What Is Money?

This first Junior Trader blog post starts with a very basic question.

What Is Money?

The question is simple but the answer is complicated.

We all know what money looks like and we all use money but it is difficult to define what it actually is.

The £5 note you have in your money box is in fact almost worthless. It only has a value because we believe it does.  Your £5 note is a promise to pay the bearer on demand the sum of five pounds.  We will come back to this promise in a little while.

Many many years ago before money was used people would barter for goods and services.

For example, if you wanted some firewood you might swap it for a basket of apples.  This simple system allowed people to trade things they had for services or goods they wanted.

Where the number of available goods were few and people stayed in and around their villages or towns this system worked well.  Problems started to appear when more goods became available and people started travelling greater distances.

Imagine you wanted to buy a lovely pair of nice new shoes from the big town 50 miles away.  The cordwainer (shoemaker) would like 12 chickens for the shoes but you only have one goat. If you want the shoes you now have to find someone who has 12 chickens and wants a goat. It would also make sense to find that person in the town because it is easier to walk one goat 50 miles than it is 12 chickens!

Now we come back to that promise and the principle of money.

If your goat and the shoes are both worth £5 you don't need to swap the goat for the chickens and the chickens for the shoes.  You can save a lot of time and trouble by swapping your goat for a £5 note and then use that to buy the shoes.  The cordwainer can then swap the £5 note for 12 chickens or anything else he needs.

As you can see the introduction of this 'promise to pay the bearer on demand a sum of money' makes the task of buying things a whole lot easier.

So there we have the very basic underlying concept of money.

Money is something we exchange in return for goods or services.  Once transferred to the new owner this same money can be exchanged for other goods or services.