In this chapter, we aim to answer the question ‘What is ?’ by reviewing its functions, origins and evolution over time. It is important to note that while we seek to provide a comprehensive answer to this question, it is not exhaustive. By the end of the chapter, we hope that you will have gained a solid understanding of the various dimensions of and are able to understand its general societal function in greater depth.

Before we properly define , let us first focus on its main functions. Generally, the economic definition of entails three distinct, but related, functions. is said to serve as:

• : a standardised measure of value for pricing goods and services

• : a tool for settling obligations and enabling payments

• : an instrument for maintaining over time.

While these functions offer a foundational framework, the practical application of is more complex.

Historically, there were periods when a multitude of standards of coexisted, often sharing the same name but possessing different values in different regions. For example, in medieval France, coins, financial records denominated in silver pennies, as well as physical goods were used to settle . To make matters even more complicated, various duchies in France minted their own each possessing a different value, leading to a lack of monetary standardisation. Even with the complexity of this monetary system, commerce continued.

This historical context prompts us to seek a deeper understanding of ’s essence and history, beyond its prescribed functions.

What is ? Where does come from, and when and how was it ‘invented’?

Monetary theory has evolved significantly over time, shaped by the specific economic, financial, cultural and social context at a given time and geographical region. Broadly speaking, monetary thinking throughout centuries has oscillated between two viewpoints:

1. with : Emphasises the role of as a tangible item with inherent worth, primarily focusing on its function as a . This point of view suggests that emerged as a solution to the inefficiencies of barter, evolving through a natural selection process that imbues a particular commodity with monetary value. From this perspective, has an ‘objective’ value based on exogenous factors related to the underlying object’s unique properties (e.g. scarcity, portability, divisibility). is thus considered ‘a physical thing’ (e.g. metal), with being an edifice of promises built on top of this solid foundation of ‘things’ (commodities).

2. of accounts and processes: Regards as an inherently social system rooted in ancient religious beliefs, particularly the sanctity of obligation, where arises from an intricate network of promises between economic agents. From this perspective, is a special type of . Here, the function takes precedence, and coinage (or other forms of representation) is merely a physical expression of these relationships.

The view that is a commodity with has held sway for an extended period and remains widely shared today. But there is mounting historical and anthropological evidence to support the view that money is best understood as a special form of that emerges from ancient networks of personal obligations and promises between community members. So how did these systems work, and how did they ultimately lead to the emergence ?

To illustrate how -based systems work, let us start with a thought experiment. Imagine a primitive society that has no knowledge of the concept of . How would social and economic life be organised in such a society?

To function effectively, the individual of members would need to be converted into community , essentially creating a mutual network. Sellers of goods and services would accumulate that they can offset against other, unrelated . Each member of the community would effectively issue their own (a personal I owe you (IOU)) which could be transferred to third parties to pay off unrelated . This conversion would turn a personal IOU into an impersonal that could be used throughout the community.

This could only work under the following two conditions:

1. Every member of the community must maintain their . This is essential as the community must retain confidence in personal IOUs that collectively shape the community’s .

2. All members in the community must either directly or indirectly know one another to trust and accept the community’s word for an unknown member’s .

You might already be able to see how these conditions may hold true for small, local communities, but are much more challenging to uphold in larger and less cohesive societies, where trust is less prevalent.

on any significant scale cannot consist of against an abstract notion of ‘society’. In the past, societies have overcome this challenge through communal trust in a few people or institutions, namely, wealthy nobles, lords, dukes and other types of societal leaders that enjoy a privileged status and respected position. Today, this challenge of trusting another member of society is overcome by a communal trust in the State, as the issuer of .

As we just seen, is fundamentally a social construct that systemises relations between human beings that were previously based on personal relationships and bilateral trust. As societies grow and become more complex, emerges to measure, keep track of and clear social obligations. This is done by turning illiquid personal promises (‘’) into transferable impersonal claims (‘’) that give access to within a wider economic area.

In essence, every sale and purchase can be interpreted as the exchange of a good or service for a of equivalent value that is expressed in terms of an intangible, arbitrary . Sellers can then use these accumulated credits to pay in turn for their consumption of goods and services, or offset financial obligations against third parties. In this way, social obligations can be valued and transferred from one person to another in a standardised manner.

This shared concept of value was further boosted by the invention of coinage, which is a useful tool for recording and transferring monetary obligations.

In this way, is inextricably linked to payments and the of obligations. In today’s monetary system, this includes such as physical (coins and banknotes) as well as bank deposits and electronic (e-money). therefore fulfils the function of a generally accepted in economic transactions.

In short, underpins a web of promises and facilitates trade among strangers who would previously not have enough interpersonal trust to interact with each other. 

allows a person to obtain goods or services before payment, based on the trust that this payment will occur in the future. One way of settling this is by giving the seller of a good or service to repay the .

It is important to note, however, that and are not synonymous. turns into when it becomes generally transferable and is accepted as a mode of repaying other . This idea lies behind Minsky’s argument that ‘everyone can create ; the problem is to get it accepted’ (Hyman Minsky (1986) Stabilising an unstable economy).

In this sense, is both an (to the holder of the ) and a (to the issuer of the obligation/), and its transfer can be understood as a operation.

For to transition into :

• Sellers must have faith in the debtor’s , i.e. confidence in their signifying that debtors will be able to honour the obligation when it comes due.

• Sellers must trust that unrelated third parties will accept the debtor’s IOU as payment, i.e. that the will be broadly accepted to extinguish unrelated to the original debtor (issuer of the credit).

Hence, any monetary system can function effectively in sustaining trade as long as there are issuers deemed by the public, a prevailing belief that their obligations will be accepted by third parties, and processes to enable the transfer of obligations between agents.

Previously, we explored the origins of as well as the different functions that performs in society. To recap, these functions are acting as a , serving a and constituting a . Ultimately, only adheres to these three roles if society trusts in the of the issuer, irrespective of the form that takes.

According to Felix Martin’s perspective in Money: The Unauthorised Biography (2013), can be seen as an intricate network of social obligations, fundamentally revolving around ‘social’ credits and debits, which are subsequently transformed into transferable financial obligations comprising and . This network forms a mutually interdependent system of promises enabling access to in real time. Its core function lies in recording and relationships, utilising a shared yet arbitrary measuring unit (reference value), known as .

Based on our review, it seems useful to consider from two different but related dimensions:

1. as a system (‘M’): ‘M’ represents the system as a whole – rules, processes and tools – designed to manage and reconcile within a society. It originated as a decentralised solution for organising economic and social activities within larger communities that outgrew traditional, relationship-based customs.
   here can be understood as a comprehensive social web of promises, or commitments, by economic actors to pay at a later date ( relationships), including the common reference unit in which these promises are denominated () and the processes that govern the of between .

2. as a means of (‘monies’): ‘Monies’ here refer to the specific instruments that are used within a given ‘Money’ system to fulfil outstanding obligations between people. The instruments can be either general purpose and widely accepted across the economy or more limited purpose and reserved for specific contexts. ‘Monies’ are the accepted tools within a society that serve as the and, depending on their properties, may also provide a .

The ‘’ of specific instruments depends on the degree to which they are accepted in society. To this end, the State generally plays a major role in determining what instruments become generally accepted and ultimately are considered a form of within society.

Trust in the issuer of needs to be general and well-founded for its obligations to circulate as . Hence, governments and banks have played a pivotal role in societal trust in .

Trust in is often taken for granted, yet it is not merely an abstract notion: it must be established and sustained. The methods for doing so vary depending on the system. Ultimately, is what society collectively acknowledges as a universal , representing undifferentiated .