Money is any commodity or token that is generally accepted as a means of payment.

A Commodity or Token

Money is always something that can be recognized and that can be divided up into small parts. So money might be an actual commodity, such as a bar of silver or gold. But it might also be a token, such as a quarter or a $10 bill. Money might also be a virtual token, such as an electronic record in a bank’s database (more about this type of money later).

Generally Accepted

Money is generally accepted, which means that it can be used to buy anything and everything. Some tokens can be used to buy some things but not others. For example, a bus pass is accepted as payment for a bud ride, but you can’t use your bus pass to buy toothpaste. So a bus pass is not money. In contrast, you can use a $5 bill to buy either a bus ride or toothpaste–or anything else that costs $5 or less. So a $5 bill is money.

Means of Payment

A means of payment is a method of settling a debt. When a payment has been made, the deal is complete. Suppose that Gus buys a car from his friend Ann. Gus doesn’t have enough money to pay for the car right now, but he will have enough three months from now, when he gets paid. Ann agrees that Gus may pay for the car in three months’ time. Gus buys the car with a loan from Ann and then pays off the loan. The loan isn’t money. Money is what Gus uses to pay off the loan.

So what wampum, whales’ teeth, tobacco, and salt have in common is that they have served as a generally accepted means of payment, and that is why they are examples of money. (1)

(1) This is an excerpt from FOUNDATIONS OF MACROECONOMICS, 6TH EDITION by Robin Bade and Michael Parkin, Addison-Wesley, 2013, p. 264.