Characteristics of money

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Date: 6 Feb 2022

The following was reproduced from the original post with permission (ref. 1). It was first published in 16 Mar 2021.

Money had taken many forms throughout time. The characteristics of money had remained immutable (e.g., acronym UPADDLE):

  1. Uniform

  2. Portable

  3. Accepted

  4. Durable

  5. Divisible

  6. Limited

  7. Equitable

'Uniform' describes the consistent value of a unit, e.g., quality of gold per gram is uniform. What is not consistent is quality of diamond per carat, which may be affected by impurities or colour. Similarly, goods such as jewelry is not uniform as it very subjective and dependent on desire (or demand).

'Portable' describes the ability to carry the 'money' with ease. Although cow or land has monetary value, they are difficult to carry, e.g., one requires care during transportation to ensure survival, while another is immobile.

'Accepted' describes willingness of the people to accept the 'money' as a token with 'agreed value'. Acceptance is strongly dependent on characteristics such as durable, limited, and equitable.

'Durable' describes the physical durability of the 'money' where it will not 'decompose' or 'break' over time, which may render its value worthless. Durability is also about 'validity' of the money, where the 'agreed value' is valid. If central banks start to print money and discriminately distribute them, thus diluting its value, 'money' will be worthless and will not last.

'Divisible' is the ability to apportion 'money' into bigger or smaller parts or values. E.g., gold can be set into different sizes where its value is dependent on its mass, e.g.. $60 per gram, thus $30 per half gram. In comparison, a cow cannot be divided into parts, unless it is dead.

'Limited' describes the inability for anyone to easily replicate or copy 'money'. E.g., gold is limited and although it can be mined, there isn't plenty to flood the market. Cow is limited as it takes time to cultivate them. Central banks have the responsibility to ensure 'printed notes' are controlled so that the notes are not easily available that would render it worthless. Also, counterfeiting notes is not easy. Thus there is trust that money is not easy to come by.

'Equitable' is about fairness in the distribution of 'money'. It is easy when money is in terms of gold, where these are traded with other goods or services. It is easy to comprehend when money is in terms of cow, where this was traded with something of agreed value. However, when central banks, like US, have the ability to print unrestricted amount of notes, there is a question of equitability of distribution. Is there fairness in the allocation of notes by the government? E.g., governments pay public servants' salaries, government contractors, oversea debts, currency trades, asset acquisition, etc.

If you have a trustworthy government, there is less fear of having worthless notes. In addition, you do not have to worry about losing access to your money stored in banks.

Notes are like your stock/share. If the company keeps diluting your stock value by issuing more stocks, it will cause the price to drop. If the company is sound and strong, there is less worry but if the company is bad, the paper money will be worthless.

What happens when money becomes worthless? People will try to spend it (trade it) to get essential items or assets. Inflation will sky-rocket. companies will lose business, jobs will be lost, bad debts increases, foreign investors will exit, and civil unrest is prominent, public security will be affected (as it affects the job of police and other civil servants), and international trade will cease. What the government can do is to use its reserves in foreign currencies or other assets.

Is digital currency the solution?

I am not sure. If it possesses all the above 7 traits, I guess digital money is good. It is not regulated or controlled by any nation. Unfortunately, its value is dependent on supply and demand and this had somewhat caused the price to fluctuate unpredictably.

Reference

  1. Characteristics of money, 16 May 2021 (http://skcsci.com/2021/05/16/characteristics-of-money/)