Aristotle: the features of good money
Over 2,000 years ago, the renowned philosopher wrote about the characteristics of good money. The majority of his thoughts still apply today.
Aristotle (384–322 BC) was an ancient Greek philosopher, polyhistor, student of Plato, and teacher of Alexander the Great. He was, besides Plato, the most influential Western philosopher. In addition to many other important teachings, Aristotle defined the characteristics of good money more than 2,000 years ago. According to him, money must be:
1. Durable, i.e. it must not be easily destroyed.
2. Portable, i.e. it must be easy to carry around.
3. Divisible such that the parts yielded by the division would be interchangeable.
4. Relatively rare and intrinsically valuable.
Most of us believe that the money or currency (euro, dollar, pound, etc.) we use daily is good money. But is that really the case?
According to Aristotle’s first characteristic of good money, currency is not durable, because it could easily be destroyed, for example, by fire. And while it is readily portable, currency is also not divisible such that the division would yield two interchangeable parts — splitting a 10 euro note down the middle does not produce two 5 euro notes. Additionally, currency is not rare and intrinsically valuable, as you can easily print or mint more of it in virtually unlimited quantities. Therefore, it can be said that neither the euro, the dollar, nor any other form of currency is good money.
Crude oil, natural gas, real estate
Although crude oil is mostly durable, divisible, and relatively limited in quantity, it is not easily portable. The same applies to natural gas. Real estate, however, is the worst of the three, because it can in no way be carried around. Dividing it would also pose quite the challenge, because how could you split a piece of property with a stretch of river in one corner and a dense forest in the other into three equal parts? How do you divide a house into ten parts? Therefore, none of the above are a particularly good form of money either.
Cryptocurrency (its most notable example being Bitcoin) is a relatively new type of alternative currency. As such, it is still too early to say what role it will play in wider society. It is also relatively difficult to measure the durability of a cryptocurrency, but when compared to conventional currencies (euro, dollar, etc.), it does have a clear advantage. As long as there are at least two computers in the world with a blockchain database, cryptocurrency transactions can technically be made. As cryptocurrencies like Bitcoin are digital, they are also readily portable. Moreover, dividing a cryptocurrency does actually produce two interchangeable parts: a cryptocoin can be “split” into two equally valuable halves. Due to their high volatility, however, it is not yet possible to say whether cryptocurrencies have any intrinsic value — only time will tell.
Gold and silver
For the last several thousand years, gold and silver have been regarded as the archetypes of real, good money. Before money existed, goods were traded through bartering (a direct transaction where goods or services are exchanged without using money). Eventually, to make trading more convenient, gold coins were introduced as a form of money.
According to Aristotle, gold and silver are indeed good money because they are durable: they will not be destroyed if your house catches fire or if you accidentally put them through a spin cycle, nor will they rust away. They are portable and can be divided into interchangeable and valuable parts: for example, if you break a 1-gram gold bar in half, you now have two 0.5-gram gold bars. Gold and silver are also rare because they are limited in quantity and cannot be easily reproduced (printed). Precious metals are considered to have intrinsic value because they have preserved their value over hundreds and even thousands of years.
In ancient Greece, one gold coin bought you a nice white robe, a handmade belt, and a pair of sandals. Similarly, you could use that same gold coin today to buy a fine suit, a leather belt, and a pair of shoes. In 1930, one silver coin was worth the same amount of gasoline as today; meanwhile, the US dollar has lost over 90% of its value.
All in all, gold and silver have been the only “good” forms of money in history. By keeping your savings in gold or silver, you can be sure that your money will retain its value even over the long term, despite the depreciation of the currency, i.e. inflation.
The modern definition of money
Money is a generally accepted legal tender that can be exchanged for other goods and services. The existence of money is based on a social agreement to use something as a medium of exchange. This agreement may be direct or indirect, voluntary or mandatory. The value of money can change due to inflation and deflation.