The 14 Characteristics of Good Money
Part 1: The Framework
I’m continually surprised at the lack of consensus around the underlying characteristics that make something good money. Many people understand that money is fundamentally a medium of exchange. But what makes something a good medium of exchange? What causes it to accrue a monetary premium? Moneyness is an emergent phenomenon that depends on the aggregation and interaction of a collection of lower-level properties. So, what are those properties?
The proposition attributed to Aristotle that money is durable, divisible, portable, and intrinsically valuable was a rudimentary start, but it only gets three characteristics roughly right. (No, the best money does not have “intrinsic value”; the opposite is true). Others have added missing characteristics to the list, but not enough. Yet others have added characteristics that are not, in fact, fundamental. (No, “acceptable” is not a fundamental characterstic of good money; it is an attribute that emerges from the other lower-level, fundamental characteristics. And you Bitcoiners out there, I’m on your team, but “programmable” may just be a characteristics that helps some of the fundamental characteristics and hurts others, though this one is worthy of further debate.)
So I’ll take my best shot. To my mind, good money has no fewer than 14 important characteristics. This list is probably not exhaustive, and most of the characteristics on this list are not my original ideas. Nevertheless, it’s the most complete list I’ve seen. Here are my 14 Characteristics of Good Money.
1. Identifiable. Any time you are selling a good or service for money, you need to be able to identify the money you are receiving. The most usable money will be easily identifiable, because this reduces the work required for the seller to verify that she is receiving the amount of value for her merchandise that she thinks she is. Accepting money that isn’t valid results in the merchandise seller being defrauded. Such an outcome can occur due to negligence (the seller accidentally accepting a ten-dollar bill in place of a twenty-dollar bill) or due to a buyer attempting to purchase the merchandise using counterfeit money (whether a home-printed bill or a lump of fool’s gold). No form of money that is difficult to identify or easy to fake will succeed.
2. Transferable. Since money is first and foremost a medium of exchange, you must be able to efficiently transfer it to someone else and thereby transmit value.
3. Durable. Durability is important for transacting across both space and time. Money that is delicate and cannot survive travel is not very useful. Neither is money that is perishable. A staple crop that can rot or a metal that easily rusts or tarnishes is of limited use as money.
4. Divisible. In order to achieve salability across scale, money must be divisible into small units of value so that it can be exchanged for low-value goods and services and so that higher-value goods and services can be priced precisely. A type of rare shell used as money that is worth twice as much as a single book cannot be used to purchase the book. Likewise, a hundred-dollar bill is a very inconvenient way to buy a gallon of milk.
5. Dense. For money to be useful for sizable purchases, it must be relatively dense in value. A substance such as sand is quite divisible into individual grains that each have very small amounts of value, but those units are so low-value that even a great number of them in aggregate isn’t valuable enough to use as money.
6. Scarce. Throughout history, one of the major killers of currencies has been excess supply. The result is price inflation. A money whose value can easily be diluted due to increase in supply is doomed. Any successful money must be difficult to create, and its creation must therefore be costly.
7. Short-Term Stable Value. Even if it doesn’t lose purchasing power over the long term, a money whose purchasing power jumps up and down in the short term is of limited use. A money’s purchasing power is effectively its price, which is set by the balance of supply and demand for the money. Short-term supply/demand imbalances that dramatically move the money’s price (and therefore the prices of all goods and services in terms of the money) make the money less effective as a medium of exchange.
8. Long-Term Stable Value. Short-term price stability is useful for transactions across space and scale, but not across significant periods of time. Storing value in money in order to purchase a good or service at a much later date requires long-term price stability.
9. Fungible. Fungibility means that one piece of money of a given stated value is the same as all the others of that stated value. All units should be identical such that one piece can substitute for another, and no particular piece is deemed better or tainted. Precious stones like diamonds would be superior forms of money if each stone were not unique. The fact that there are differences between each individual stone requires the seller of the good or service to assess the value of the gem being offered, which significantly reduces ease of exchange.
10. Unseizable. Transferability is a double-edged sword. Money that can be transferred away from you without your consent (i.e., seized) is not as good as money that is hard to seize. The best money is resistant to parties who seek to seize it, including thieves, sticky-fingered border guards, invading armies, and corrupt tax collectors.
11. Censorship-Resistant. The type of transferability envisioned in the earlier definition is based on mutual consent by both the seller and the buyer of the good or service. As surely as a third party taking your money from you without your consent is a problem, so is a third party preventing you from engaging in a transaction to which both buyer and seller of a good or service have consented. You probably don’t want a third party to have the power to stop you from transferring the money to someone.
12. Private. Most of us don’t want every action we take (whether intimate, exciting, or mundane) to be broadcast to the world. Just as we would like to occasionally communicate privately, we sometimes need to transact privately. You might not mind having some of your purchases broadcast to the world, but you probably want to at least have the option of privacy on occasion.
13. Required for Some Important Purpose. One effective way of bolstering a form of money is to make sure it’s required for some purpose. Governments who require their native currency for payment of taxes are a good example. But a business can also create demand for its particular money by requiring its use when purchasing its goods or services, such as a laundromat that requires you to buy customer tokens to operate the washing machines, or a carnival that requires the purchase of tickets to spend on rides.
14. Backed by a Powerful Agent. It helps if a powerful agent or group of agents (such as a government) explicitly or implicitly supports it. Probably the greatest strength of the U.S. dollar is that it is backed by the world’s most powerful military. However, backing by a powerful agent can also be double-edged if it means less censorship-resistance and greater seizability.
In later articles I will apply this framework to several existing forms of money.
