Money is perhaps the most misunderstood element in all of economics. We all think that we know what it is, we certainly know that we don't have enough and would like more, but what is it really? As a human invention that is central to practically everything that we do in the modern world you would think that it should be relatively easy to understand, but it most definitely is not.
Money is so essential to human societies that it has been invented countless times throughout history in almost every community. Without it people either have to barter goods, which is cumbersome and largely impractical, or remember who owes what to whom, which works within small well-knit communities but is difficult within large or loosely-knit communities and practically impossible when dealing with outsiders (Martin 2014 & Graeber 2011).
Money's essential characteristic is that it must be acknowledged as an acceptable means of exchange for goods and services by all people in the community that use it. A person must be confident that in accepting money in payment for something they wish to sell, others will accept it in payment for something they wish to buy. Other characteristics are that it should be durable, recognisable, not easily made, easily carried and fungible (mutually substitutable - any coin, note or other representation of a given value is as good as any other of that value). If it has inherent value then all the better from a confidence point of view, since acceptability as payment, especially in trades between strangers and between countries, is all the more likely. This is the reason why precious metals have been so widely used as money historically. In the modern world money does not have inherent value, instead its value is guaranteed by the state or banks, and the confidence that is necessary for the public to accept and use it depends on their trust in the guarantor's ability to honour the guarantee.
Money means that the seller of goods doesn't have to trust the buyer; they only need to trust the issuer of the money.
A further characteristic of money is that it can act as a store of value. This emerges from its other characteristics rather than being essential in itself, and it is a very unfortunate characteristic because it leads to hoarding, which takes money out of circulation - money is removed that would otherwise be available for spending - and that can be very damaging to an economy as will be seen later in chapters 13 and 15. Money is seldom hoarded nowadays by individuals, but it can remain idle in bank accounts for long periods, and that has the same effect - see chapter 39.
The essential point to remember is that money is important not for what it is, which is nothing more than symbols or tokens, but for what it represents, which is entitlement to wealth. We shall see in due course that businesses that deal in entitlements are able to manipulate and manage them in ways that make it possible to adjust the distribution of wealth in their own favour, and the processes they use are so clever and subtle that in most cases those who lose out don't even realise what is happening.
Another feature of money is that it always stays as money. While it exists it never changes into anything else. It can be exchanged for very many things, but it never becomes anything other than money, all it does is change hands.
This might seem so obvious that it doesn't deserve mention, but it is so often overlooked and so significant that attention needs to be drawn to it. We often hear things like 'Fred's money is tied up in property', giving the impression that Fred's money has become property, and at the individual level it certainly seems that way as we exchange money for goods, but for the economy as a whole money just circulates and always remains as money. This is true even for a particular currency. Although a currency can be exchanged for another currency it doesn't ever become that other currency or anything else.
What this means is that money's role in the economy is that of a lubricant.[68] It circulates around the economy like oil circulates around an engine, and it serves exactly the same purpose - it allows things to happen (exchanges in the economy, metal parts moving against other metal parts in an engine) that without it wouldn't happen.
Money's role in the economy is that of a lubricant, it allows exchanges to happen that without it wouldn't happen, but it is neither used up nor changed by those exchanges.[69]
We have come so completely to accept that what we can do as a society is limited by the money that society has that we have lost sight of the fact that money only consists of tokens - it is merely symbolic - a human invention created to assist human interaction. The truth is that we do not need to be limited by money unless we choose to be.
We, as a society, are limited in what we can do only by the availability of human effort, willingness, skill, technology, and raw materials, yet we allow ourselves to be limited by the availability of tokens. If the effects weren't so tragic the situation would be comical.
A government in control of its own economy that can't act for lack of money is like a railway company that has everything it needs to run trains - locomotives, carriages, track, signalling and power, with empty trains waiting at stations and passengers wanting to board - but can't run them because it doesn't have enough tickets!
If you heard that from a railway company you might be tempted to reply (after removing all expletives): "WELL WHY NOT JUST PRINT SOME MORE TICKETS?"
Money was invented to serve humanity - to permit transactions - yet the advent of monetarism in the 1980s turned the tables and made humanity serve money. Government and central bank priorities are now monetary features of the economy - inflation, interest rates, deficits, and the national debt - when they should be real features of the economy - employment, wealth creation, and public wellbeing.
The prevailing philosophy is 'get the monetary features right and wealth creation, employment and wellbeing will come good automatically', when the truth is quite different: create, allocate and distribute money appropriately in order to create wealth, employment and wellbeing.
Money has become so central to every economy that its role is easily forgotten. Recall what was said earlier about surplus wealth being no more than the product of people co-operating to do and make things for others. In material terms those things are the only real things that we have. We engage in transactions of immense complexity, involving not only exchange of things directly, but agreements to exchange things in the event of certain circumstances, options and commitments to exchange things in the future, loans of things in return for yet more things, and exchange of things for other, bigger things that we and others use communally. Although it is money that makes possible all these exchanges, all that really changes is the creation and ownership of things.
A deep-seated belief is that money is the power to create wealth - with money I can have someone work for me whereas without it I can't. But wealth-creating power already exists within every human being. Money merely provides the lubrication that releases that power.
It is often useful to remove money from transactions in order to show what happens to the underlying wealth. The exercise is especially powerful in giving a much more transparent view of events than is possible when money stays in the picture. Let's say I work for someone for a day and am paid £10 - work isn't my strong point. Elated with my day's wage I rush off and spend it all on chocolate and make myself ill - a fool and his money..... Now from my point of view I have received £10 and paid £10, so my money transfers cancel out and can be removed from the picture. The net effect in wealth terms is that I have given a day's labour and received a pile of chocolate. Money is merely an intermediary in this process in that it came into my possession temporarily and then went out of my possession again. This simple example isn't particularly illuminating but it serves to remind us that underneath all the complexity of modern economic life all that is happening is people co-operating to do and make things for others. I did a day's work that in conjunction with other workers allowed our employer to produce and sell goods or services, and there were vast numbers of people involved in producing and making available the chocolate that I wanted in exchange for my work.