The Meaning of Money

I have been thinking for a long time about meaning of money and the following represent my personal (and not necessarily with concordance to the most financial experts) opinion on what “The meaning of Money” is.

Shortly: Money represent “Trust distribution system” with tickets (e.g. banknotes) or in case of paperless money more complicated system involving additional layers of trust.

So, let me try to explain what I mean.

  1. There is an authority organization (government, company, etc.), that is responsible for enforcement of laws and rules in given market or area. There is a trust (believing) in the fact that rules (laws) will be followed by all participants in the game (e.g. market).
  2. One participant in the market owns documents (trust tickets) issued by the Trusted Authority.
  3. Other participant owns some goods.
  4. Both participants want to exchange goods and money.
  5. The exchange price (e.g. what quantity of money for what quantity of goods) is determined by market mechanisms and are based on the degree of trust
  • The goods owner valuate the money using the subjective quantitative measure of Trust in authority organization, and subjective measure of relative valuation of his goods to other types of goods in the market or other type of market knowledge.
  • The money owner do the same but from his own point of view.

Authority Organization and distribution of trust

Let me elaborate on each point:

  1. There is no money without authority behind them. This can be government, company, person or any kind of organization. I am not talking here about gold backed money, they have his own value (based on the trust that they can be exchanged for gold at any time). It is important for each participant in the market that rules will be followed. In case of political changes and other extraordinary conditions (war, natural disaster) participants are in doubt that all rules will be followed and that the authority will continue to exist in the current form. Degree of trust decrease and this lead to money inflation process. In some cases trust in the government disappears completely (Yugoslavia suffered 5 × 1015 percent inflation per month (prices double every 16 hours) between 1 October 1993 and 24 January 2944) and this creates hyperinflation.
  2. Each participant can own documents from different authority organizations and use them in the same market.
  3. Each participant can own goods and money at the same time (trivial).
  4. The size of the market is determined by the number of participants who want to exchange money for goods and goods for money.
  5. Market participants can use direct exchange of goods (barter) but it is not always possible and money are preferable. On one side the person that owns goods do not want to have money, they are useless for him (in sense that he can’t eat them for example). On other side, he trust the authority, that the rules will be followed and in this way he can make new exchange (money for new goods that he wants). So, he accepts initial exchange in order to have possibility to make the second one.
  6. What is interesting here, is money markets. One participant exchanges one type of money for other based on his own relative trust (and information on which it is based) in one vs. second authority organization.

How about “virtual money”:

The virtual money add additional layer of trust because of network. We have to have to trust in the authority that issued the money and additionally that virtual representation of money is genuine in the moment of trade. If in the trade operation virtual goods are exchanged genuinity of the virtual goods have to be assured too.

Notes:

  1. There is not one definition of Trust. The money valuation problem is equivalent to quantitative measure of Trust.
  2. My definition of Trust: This is quantitative forecast (based on subjective model) of risk in behavior of organization or person. It is interesting to discuss the relationship between trust and risk: http://www.istc.cnr.it/T3/trust/pages/risk.html

Useful sources of information:Trust Theory Group

Probably most of you do not agree with me. I will be pleased to read other opinions on the subject.

Finance Comments 0 Jul 25th, 2010

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