7. Characteristics of Money

Money is like any other good - just with unique characteristics. Because of these unique characteristics, it can be set apart from different goods and function as an abstract, neutral mediator between all sorts of other goods.

7. Characteristics of Money
Monetary graph
List of contents
In the Eye of the Beholder

In the Eye of the Beholder

When we talk about money today, most people have an objective thing in mind: a coin or a banknote. Just as value exists only as a subjective component, money is not an objective thing either. What serves as money is in the eye of the beholder and thus arises from subjective evaluation. The Austrian polyglot Friedrich August von Hayek pointed out exactly this very important fact when he described money not as a noun but as an adjective. Thus he wrote in connection with goods not of money, but of goods with higher and lesser moneyness attached to is.

Marketability

Marketability

The higher the moneyness of a good is, the better and faster it can be sold. In this context, one also speaks of the marketability of a good. With increasing moneyness the marketability of the corresponding good grows and thus also the possibility of finding a market for this good. The exchangeability of a good is therefore based on its marketability. Higher marketability also means that the difference between the purchase and sales price of the good is smaller. The good with the smallest bid-ask spread, the difference between purchase and sales price, at the same time also has the least sinking marginal utility. This is why this very good can be seen as the most marketable good vis-a-vis other goods. The bid and ask spreads for this good are the smallest. Whatever has the least falling marginal utility can be considered actual money. It is the good with which saturation in trade virtually never sets in. More of this good is always preferred.

Unique Characteristics of Money

Unique Characteristics of Money

Like money itself, marketability is not an objective characteristic of any good. Nevertheless, there are characteristics that foster marketability. These include: -Transportability -Divisibility -Uniformity -Durability -Appropriate purchasing power A good that has these characteristics and fulfills them better than other goods also tends to have a better chance of being considered money among people.

Discovery Process

Discovery Process

The marketability of a good is figured out by human beings when they mutually interacted with one another. So the marketability of potential goods becomes obvious over time and establishes itself. This spontaneous process consists of a process of discovering which good shows the highest marketability. As history shows, precious metals have proven to be marketable goods in a special way. Once their marketability has been discovered, convergence or network effects hit in that steadily increase marketability. From this perspective, money is therefore also to be understood as a network effect good.

Rising Marginal Costs in Production

Rising Marginal Costs in Production

However, being a network effect asset is not enough. If money were a network effect product like any other, economies of scale in the production of this product would come into play as network effects and demand increase. More of it would be produced, which is why the supply of this thing would increase and balance the surplus in demand. The marketability would decrease because there seems to be no reason to keep this network effect product in liquid stock in comparison to other products. The monetization of this good would be stopped to a certain extent. Scarcity is therefore a crucial property for money. This is expressed by rising marginal costs in production. With a good like this, something special unfolds: The more such a good is in demand due to its marketability, the more difficult, complex and thus costly its production becomes.

Monetary versus Industrial Demand

Monetary versus Industrial Demand

The stronger the demand for such a good, the more its marketability increases. Higher marketability in turn feeds speculative demand. This speculation goes to expect an even higher marketability in the future. Also included in the speculative monetary demand is the expectation that this good will have a higher exchangeability in the future.

Stock-to-Flow Ratio

Stock-to-Flow Ratio

Goods that have rising production costs are characterized by a relatively high stock-to-flow ratio. This ratio describes the stock of the good already produced, which is set in relation to the annual newly produced output. The higher the ratio, the higher the stock in relation to the newly produced quantity, called the flow. The stock describes hoarding or stockpiling, while the flow includes production and consumption. The latter is thus an indication of industrial demand and the former, on the other hand, an indication of monetary demand. The higher the stock in contrast to the flow, the higher the monetary demand, which the respective good has. At the same time, the stock-to-flow ratio also measures the hardness of a good.

Liquidity

Liquidity

A high stock-to-flow ratio thus increases the incentive to hoard this good, i.e. to store value holding on to this good. If this good still shows network effects, the optimal conditions for high marketability have been created. In terms of liquidity, such a good should hardly be surpassed in comparison to other goods. Its high inventory in comparison to the newly produced quantity as well as its high marketability make this network effect good into optimal money. A thing has a high monetary value in the long run if there are large incentives to hold this very good, while one can liquidate it due to its high marketability at the smallest bid-ask spread possible. In order to finally reach this "endpoint", which will probably never be reached, much speculative anticipation is necessary. The more people begin to do so, the closer one gets to a fictitious "endpoint". So a money being discovered out in the wild always feels like a pyramid scheme. But lo and behold: money really is the bubble that never pops.