Lessons·Finance & Economics·adults · advanced
What Is Money — and Why Does It Have Value?
Explore one of the most fundamental questions in economics: why does money have value at all? We trace the history of money from shells and cattle to Bitcoin, and build a framework for understanding inflation, trust, and the future of currency.
About 30 minutes
If every person on Earth received £1 million tomorrow, would anyone actually be richer?
Before you start
Watch The History of Money by Crash Course Economics (11 min) — Pay attention to the section on 'commodity money' vs 'fiat money' (around 3:00–6:00). Ask yourself: what is the difference between the two, and which system do we use today?
- Before watching: what do you think makes money valuable? Write one sentence.
- After watching: what is the single biggest thing that gives modern money its value?
- In your own life: have you ever experienced a situation where money lost value quickly — inflation, a currency crisis, or a failing economy?
Further reading: The Ascent of Money by Niall Ferguson — Chapter 1 ('Dreams of Avarice'). Available as a free preview on Google Books.
From Shells to Smartphones: 10,000 Years of Money
Around 9,000 BC, before coins existed, farmers in Mesopotamia used cattle as money. A transaction might read: 'two goats for one ox.' This was barter — direct exchange without any middleman. It worked, just about, in small communities where everyone knew each other.
The problem was what economists call the 'double coincidence of wants'. If you had grain and needed shoes, you had to find not just a shoemaker, but one who specifically wanted grain, right now. As villages grew into cities, barter became impossibly clumsy.
Around 2,000 BC, the Lydians in modern-day Turkey created something revolutionary: the first standardised coins, stamped with the king's face in electrum (a natural gold-silver alloy). The stamp was crucial — it was a guarantee of weight and purity. You didn't need to trust the stranger you were trading with. You trusted the king. Money had arrived.
For the next three millennia, money was 'commodity money' — its value came from the material it was made of. Gold and silver coins held value because the metal was scarce, durable, and universally desired.
Then, in 17th century Sweden, something radical happened. Banks began issuing paper receipts for gold deposits. The receipt said: 'I promise to pay the bearer X amount of gold on demand.' People began trading the receipts instead of lugging the gold around. The world's first banknotes were born — and money became a promise rather than a thing.
By 1971, the promise broke entirely. US President Nixon 'closed the gold window', severing the last link between the US dollar and gold. Every major currency in the world became 'fiat money' — backed by nothing but government decree and collective trust. Today, the pound in your pocket has no intrinsic value whatsoever. It is worth what we all agree it is worth. Which raises the question: what exactly are we agreeing on?
The Three Functions of Money — A Framework
Economists define money by what it DOES, not what it IS. Any object can function as money if it performs three roles simultaneously:
1. MEDIUM OF EXCHANGE
Money solves the double coincidence of wants. Instead of trading grain for shoes directly, you sell grain for money, then buy shoes with money. The money sits in between, making all exchanges possible. This is why cigarettes functioned as money in prisoner-of-war camps during WWII — they were accepted as payment by almost everyone.
2. STORE OF VALUE
Money must hold its value over time. A loaf of bread is a terrible store of value — it goes mouldy. Gold is an excellent store of value — it doesn't rust, corrode, or disappear. Modern currencies are moderate stores of value: inflation slowly erodes them, but they don't collapse overnight (usually).
3. UNIT OF ACCOUNT
Money gives us a common language for measuring value. Without it, how would you compare the price of a house to a haircut? Money reduces everything to a single number, making economic decisions possible.
The insight: when a currency fails, it typically fails in the sequence above — first as a store of value (inflation destroys savings), then as a medium of exchange (people refuse to accept it), then as a unit of account (prices are denominated in foreign currency instead). This is exactly what happened in Zimbabwe in 2008, Venezuela in 2018, and is partially happening in Turkey and Argentina today.
Why This Affects Your Money Right Now
Understanding the nature of money isn't just history — it directly explains what's happening to your savings and purchasing power today.
When a central bank like the Bank of England 'prints money' (quantitative easing), it doesn't print paper — it creates digital entries in bank accounts. More money chasing the same amount of goods means each pound buys slightly less. This is inflation. Between 2021 and 2023, UK inflation peaked at over 11% — the highest in 40 years. A person holding £10,000 in cash saw its real purchasing power fall by roughly £1,100 in a single year.
At the same time, Bitcoin was created explicitly as an answer to fiat money's weakness — a currency with a mathematically fixed supply of 21 million coins, designed to resist inflation by design. Whether it succeeds as money depends entirely on whether it fulfils all three functions above, sustainably.
The question for you: where is your money? Cash loses value to inflation. Property and equities generally beat inflation over time. Understanding money's nature is the foundation of every financial decision you will ever make.
What You Now Know
- Commodity Money
- Money whose value comes from the material it is made of — gold, silver, cattle, shells.Gold coins in ancient Rome had intrinsic value — melt them down and the metal was still worth something.
- Fiat Money
- Money declared legal tender by government decree, with no intrinsic value — its worth comes entirely from collective trust.The British pound today is fiat money — a £20 note costs about 5p to print but is accepted as worth £20.
- Inflation
- The rate at which the purchasing power of money falls — how much less your pound buys compared to last year.UK inflation at 10% means something that cost £100 in 2022 cost £110 in 2023.
- The Double Coincidence of Wants
- The problem with barter: you must find someone who has exactly what you want AND wants exactly what you have.A farmer with grain who needs shoes must find a shoemaker who happens to need grain — almost impossible at scale.
- Store of Value
- One of money's three functions — the ability to hold value over time so it can be saved and spent later.Gold is an excellent store of value; cash is a moderate one; fresh food is a terrible one.
- Quantitative Easing (QE)
- When a central bank creates new money electronically and uses it to buy financial assets, increasing the money supply.The Bank of England used QE after the 2008 financial crisis and again during Covid-19 to stimulate the economy.
For Your Live Session
- In your own words, what gives the British pound its value today? What would have to happen for people to stop trusting it?
- Some economists argue that Bitcoin is 'digital gold' — a better store of value than fiat currency. Others say it has no intrinsic value and is pure speculation. Which view do you find more convincing, and why?
- If a government prints more money, who benefits and who loses? Think about: people with savings, people with debts, people who own property, workers on fixed wages.
- A contrarian view: is inflation always bad? Can you think of a scenario where mild inflation is actually better for an economy than zero inflation?
- Turkey has experienced significant inflation in recent years. How does this affect ordinary people's day-to-day decisions about money, savings, and spending?
Finance Vocabulary for This Topic
| English | Türkçe |
|---|---|
| fiat currencyThe pound is a fiat currency — its value rests entirely on the government's credibility. | itibari para / karşılıksız paraPound bir itibari para birimidir — değeri tamamen hükümetin güvenilirliğine dayanır. |
| purchasing powerHigh inflation erodes purchasing power — your salary buys less each year. | satın alma gücüYüksek enflasyon alım gücünü aşındırır — maaşınız her yıl daha azını satın alır. |
| monetary policyThe Bank of England's monetary policy committee decides whether to raise or cut interest rates. | para politikasıBank of England'ın para politikası komitesi, faiz oranlarının artırılmasına veya düşürülmesine karar verir. |
| legal tenderPound notes are legal tender in England — businesses must accept them as payment. | yasal ödeme aracıPound banknotları İngiltere'de yasal ödeme aracıdır — işletmeler bunları ödeme olarak kabul etmek zorundadır. |
| central bankThe Bank of England, as central bank, controls the supply of money in the UK. |
Writing task
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