- 1
Bob takes out a napkin and writes the following on it:
Alice painted Bob’s house for 100 hours.
- 2
Remarkably, the napkin has
acquired “moneyness.”
How?
Watch this progression. What if Bob wrote the following instead: - 3
Does it matter what specific activity Alice performed?
Why does Bob need to specify that Alice was the one who performed the work? Couldn’t he just write: - 4
Or how about just:
Still not convinced the napkin has moneyness?
Here’s another type of paper with 100 “units” written on it.
If Alice valued her time at $1 per hour, she would accept this $100 dollar bill as payment for her 100 hours of work. If Bob agreed to Alice’s rate, he would exchange the $100 dollar bill for 100 hours of her work. This illustrates that money acts as a *record* of completed work. When we exchange money for a good or service, we record a value-for-value exchange. Money, distilled, is recordkeeping.
- A unit of money (e.g., $100 dollar bill) is a record type.
- Money is a unit of account.
- The act of exchanging money for a good or service memorializes (records) an exchange of value.
- Money is a medium of exchange.
But why is the $100 dollar bill good money, and the napkin bad money? There are a few reasons, (think of a few first, then see “Properties of Money” below), most glaring is that anyone can take a napkin and write “100 units" on it without having verifiably performed any work. By contrast, an authentic $100 dollar bill is difficult to counterfeit — or acquire without providing value in return.
And how does the $100 dollar bill itself come into existence? In our thought experiment, good money originates from the performance of work (painting someone’s house). Bad money originates arbitrarily, such as by decree (fiat) or writing on a napkin without having performed any work.
Ideally, the thing you use as money has a mechanism of origination that can’t then be cheated. Otherwise, why work for - or save in - it? Another way to say this is that good money — hard money — has built-in mechanisms to enforce its scarcity. For example, physics: all of the gold in the earth’s crust has already been formed, and it takes work to get it out of the ground.
- Bad money is easy to create. Good money is hard to create.
- Good money is verifiably scarce.
- Good money is a record of completed work.
- Money is a store of value.
- Mental Model #1: Money is recordkeeping.