What is Money?

Money is so woven into daily life that we rarely stop to ask what it actually is. We earn it, spend it, worry about it — yet most people would struggle to define it with any precision.

This article breaks down the concept of money from first principles: its three functions, five types, seven properties, and four measurements of money supply. Understanding these building blocks won’t just satisfy intellectual curiosity — it will sharpen every financial decision you make.

Because not all money is equal. And the sooner you understand why, the better.

In economics, money is broadly defined as a medium of exchange for goods and services. The most widely accepted forms today are paper banknotes, metallic coins, and bank credits. But that definition barely scratches the surface.

To effectively discuss, manage, and master money — and through it, financial freedom — you need to understand its three functions, five types, seven properties, and four measurements of money supply. Let’s build that foundation.

The Three Functions of Money

For any asset to qualify as money, it must serve three distinct roles. These functions work together as a system. Weak one, and the whole structure becomes unstable.

These three functions reinforce each other. The medium of exchange enables transactions; the unit of account standardises value; the store of value enables wealth to be preserved and transferred across time. Together, they are the architecture of any functioning monetary system.

The Five Types of Money

Money is not a single, uniform thing. It comes in five distinct forms, each with different characteristics and roles.

The Seven Properties of Money

For any asset to function as money, it must possess seven core properties. These are universal across all five types.

Fungibility is the foundation of any exchange system. If two units of the same currency are not perfectly interchangeable, trust in the system collapses. A dollar is a dollar, regardless of which specific note you hold — and that reliability is what makes transactions frictionless.

Divisibility is what makes money practical at every scale. You need to be able to pay for a coffee as easily as you pay for a house. Without divisibility, trade becomes clumsy and inefficient — as anyone who has tried to make change with a gold bar will appreciate.

Durability matters because money that deteriorates quickly cannot serve as a reliable medium of exchange or store of value. This is precisely why shells, spices, and produce made poor long-term money throughout history, and why metals and paper became dominant.

Portability determines whether money can follow commerce. A currency too heavy or bulky to carry limits economic activity to the local. The shift from gold coins to paper notes — and eventually to digital money — was driven almost entirely by the need for greater portability.

Cognizability is about instant recognition and trust. If you cannot quickly identify the value of a monetary unit, every transaction requires negotiation. Standardised denominations, distinctive designs, and security features all serve this property.

Stability of Value is arguably the most consequential property for everyday financial wellbeing. When money loses value rapidly — through inflation or hyperinflation — it fails as a store of value and ultimately as a unit of account. Weimar Germany, Zimbabwe, and Venezuela are all cautionary tales of what happens when this property breaks down.

Limited Supply underpins everything. Scarcity is what gives money its value. An asset that can be created without limit cannot hold value — which is why governments guard control of the money supply, and why Bitcoin’s hard cap of 21 million coins is central to its value proposition as a monetary asset.

Taken together, these seven properties explain why gold held monetary dominance for millennia, why paper fiat money eventually replaced it for practical purposes, and why no cryptocurrency has yet fully succeeded as everyday money — it excels on some properties (limited supply, divisibility) while struggling on others (stability of value, cognizability in daily commerce).

Does money need to satisfy all seven properties?

In theory, yes — an ideal form of money would score perfectly on all seven. In practice, no form of money ever does. What matters is the overall balance. A currency can function well even if it is weak on one or two properties, as long as it is strong enough on the others. Cash, for example, scores poorly on stability of value over the long term due to inflation, yet it remains the dominant medium of exchange because it excels on fungibility, divisibility, portability, and cognizability. Gold, on the other hand, is exceptionally durable, scarce, and stable over centuries, but fails on portability and cognizability in daily commerce — which is precisely why it was displaced by paper money for everyday transactions, even though it retained its status as a store of value.

The seven properties are therefore best understood as a diagnostic framework rather than a checklist. When a currency begins to fail on multiple properties simultaneously — as happened in Weimar Germany, Zimbabwe, or Venezuela — the entire monetary system unravels. The more properties a form of money satisfies, the more trust it commands, and trust is ultimately what money is built on.

Money Supply and Its Four Measurements (M0, M1, M2, M3)

In macroeconomics, the money supply refers to the total volume of money held by the public at any given moment. Central banks track this through four nested measurements, each broader than the last.

As economist Anna Schwartz noted, the components of M0 and M1 function primarily as a medium of exchange, while M2’s added components are used primarily as a store of value. The distinction matters: the more liquid the money, the more it circulates; the less liquid, the more it sits as preserved wealth.

The largest part of the money supply consists of commercial bank deposits — not physical cash. Central bank currency makes up only a small fraction of total money in modern economies.

Conclusion: Not All Money Is Equal

Money is the lifeblood of economic life — the technology that enables us to trade, measure, and preserve value. But it is not a monolithic thing. Its functions, types, and properties vary significantly, and understanding those differences changes how you interact with it.

Consider what this framework reveals in practice:

• Buying gold? You’re acquiring commodity money — a potential store of value. Not a medium of exchange, and certainly not a unit of account.
• Buying cryptocurrency? You’re primarily taking on a speculative asset. Volatile supply dynamics and limited acceptance undermine its function as a store of value or reliable medium of exchange.
• Holding a lot of cash? Cash excels as a medium of exchange, but over the long term it erodes as a store of value. Inflation is a slow tax on idle money.
• Measuring your net worth? You’re using money as a unit of account — a common denominator across cash, real estate, equities, bonds, and commodities.

For wealth creation and financial freedom, the insight that matters most is this: focus on productive assets that generate and store value. Money is the tool; assets are the engine.

As JP Morgan put it with characteristic directness:

“Gold is money. Everything else is credit.”

Understanding money — really understanding it — is where financial mastery begins.

PODCAST Episode

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