Money is a system of trade that is used to exchange goods and services. It is a medium of exchange, a unit of account, and a store of value. In this post we explain the 6 characteristics of money.
Table of Contents
What Is Money?
Money serves as the backbone of modern economic systems, functioning as a medium of exchange that facilitates trade between individuals and organizations. Beyond this primary role, money also serves as a unit of account (allowing us to price goods and services), a store of value (preserving purchasing power over time), and a standard of deferred payment (enabling credit and debt arrangements).
According to the Federal Reserve, money can be broadly categorized into two types: commodity money and fiat money. Commodity money derives its value from the inherent worth of the material it’s made from, such as gold or silver coins. Fiat money, which dominates today’s global economy, has no intrinsic value but derives its worth from government decree and public acceptance.
The Six Essential Characteristics of Money
For any item to function effectively as money, economists have identified six crucial characteristics it must possess:
1. Durability
Money must withstand physical wear and tear over extended periods. Consider why we don’t use perishable items like fruit as currency—they would spoil before completing many transactions. Modern paper currency incorporates special materials and security features designed to last years in circulation, while coins are made from metals that resist corrosion. Digital currencies take this concept further, existing as durable data that doesn’t physically deteriorate.
Real-world example: U.S. paper currency lasts approximately 7-15 years in circulation depending on the denomination, while coins can remain functional for decades.
2. Portability
Effective money must be easy to transport and carry. This characteristic explains why societies moved away from using cattle or large stones as currency—they were simply too cumbersome for daily transactions. Modern currency achieves portability through lightweight materials and compact designs that fit easily in wallets and purses.
Real-world example: A $100 bill weighs about one gram and occupies minimal space, yet represents significant purchasing power compared to carrying $100 worth of copper coins.
3. Divisibility
Money must be divisible into smaller units to accommodate transactions of varying sizes. Without this characteristic, making exact change would be impossible, and small purchases would become impractical. The U.S. monetary system demonstrates this principle with denominations ranging from pennies (1¢) to large bills, allowing precise pricing and payment.
Real-world example: You can buy a $2.37 coffee using various combinations of bills and coins, or pay with a credit card that divides digitally to the exact cent.
4. Uniformity (Fungibility)
Each unit of money must be identical in value and interchangeable with every other unit of the same denomination. This means one $20 bill has exactly the same purchasing power as any other $20 bill, regardless of when or where it was printed. This uniformity ensures consistent value and prevents confusion in transactions.
Real-world example: A $20 bill printed in 2010 has the same value as one printed in 2023, and both are accepted equally at any store within the United States.
5. Limited Supply (Scarcity)
Money must have a controlled, limited supply to maintain its value. If money could be produced in unlimited quantities, it would lose its purchasing power through inflation. Central banks like the Federal Reserve carefully manage money supply through monetary policy to balance economic growth with price stability.
Real-world example: The Federal Reserve controls U.S. money supply through various mechanisms, including setting interest rates and reserve requirements for banks, preventing excessive money creation that could devalue the currency.
6. Acceptability
Money must be widely accepted by the general public and institutions as payment for goods, services, and debts. This acceptance is often backed by government decree (legal tender laws) and social convention. Without broad acceptability, an item cannot function as effective money.
Real-world example: U.S. dollars are accepted for tax payments, debt settlement, and most commercial transactions within the United States, while cryptocurrencies, despite having other money-like properties, have limited acceptance for everyday purchases.
Types of Money in Today’s Economy
Fiat Currency
The dominant form of money worldwide, fiat currency is government-issued money that isn’t backed by physical commodities. Its value stems from government regulation, public trust, and widespread acceptance. Most modern currencies, including the U.S. dollar, euro, and Japanese yen, are fiat currencies.
Digital Money
Electronic representations of fiat currency that exist as account entries in banking systems. This includes money in checking accounts, electronic transfers, and mobile payment systems like Venmo or PayPal.
Cryptocurrency
Digital assets that use cryptographic technology to secure transactions. While cryptocurrencies like Bitcoin possess some characteristics of money, their limited acceptance and high volatility currently prevent them from functioning as effective general-purpose money in most economies.
The Evolution and Importance of Money
Money represents one of humanity’s most significant innovations, eliminating the inefficiencies of barter systems and enabling complex economic relationships. From ancient commodity money to today’s digital transactions, the evolution of money reflects our ongoing efforts to create more efficient mediums of exchange.
The six characteristics outlined above aren’t merely academic concepts—they represent the fundamental requirements that allow money to facilitate the countless daily transactions that drive modern economies. Understanding these characteristics helps explain why certain items succeed as money while others fail, and why monetary systems continue to evolve with technological and social changes.
Sources and Further Reading
- Federal Reserve Education: “What is Money?”
- Mishkin, Frederic S. “The Economics of Money, Banking, and Financial Markets”
- Board of Governors of the Federal Reserve System publications
- International Monetary Fund educational resources
This guide provides educational information about monetary economics and should not be considered financial advice.
