Characteristics of money

0:00- [Instructor] When you think of money, you might have an image like this in your head, but what we're gonna do in this video is dig a little bit deeper into what exactly is money and also related notions like currency. When are these the same thing or what might have to be different or in what context are these words used?

0:17Well, let's just think about how you might use money. Well, one is, let's imagine this gentleman here who seems to be sitting on a pile of money, he might take a few of these coins and he might give it to someone. And in exchange, that someone might give this individual something nice.

0:40Maybe a potted plant. A two-coin potted plant right over here. Or maybe if they gave 10,000 coins, it might be a car. Or maybe if you gave 100,000 coins or 200,000 coins, maybe it's something bigger like a house. But what we're seeing here is that this money could be used to exchange for other things.

1:04So that's one of the uses of money. It is a medium of exchange. And when I say medium, I'm not talking about small, medium, large, I'm talking medium like it's a substance. It's a thing that you can exchange for other things. Now, related to that, when I'm not using it, when I'm not giving someone this money in exchange for other things and I'm just sitting on a big pile of it, it really acts as a store of value.

1:31Store of value. And this picture makes that in some ways very, very explicit where this person is literally storing their money, but it's a store of value because, hopefully, this person got their money in legal ways. They did things for other people, they sold things to other people.

1:50And they didn't need to use, they didn't need to trade immediately for something else, so they just stored that value and maybe they'll use it in the future in some way, and so money has to have that property. Now, another property of money is you want to be able to measure how much value there is.

2:08So you could probably count this and say, there are a million dollars in this pile. So that is a unit of account. The same way it would be very hard to measure a football field if you didn't have yards and feet and inches, it would be very hard to measure the amount of value you have if you didn't have things like dollars and cents, at least in the US.

2:31In other countries, you have other currencies. And that gets us to the word currency. How do these relate? Well, traditionally when people talked about currency, they were talking about physical money. So this picture is a lot of currency right over here. And when people talked about money, they talked to you about it in broader terms.

2:51That money could be what you have sitting in your bank account, and it might not even be in the form of physical money. It could be numbers in a database someplace that just says that this is how much value you have and we've measured it this much. It's a million dollars, it's just in a database someplace, but it doesn't necessarily have to be physical.

3:13You could even use that money by writing a check. And a check is physical, but it's not physical money. It's making reference to money in a bank account to essentially transfer that money to someone else's bank account. And you could also have digital money. You might have heard of debit cards.

3:32We have other videos where we talk about that, but when you use your debit account, the same thing happens. The money gets transferred from one account to another account. Now, these words are getting a little bit blurrier as people start talking about digital currency, so this traditional definition of physical is getting a little bit blurry, but that's how people have historically thought about it.

3:54Now, let's think about some of the other properties that we want for money and/or currency. Well, it would be a shame if some society, instead of using gold coins or very durable paper over here, if they used, say, oranges for money. What would be wrong with using oranges for money?

4:14So these are, those look like gold coins. Let me make it look more like oranges. So if you had oranges for your money, well, this has the problem of it's not particularly durable. You couldn't sit it and put it in a vault like this and then come back a year later and it would've stored your value.

4:32These oranges probably would have rotted. So this right over here is not a good store of value because it is not durable. So money needs to be durable, the oranges are not. And also, oranges might not be particularly portable. You might have to lug around a lot of oranges in order for you to get something.

4:52Now, you might say, well, gold coins can be very heavy, but generally speaking, one small gold coin has a lot of value in it, so you're not going to be carrying around pounds and pounds of it. And of course, as we go into digital currency, that is durable. The things that are in a database don't disappear overnight or don't go bad, like those oranges, and digital currency is very portable.

5:13Now, another idea is that you need that money to be uniform and maybe a related idea to uniform, it has to be known or generally accepted. If money always looked different, if it was sometimes a gold coin, sometimes, I don't know, a blue coin, something else, sometimes an orange, then when you go to one other place, people say, well, I'm not sure what that is, or I'm not even sure what the value that that is storing, and I'm not necessarily going to accept this.

5:39You're not going to be able to store your value and then exchange it for other things unless someone is willing to accept it. So that money has to be accepted. Now, it also has to be limited. You don't want a world where people can just print as much money or counterfeit as much money as possible.

5:57Then the money would lose its value. It would not be a good store of value then. And then you also want it to be divisible because different things cost different amounts of, or have different amounts of value, I should say. You could imagine a society that uses, say, a cow as money of some kind as their currency.

6:19But how are you going to have change for a cow? If I wanna use a cow to buy a potted plant, I'm guessing a cow is worth many potted plants. But I just wanna get one, so how do they give you back change? They can't give you back part of a cow, and let's say it's only living cows that can be used for money in that society.

6:36So you want some medium of exchange that is divisible, and that's why we have things like dollars and cents and not just individual dollars. You can have a hundred dollars bill, a $20 bill, a five, 10, five, $1 bill, and then you can have all of the different coinage all the way down to a penny so that you can get really specific and divide down exactly however much value you need.