hard in the social sciences. Martin evokes the classical Chinese proverb, “the fish is the last to know water,” to describe our predicament. Given that economics defines how everything moves through society, and that we’ve equated money as the prime mover of this process, he thinks it’s hard for us to overcome our pre-existing biases around the subject. Martin then likens this to a speech by the physicist Richard Feynman, who pointed out that the invisible electromagnetic field is responsible for the visible effects of static electricity. The underlying system is the prime mover.

Martin continues,

The great temptation has always been to think that coins and other currency, being tangible and durable, are money—on top of which the magical, incorporeal apparatus of credit and debt is constructed. The reality is exactly the opposite.

This is more than semantics. When foreigners arrived on distant shores to trade, the value of their sacred objects might prove worthless to the culture they encountered. Money has always been fluid in this sense, but the underlying system is a universal phenomenon. And these particularities matter at a time when people feel disconnected from economic forces beyond their control.

As Martin writes near the end of his book, the ultimate goal of monetary policy is the creation of a “just and prosperous society.” While he says this feels like a distant dream given today’s reality of central banking, the goal of such a society is the “only reliable guide to policy.” When people feel that national money is failing their best interests, people will improvise with new forms of money that will better serve them—which is likely why the full subtitle of his book is The Unauthorized Biography - From Coinage to Cryptocurrencies.

A lot of criticism around cryptocurrency has stemmed from the lack of imagination that Martin identifies: we confuse money with the underlying system, getting so caught in our current era that we forget “money” has always been fluid. Value is a socially implemented and accepted token representing a much vaster underlying system of exchange. That’s why Martin’s observation that most American and British money is already digital is so astute: in a technologically-oriented society, it makes sense that our tokens of value be represented by code.

So we might not be able to give a definitive answer to the question of what money is, but we can identify that the tokens we assign value to are an essential component that ensures that the underlying system keeps flowing. And given how many people are frustrated by how little flow they experience today, it’s no wonder they’re searching for a form of money that better serves their interest.

We should embrace more democratized forms of money that help create a “just and prosperous society.” Since we’re no longer stumbling across unknown islands unsure of the value of our objects, that money needs to be global. And it needs to work for everyone.