good money

Four Characteristics of Good Money

What constitutes “good money”…  A U.S. Dollar?   The British Pound?   The Chinese Yuan?

By proper definition good money must include two functions: a store of value and a medium of exchange.

good moneyBut the idea of what characterizes good money goes back to the days of Aristotle, the Greek philosopher (384 BC – 322 BC).

He was concerned with how fair exchange could be made for different items.

For example, how would you trade a pig for three chickens? What if those chickens are all different sizes? Is it the number of chickens or the weight of the chickens that is important? How do you measure the value of items that are not uniform?

Aristotle searched for a principle to equalize items that were incomparable or unequal.

He wanted a “good money” that could be used to move away from a bartering society, and allow for an efficient and free flow of goods and services.

After some time, Aristotle defined four basic characteristics which money must possess to be considered good money:

  1. Durable– Good money must be able to stand the test of time and the elements. It must not fade, fall apart, or corrode. It should be indestructible…thus fruits and vegetables wouldn’t qualify as good money.
  2. Portable– Good money must hold a large amount of value relative to its size and weight and be easily moved. This eliminates water as a source of good money. Imagine trying to deliver enough water to pay for your new home.
  3. Divisible– Good Money must be able to divide easily into larger and smaller pieces without losing its value. This is why we don’t use things like porcelain for money; half a Ming vase isn’t worth much.
  4. Intrinsically Valuable– Good money should be valuable in of itself. Its value should be totally independent of any other object. Basically, the item must be rare.  This is why pieces of paper currency, no matter how beautiful the printing may be, doesn’t meet this characteristic.

 

What Aristotle described as good money several thousand years ago still holds true today.

Let’s examine Aristotle’s characteristics with these examples:

good money

 

 

 

 

 

 

 

 

 

 

Our paper currencies carry a hefty premium for being a good currency but a bad store of value. What would be the reason to keep all your savings in a currency that has no intrinsic value?

Although people use gold for jewelry, dentistry, and for some high tech products, gold’s primary usage has always been as money.

Gold has been the choice of money for over 5,000 years because it is valuable, durable, divisible and relatively portable.

 

Learn more from the Hidden Secrets of Money educational series produced and hosted by Michael Maloney.

 

 

The best investment you can make is in your financial education. Start today.

Think deeper.

good money

 

 

 

 

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