What is money? Part 2 - Properties of money, monetary policy and currency
Nov 4, 2022
Disclaimer: Economics is not an empirical science. This contribution is based on the intellectual framework of the Austrian school of economics, as well as a personal opinion. There are various monetary and economic theories that encompass different views, this paper represents one of them.
In the first part of this series, we covered the functions and history of money. Now we would like to turn our attention to the properties of money, as well as the topics of monetary policy and currency.
In order to fulfill the three important functions of money (store of value, means of exchange and payment & unit of account), a good money naturally needs certain properties. The better these can be fulfilled, the more solid, healthy and hard a money is. In previous ways of looking at this, it was mostly a matter of six characteristics of a good money. With Bitcoin, however, a seventh property is probably added here for the first time, which mankind has not yet been able to ensure. In fact, we list a total of 8 here.
The properties of money:
1. scarcity - limited in quantity, or at least difficult to increase.
2. longevity - physical durability, indestructibility if necessary.
3. acceptance - willingness to accept in exchange for goods & services.
4. portability - transportability across time and space
5. divisibility - as high as possible divisibility into smaller subunits
6. fungibility - units are as arbitrary as possible interchangeable without visible difference
7. immutability - resistance to change in quantity, property or function.
8. verifiability - recognizability of the authenticity of the money.
The better a money fulfills these seven characteristics, the more suitable it is as money and the more likely it is to become a desired candidate for money in the market. With Bitcoin in particular, we have a very pronounced version of immutability for the first time
In order to better understand the interplay between money, the state and the economy, a distinction is often made between money and currency. Currency is the legal implementation and order of the monetary system within a state, i.e. the definition of what must be used as money. Money, on the other hand, is the generic term for the generally accepted medium of exchange. It is a commodity that prevails on the market because of its characteristics, quite independent of coercion by governments.
Thus, "currency" could be described as a subform of money in which some properties, such as immutability, are rather less given, but acceptance is ensured by regulation.
Monetary policy is generally understood as the measures used by the central bank to achieve its objectives. It is important to note that monetary policy interventions are a clear decision of the government, creating the option to intervene in the market and, if necessary, to redistribute wealth.
Per se, intervention in the money market is not necessary, since an economy can function with any money supply and without intervention, as some economists of the Austrian school have impressively deduced.
But if you conduct monetary policy, you have the possibility to steer markets, for example, by manually setting and changing the interest rate, which is nothing more than the price for borrowing money. Monetary policy is therefore a powerful tool, the use of which should be well considered.
Prices are regulated by supply and demand. If there is a lot of demand for a good, but very little supply, the price for this good is very high. Like with sought-after concert tickets. Of course, it is the same the other way around. If there is little demand but plenty of supply, the price is low. If all other parameters remain the same, but the amount of our money is expanded through credit creation, we can be sure that the purchasing power of our money will decrease.
However, this is often not noticed over long periods of time, as technological progress counteracts this and prices are thus relatively stable. If a money supply were to remain constant, however, prices for goods and services would fall in the long term. In such an environment, savers would be rewarded and everyone's standard of living would rise.
In our current system, new money is mostly created through loans, but also through direct purchases on the financial market by the central bank. The problem that arises here is described quite well by the Cantillon effect. If there are entities that can create new money without any work, both these entities and the institutions that are close to them and may, for example, be the first recipients of loans or otherwise receive the new monetary units, benefit.
Since these are usually large companies or associations that engage in lobbying, these initial recipients also have an above-average advantage. If the increased amount of money is distributed over time in the market and "trickles down" to the normal consumer, prices of assets and scarce goods have usually already risen. Wealthy people, who usually already own several properties or similar, thus automatically benefit from a loose monetary policy.
So the expansion of the money supply is certainly one of the bigger factors in the widening gap between rich and poor. The salaries of hard-working people do not rise to the same extent as assets, or do so only very delayed. One consequence of this is that it is becoming harder and harder for the middle and lower classes to find affordable housing, and the cost of living in general is becoming a larger and larger part of their expenses. So if the hamster wheel seems to be spinning faster and faster, this could be one reason.
Tangible or intangible assets to which a value can generally be attributed or which have a certain benefit are referred to as assets. They are the result of events in the past from which future economic benefits are expected. Examples include company shares, bonds, real estate or gold. Assets are often used as a store of value, even if they do not necessarily generate a return or have to be productive. The best example of a non-productive asset is money that holds its value.
So, as you can see, there are a lot of problems in today's money system. Bitcoin attempts to fix some of these problems, and a decentralized approach to this form of money was deliberately chosen. Through Bitcoin's network, which is distributed all over the world, for the first time in human history, anyone can own and accumulate an asset that is truly limited, decentralized, censorship-resistant, limitless, and unconfiscable. So not only is Bitcoin an asset, it actually lowers the barrier to owning one worldwide.
Anyone can own, transfer and hold Bitcoin. All in all, these are quite good prerequisites for becoming the most marketable of all goods, and thus money.
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