What is Money?

(by Jorge Zaccaro)

We buy things all the time, but we seldom pay for them actually. Instead, we give pieces of paper or transfer digital numbers, which are not really worth the same as the things we exchange them for. Then, what is it that we are actually doing when we give cash or transfer funds to a person or merchant? We are making a promise, a promise to pay.

Money is not a means of payment, but a promise to pay.

Most money these days is an IOU (I Owe You), a promise to pay [1]. When you “pay” someone you are not actually paying her, but promising that either you, or another member of your community, will pay her in the future with an actual good or service that does have an equivalent value. When you give money to someone, you are essentially acknowledging the idea that you owe something to that person in exchange for the goods or services that you just received, and the way you keep track of that debt is by exchanging some form of credential that represents that idea.

Money is not a piece of paper with an official-looking design and watermarks printed by a government; that’s paper currency. Money is not a set of account balances held by a financial institution; those are demand deposits. Money is definitely not a precious metal extracted from the ground by a mining company; that’s a chemical element. Money is not a thing, it’s an idea: an idea that helps you remember that you agreed to owe something to someone, or someone agreed to owe something to you.

Money is an idea. An idea about debt.

Contrary to popular belief, money did not evolve from barter [2], but from the need of keeping track of debts within communities. Historically, humans have agreed to use commodities and objects such as salt, shells, beads, tally sticks, coins and paper notes as a way of keeping track of the debt relationships that emerged from commerce. Even though all those elements had some degree of common desirable characteristics such as durability, divisibility, recognizability, portability, fungibility and scarcity, there was no particular reason to choose them as a medium of exchange.

Nowadays, we are capable of carrying out most information processing about trade by using computer networks like the Internet, but an understanding of money and payments as other forms of information is still missing. Furthermore, we have narrowed down the options of what can be used as a medium of exchange from commonly accepted assets to predominantly national currencies. As a result, if we do not have enough of them or a means of payment to spend them online, we wrongly believe we cannot engage in trade at all.

Money is information about what we owe each other.

Money is information about who owes what, and just like any other form of information such as articles, photos and videos, it can be generated and communicated using technology. But, how can that be done, exactly? Computers can be used to keep accounts and perform the required arithmetic operations to modify those accounts, and the Internet can be used to exchange messages about trades and keep records of them available worldwide. Therefore, using balances from a particular institution is no longer the only option for keeping track of what we owe each other online.

Bitcoin is an innovative example of using computers to keep track of debts in a (virtual) community, and has features like pseudonymity, openness, decentralization, global reach and low fees that make it very promising. However, Bitcoin shares an important drawback with most forms of money broadly used on a daily basis: if you want some bitcoins, you need to buy them. Therefore, just like in the case of national currencies, if you want to use bitcoins as a way of keeping accounts you will need to borrow or buy those numbers first. But, what if you have no money to buy bitcoins? A question that can be made clearer if rephrased as:

What if you have no money to buy money?

Since money is information, there is no real need to buy it or borrow it at interest. Instead, we can create that information ourselves using technology. When someone does not have “money” to buy something from a member of a community, the amount of the transaction can be recorded and the good or service can be traded anyway, with the promise and expectation of repaying that debt in the future. Assuming that the members of a community consider themselves trustworthy, and a sense of reciprocity is encouraged, all debts should cancel against each other after a period of time.

Creating money and making payments is a matter of agreeing upon a system to create records of debts and make changes to these records securely [3]. Using technologies such as mobile phones, cryptography and the Internet, these systems can be built and made available worldwide for communities and businesses to issue their own interest-free currencies for supporting their economies and solving social problems.

When the existing and upcoming complementary currency systems finally go mainstream, people’s prosperity and quality of life will not be hindered by the available paper notes or metal coins anymore. No one will ever have to complain about “not having enough money” again, and hopefully the problems derived from the artificial scarcity of the current monetary system will be a thing of the past.

So, remember:

Money is just information, and you can create it.


[1] The Economics of Digital Currencies - Quarterly Bulletin Article - Bank of England. https://youtu.be/rGNNiTaC2xs?t=41

[2] Felix Martin, “Money: The Unauthorized Biography” https://www.goodreads.com/book/show/17307317-money

[3] Digital Currencies - Quarterly Bulletin Article - Bank of England. https://www.youtube.com/watch?v=CxDKE_gQX_M

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