Money - what is it?


Wow - ten trillion dollars !.
If I owned this note, would I be a trillionare? Yes. Would I be rich? Unfortunately, no.

What exactly is money - a big question - you might answer 'who cares, as long as I have enough'.

A very loose definition might be 'the numbers in your bank account that allow you to buy stuff' (economists have more detailed definitions - see later.). You don't even need bits of coloured paper or plastic or little discs of stamped metal to buy stuff, you can just use a debit card and touch it to a machine and money is 'transferred' from your bank account to the coffee vendors' bank account so you can walk away with a latte.

However, you might be surprised that nothing was actually 'transferred'. The debit card allowed your bank to reduce your bank account by one coffee price, and the vendors bank was allowed to increase the vendors account by the same amount. Numbers were decreased in one computer, and increased in another (see later post for 'bank reserves').

In fact, if you used a credit card you don't even need to have any money in your bank account. The credit card allows the vendor to increase their account by the price of one latte, and you pay (at the time) absolutely nothing. Effectively, the credit card company created 'money' out of thin air with the collateral that you promise to pay them back. Of course, that 'promise' is actually a legal contract between you and the credit card company that you signed when you got the card, so they can be pretty sure that they will get the 'money' from your bank account later plus interest.

So, noting that only about 3% of money in circulation is in the form of notes and coins (which we can call 'cash'), we can say that 'money' is merely numbers stored in a banks' computer. These numbers can be changed with software such as a spreadsheet, just as you can do on your home PC.

In fact, ignoring cash we can say that all 'money' only exists as magnetic patterns on the surface of computer hard disks. Scary - what if a massive sun storm wiped all the hard disks?
( If this detail seems quaintly old-fashioned to you, because you know that computers actually use optical-quantum storage with virtually unlimited capacity, you're probably far in my future - hi there!).

So how much do you think it costs takes to create one unit of currency? The same as it costs to update a cell in a spreadsheet on your computer. Virtually no electrical energy, and in human terms one tap of a finger. How about a million units? Much about the same.

In other words, 'money' costs virtually nothing to create. Or destroy.

Finally (for this post) some people fret about questions such as 'is money debt?' or 'is gold money' or 'is money not backed by gold really money?'. I may visit these questions later, but my simple definition above is good enough for most people.

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