Money attracts more odd-ball statements than just about anything else. Many people might benefit from a straight-forward discussion about what money actually is. In simplest terms, money is a method of exchanging things that makes the exchanges less difficult. In technical terms, economists often say, “Money is the medium of exchange that reduces transaction costs.” So if you really want to you can think of money as a medium, as a language. But let’s get more concrete.


What happens when two people exchange?

Let’s say I grow apples. Of course, maybe I would like to eat some of the apples I grow. But if I grow many apples, then eventually I will have more apples than I can eat. The apples that I want to eat for myself are very valuable to me. However, the additional apples beyond that are really not valuable to me. In fact, if I have too many of them, they are a burden, not a benefit, because they will just sit and rot.

Now maybe some other people make shoes. Of course the shoes they make for themselves are valuable to them. But additional shoes are not valuable. What happens if the shoe-makers, who have a very big, hungry family, decide to trade a pair of shoes to me for some apples? The shoe-makers have given up something that is not valuable to them (extra shoes they don’t need) and I have given up something that is not valuable to me (extra apples I don’t need.) However, we have all received something valuable in return. Both of us are better off after the exchange. This is one of the essential truths about human interaction—trade creates wealth.

(Exchanging ideas, in particular, creates enormous wealth.)

Sure, some small amount of wealth is created by the actual production of things, but most wealth is created when human beings exchange with each other.

The Method

Of course, in a simple bartering example a big problem might come up. What if the shoe makers don’t want very many apples right now? What if they want some other things besides apples? Well, we could still work out a deal where I would promise to give them a series of deliveries of apples in the future in order to have shoes now. They might then demand more apples than normal, since they are giving me the shoes now but getting their apples later. In other words, I could take out a loan from them. (Money is not necessary for there to be loans.)

Alternatively, I could start giving them some apples now and, after some time when enough apples had been delivered, they could give me a pair of shoes. I might demand that they take fewer apples than they normally would, due to the fact that they are getting the apples now whereas I get the shoes later.  In other words, I could save. (Money is not necessary for there to be savings.)

In fact, I could even invest. I could promise a steady stream of apples to a budding shoemaker just starting out in exchange for a stream of future shoes when I need them. Of course, there would be risk involved—the budding shoemaker might not be able to make it, and then my investment of apples would not pay off.

Saving, borrowing and investing could all happen without money in a bartering system. Unfortunately, bartering methods are often difficult to keep track of, and they require an enormous amount of trust. So, without a better method of exchange, the number of people we can exchange with is limited to those people with whom we share great trust.  Since trade creates wealth, this means that our ability to create wealth is very limited.

Making Exchange Easier

Money is the method of exchanging things that makes the exchanges easier. Instead of always having to barter (and always having to carry around our goods on our backs), we have a method, or a medium, of exchange that allows us to easily account for everything we do that other people value. Instead of directly exchanging apples, shoes, plumbing services, entertainment, or whatever, we exchange everything for money and exchange money for what we want.

The important point is that in any voluntary exchange (as long as people actually know what they are getting), the exchange still creates wealth. If it didn’t create wealth, then why would people voluntarily do it?

Voluntary trade makes everyone better off and no one worse off. Money is nothing more than the method of making voluntary trade easier.

Or maybe.

Maybe I should say that money should be nothing more than the method of making voluntary trade easier. Once something becomes a system, it is always possible to do nothing except try to figure out how to game the system.

And we see a lot of people doing that, right? Some of them, especially on Wall Street, even become successful. Maybe it’s tempting to think we can do the same thing.

I would caution you, though, about two things. If you see your life as playing the game, that’s not going to be fulfilling because you won’t see what you’ve done for others that matters. Also, most people who try to play the game don’t win. They end up being little sharks that get eaten by the big sharks. You just don’t hear their stories, because no one makes a movie called “The Wimp of Wall Street.” You don’t see all the players who lost. You only hear about the winners.

Money is not an abstraction. Money is a simplistic representation of work, of expertise and of actual goods. When I stopped thinking of money as an abstraction, my habits changed. First, I focused more on the value I create for other people, which led to greater success. Second, I spent more wisely by always imagining that I was spending my hours worked or my expertise gained. In other words, I imagined I was bartering with real goods, not with dollars.

Try to imagine everything as barter, not as money, and see if your habits start to change.