Hard Money Diploma · Module 1: What Is Money?

1.0 Introduction

Welcome to the Hard Money Diploma. In this module, we'll explore the fundamental question of why money is essential in our lives. We'll look into the nature of money and its various forms, aiming to gain a deeper understanding of its significance.

Money is something we use every day, but do we actually understand why we need it and what it is?

1.1 Discussions about Money

Let's start by answering the five following questions. Consider practical uses like acquiring necessities such as food and desired items. Try to be specific in your examples, balancing creativity with realism.

Discussion: What is Money?

1.2 Definition of Money

Have you ever stopped to think about what money really is? Money is essentially a way to exchange goods and services. It represents the value of these items in a form that can be easily traded. It's like a universal language that allows us to trade with people all around the world, even if we don't speak the same language or share the same culture.

Money is like a social contract that allows us to make exchanges without having to rely on bartering or finding someone who specifically wants what we have to offer. If a group of people started accepting chocolate as payment for most goods and services, chocolate would become money (although, since it would melt in some parts of the world, we might consider it bad money).

In other words, money itself doesn't have the power to satisfy human wants; it's just a tool that allows us to trade more efficiently.

1.3 Functions of Money

When it comes to buying and selling goods and services, money is the key player. Money serves several important functions:

Store of Value

Money should maintain its value over time, making it useful as a method to save and invest the value of human labor. This lets people use money to plan for the future.

Medium of Exchange

With money, you don't have to find someone who wants exactly what you have to trade. Instead, you can use money to buy and sell anything you want. This makes trading and commerce much more convenient and efficient.

Unit of Account

Money provides a universal standard for measuring value. If you wanted to buy a new car, you could compare prices from different dealerships in dollars. Without a unit of account, you'd have to compare the value of one car to another using something else, like the number of cows it was worth.

Exercise: What function of money is this an example of?

1.4 Properties of Money

Money works well only if it has certain key qualities:

Exercise

Score each item on a scale from 0 to 5 for each characteristic (0 = Terrible; 3 = Okay; 5 = Excellent). Tally the scores to determine which one is best suited to be a form of money.

1.5 Types of Money

Money can be divided into two main categories: physical and digital.

Physical money

Digital currencies

Electronic currencies are digital versions of traditional currencies like dollars or euros, moving through payment rails that rely on intermediaries such as banks, which charge fees and can approve, delay, or reverse transactions.

A key idea behind some digital currencies is removing intermediaries, creating a system where control is shared rather than held by a single authority, more like the internet.

1.6 The Psychology of Money

Imagine you are stranded in a desert and you only have one bottle of water left. You are thirsty and desperate for a drink, but you also know that you will need the water to survive until you can find more. You might ration it in small sips, or drink as much as you can in one go. Either way, you face a difficult decision.

Scarcity applies to all resources, not just water. Whether it's money, time or even love and attention, we constantly face choices about how to allocate our limited resources.

There are two types of scarcity

The main difference between the two is control.

Example of time preference

You can receive $100 today or $110 in a year. High time preference takes the $100 now; low time preference waits for the larger reward, focused on long-term planning.

Back in the desert: drink all the water at once and you might not have the energy to search and find the cactus with more water later. The opportunity cost of the quick drink is the future chance you never got.

Activity: Time preference

Conclusion and Discussion