6. Forms of Money

Money comes in different forms. Depending on the form it takes, money behaves differently.

6. Forms of Money
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Money and "Money"

Although we all carry a concrete idea of money around in our heads, money is not just money. It is a highly complex matter and exists today in numerous forms. What some dismiss as money, others consider to be the perfect money par excellence. So how is it possible to maintain a sober perspective in this tangle of money and money-like assets?

Categorization of Money

Categorization of Money

Probably the most helpful attempt at categorization was made by the great monetary theorist Ludwig von Mises. To avoid confusion between different types of money, von Mises distinguished between commodity money, credit money and token money. In this way, he defined three basic forms of money that are still relevant today. As the complexity of the real world dictates, these three forms cannot be neatly separated from each other, but in some cases merge smoothly. Nevertheless, the question arises: How are these basic forms of money to be defined?

Commodity Money

Commodity Money

This form of money refers to a money that spontaneously emerges on the market as the most marketable commodity. Marketability ultimately results from the fact that a thing fulfills certain favorable characteristics that promote marketability.

Credit Money

Credit Money

Credit money is based on debt instruments and always represents a claim. However, the respective debt is always settled in commodity money, which is why credit money always has an independently existing from of money as its reference. If credit money is redeemable in commodity money at any time, it is not a credit money after all. Rather, credit money means that it becomes due after a certain term and the debt instrument must therefore be settled in commodity money. One also speaks of credit money maturing into its underlying money.

Token Money

Token Money

Token money is the third, seemingly most abstract and yet probably the most common form of money today. As such, token money is any type of money that is neither based on a material good nor represents a claim on any good. Ultimately, it is a mere sign, a symbol, sign money. In many circle it is today also referred to as fiat money. In historical reality, it was almost always the case that a token or fiat money developed out of a commodity money. Through the gradual abolition of the obligation to redeem, a money-like hermaphrodite form of credit money and token money was always gradually created.

Concrete Examples

Concrete Examples

The classic example of commodity money have always been the precious metals gold and silver. Over thousands of years, these have emerged as the prime forms of commodity money. The historical example of a credit money is the bill of exchange. These have always circulated as claims on gold with a predefined maturity date. As soon as the maturity was over, the bill of exchange matured into gold and had to be settled definitively in in-kind or commodity money by the issuer. And currently? What is considered to be credit money? At one time, gold-backed government bonds resembled credit money. Today, government bonds are part of the monetary base. Cash in the form of banknotes issued by central banks is an obligation to them and could thus be seen as a kind of monetary surrogate of credit money. This is because banknotes were originally issued on the basis of bills of exchange, meaning that the banknotes themselves had to be repaid at maturity in bills of exchange, which in turn were due in gold. As such cash can also be considered to be closest to token money as it, theoretically speaking, it’s an abstraction of an abstraction already.

In the Gray Area of Money Forms

In the Gray Area of Money Forms

All of these forms of money are all still around today. Token money in particular exists today in different variations and is always hierarchically structured. While credit money and token money were once based on commodity money, today it is special types of token money that ultimately serve as the basis for other token monies. Thus, real estate, stocks and other securities have also acquired monetary value. What one would not usually assess as money according to common sense, has today quite clearly monetary character. The reason: These goods are considered to be scarcer than the monetary expansion that is happening with base money, reserves and bank deposits.

Synthetic Commodity Money

Synthetic Commodity Money

In addition to the plethora of token money and token money surrogates, some focus currently shifts again increasingly to commodity money. Typically, the latter is seen in stark contrast to token money. It is only logical, then, that with a constant "expansion" of fiat money, commodity money is once again gaining in relevance. Commodity money is seen as something naturally scarce, while token money can be created inherently without limits by the so-called "bookkeeper's pen" (according to Milton Friedman). What many do not yet understand though: Commodity money does not necessarily have to be physical. Bitcoin demonstrates this. The cryptoasset is actually token money, but it technically imitates commodity money. It can be said that Bitcoin is thus synthetic commodity money in digital form and has thus enriched monetary theory (and also practice) with a new type of money.

Commodity and Token Money All at Once

Commodity and Token Money All at Once

In terms of the three forms of money, Bitcoin ultimately does indeed represent a truly revolutionary discovery. Due to digital scarcity, Bitcoin is absolutely scarce and thus embodies the perfect type of commodity money like no other commodity money. At the same time, however, the cryptoasset is pure information and thus, above all, a symbol of bits and bytes. As an informational monetary unit, Bitcoin is not tied to any physical object and can therefore be transferred and shared efficiently. This novel combination of physical and informational money in one that makes money scalable and programmable, but nevertheless is built on a foundation of absolute, digital scarcity. Thanks to Bitcoin, money is optimally transferable across space and time. In space because of its digital nature, over time because of its absolute scarcity.