The first part of looking at Digital currencies, Crypto Currencies or Bitcoin, is to define, “What is money”; since we need to decide and agree what is money before we can discuss if Digital Currencies, Crypto Currencies and Bitcoin are money or not.
First, a definition of money from Wikipedia:
“Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, sometimes, a standard of deferred payment. Any item or verifiable record that fulfills these functions can be considered as money.”
Which further cites to:
4. Mankiw, N. Gregory (2007). “2”. Macroeconomics(6th ed.). New York: Worth Publishers. pp. 22–32. ISBN 0-7167-6213-7.
5^ Jump up to:a b c T.H. Greco. Money: Understanding and Creating Alternatives to Legal Tender, White River Junction, Vt: Chelsea Green Publishing (2001). ISBN 1-890132-37-3
So, for something to be considered money it has to be or have:
1: Medium of Exchange
2: Unit of Account
3: Store of Value
4: Sometimes a standard of deferred payment.
What are each of these things?
1: Medium of Exchange – The item or record is used instead of barter. Without money the only way to get or exchange goods would be by barter where you would exchange something you had for another item from someone else. The main problem with any barter system is that it only works or trades can be done where there is a “coincidence of wants”; i.e. I want what you have and you want what I have, so we can make an exchange. One top of that there is still the problem of quantities or amounts under a barter system.
Example: I have a used car and a famer has vegetables. The farmer wants my used car and I want some of the food, so we can make a barter exchange. The problem is amounts. The used car is probably worth a lot more than the food in small quantities, so unless I am willing to take large amounts of foods, and have the ability to transport and store the food, we still have a problem as to how to make the exchange. While we can introduce another party to the exchange where I take the large amounts of food in exchange for the car and another person does a barter exchange with me for the amounts of food I do not want, we are making the trade more complex and difficult to arrange a complete transaction.
With money, the farmer just gives me the agreed amount and then I can parcel out said funds as I see fit, or even save them for later use.
2: Unit of Account – With money it is easy to tell ‘how much you have’, you just total up the units of money and the value. Here in the United States one would normally talk in terms of United States Dollars (USD) when discussing how much money something was or how much they had. With a barter system, things have a value depending on how many of other items are wanted or needed and there is no clear unit of account to compare across items.
Example: In my earlier examples of a used car, how would one describe or talk about its value or unit of account? With the farmer, he would describe it in terms of how much food he was offering to exchange it for, but when comparing his offer to other offers, how would they compare. As an add on to the original example, lets say there was another buyer for the used car, a carpenter; he offers 100 hours of his labor on house repairs in exchange for the used car. At the same time the farmer offers 100 cases of 8 x 15oz cans of corn. Which is a better deal? How does one compare to the other in terms of what is offered? With money assigned to each, it is easy to make the comparison. Without money, it is hard to know which would be a better deal or how to value barter exchanges.
3: Store of Value – Money needs to be able to be stored for use later. An item or record that could not be stored or saved until later would not be useful for money since it would need to be used or exchanged immediately in order to avoid losing it. Most forms of money last a somewhat long time, even paper currency since those are usually made of some material that will last a while. One example is the United States Dollar. Even though most people talk about dollars being “printed on paper”, it is really printed on a material of linen and cotton. The typical printed USD can last, on average, 5.9 years. (https://allthingsfinance.net/how-long-do-dollar-bills-last-the-lifespan-of-a-one-dollar-bill/ )
4: Standard of Deferred Payment – This means that money is the preferred way or allowed way to pay a debt. The reason this would be one of the elements of what money is, is that no lender would want to have a payments made on a loan they made in money that was or had lost value.
Agree or Disagree, Like or Dislike, I look forward to the discussion about Digital Currencies.
Louis J. Desy Jr.
Saturday, December 16, 2017