What Is Money

Money is a tool we use to exchange value. It's how we reward people for their work and trade for things we need. Imagine you want bread but don't want to bake it yourself. You hand the baker money, and he accepts it because he knows he can later use that same money to buy something he needs.

Money represents the effort and time people invest in their work. When new money is created without a matching increase in productivity, it creates an imbalance. This dilution reduces the purchasing power of existing money, a process we call inflation, a subject we'll explore in later chapters.

At its core, money solves a simple problem: it makes trade easier. Before money, people relied on bartering. We'll take a closer look at how bartering worked in the next chapter, but the key takeaway here is that money solved this limitation by becoming a universal medium of exchange.

Good Money vs. Bad Money

Not everything can function as money. Bananas, for example, spoil quickly. Gold, on the other hand, is scarce, durable, and has been trusted across cultures for thousands of years. Bitcoin builds on these same principles in digital form. For money to work well, it needs special qualities. It has to be durable, easy to divide into smaller amounts, portable, and widely accepted.

In the next chapters, we'll trace how money evolved and then study the key traits that make money reliable.

The Money Belief System

Money is not just metal or paper, it's a collective agreement. A dollar bill, a gold coin, or a digital token only functions as money because people believe it has value and will be accepted in exchange for goods and services.

Throughout history, societies have assigned value to shells, beads, salt, silver, and paper. None of these items had intrinsic value equal to their purchasing power. What gave them power was trust, the shared belief that others would accept them tomorrow, just as they did today.

This belief system is fragile. When trust in money erodes, as in times of hyperinflation or economic collapse, people quickly move to alternative stores of value.

Summary

Money is a tool that makes trade easier by serving as a universal medium of exchange. It represents the effort and time people put into their work. When more money is created without a corresponding increase in productivity, its value is diluted, which creates economic problems.

Throughout history, societies have used many different forms of money, but what made them effective was not their intrinsic value, it was the shared belief and trust that it would be accepted in the future.