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Money is an agreement, between a community, to use something as a medium of exchange, which acts as an intermediary market good. It can be traded and exchanged for other goods. The agreement can either be explicit or implicit, freely chosen, or coerced. Money is an abstract form of power. As discussed below, money also has other characteristics.
Money itself must be a scarce good. Many items have been used as money, from naturally scarce precious metals and conch shells through cigarettes to entirely artificial money such as banknotes.
Modern money (and most ancient money too) is essentially a token - an abstraction. Paper currency is perhaps the most common type of physical money today. However, goods such as gold or silver retain many of the essential properties of money.
Money has the following three characteristics.
1. It must be a medium of exchange
When an object is in demand primarily for its use in exchange -- for its ability to be used in trade to exchange for other things -- then it has this property.
This characteristic allows money to be a standard of deferred payment, i.e., a tool for the payment of debt.
2. It must be a unit of account
When the value of a good is frequently used to measure or compare the value of other goods or where its value is used to denominate debts then it is functioning as a unit of account.
A debt or an IOU can not serve as a unit of account because its value is specified by comparison to some external reference value, some actual unit of account that may be used for settlement.
For example, if in some culture people are inclined to measure the worth of things with reference to goats then we would regard goats as the dominant unit of account in that culture. For instance we may say that today a horse is worth 10 goats and a good hut is worth 45 goats. We would also say that an IOU denominated in goats would change value at much the same rate as real goats.
3. It must be a store of value
When an object is purchased primarily to store value for future trade then it is being used as a store of value. For example, a sawmill might maintain an inventory of lumber that has market value. Likewise it might keep a cash box that has some currency that holds market value. Both would represent a store of value because through trade they can be reliably converted to other goods at some future date. Most non-perishable goods have this quality.
Many goods or tokens have some of the characteristics outlined above. However no good or token is money unless it can satisfy all three criteria.
This distinction between money and credit causes much confusion in discussions of monetary theory. In lay terms credit and money are frequently used interchangeable. Even in economics credit is often refered to as money. For example bank deposits are generally included in summations of the national broad money supply. However any detailed study of monetary theory needs to recognise the proper distinction between money and credit.
The rest of this article frequently uses the term money in the looser sence of the word.
To function as money in a modern economy a good or token should possess a number of features:
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