What is Money

6 min readApr 15, 2026

Notes from the appendix of the course Asset Structure and Investment Vehicles.

Which layer does money belong to? Money is transversal to the layers. Money refers to a set of assets that can be found in different layers. For example:

Real asset: gold when it was the monetary standard (until Nixon in 1971).
Financial asset: bank deposits.
Vehicle: custody and safekeeping deposit.

Examples of assets we call, have called, or could call money: gold, silver, bitcoin, currencies, central bank reserves, demand deposits…

Theories on the origin of money:

Evolutionary theory / metallism (Menger). Orthodox. Liquidity as a property of goods. Money as the most liquid good — the one with the most stable marginal utility, the most invariant in value — that solves the problem of the double coincidence of wants in barter (dictionary vs salt). A decentralized and spontaneous discovery process.
Chartalist theory (Knapp). Heterodox. Money is created by the State or more generally by the group, which defines the unit in which taxes are paid (tax liability). Money is simply a debt. Some anthropologists (David Graeber) argue that historically money did not emerge from barter and that debt preceded physical money. MMT draws on this theory.

Both theories are interesting and in my view not necessarily irreconcilable:

It is undeniable that a group to which its members extend massive credit has an enormous capacity to influence the liquidity of goods: anything that a large State demands or requires with some stability will be more liquid than any other good.
The evolutionary theory applies to both spot and deferred exchanges: the fact that historically debt precedes barter and that intra-group exchanges take place via credit does not invalidate the evolutionary pressure to find liquid goods in which to denominate debts (to make the value of what is exchanged more predictable) and to conduct inter-group exchanges (on the spot).

Characteristics of money:

Acceptability: recognized and accepted by all
Durability: resistance to use and the passage of time
Portability: easy to transport
High unit value: low custody cost
Divisibility: easy to divide and handle
Homogeneity / fungibility: indistinguishable units
Authenticity: hard to counterfeit and easy to verify
Broad, deep, and stable demand
Rigid supply: low flow-to-stock ratio
…

Standard definition of money: generally accepted medium of exchange.

This can be enriched somewhat.

Functions of money:

Medium of exchange
Store of value
Unit of account (defining debts — primary for Hicks)

Key idea: money is expensive, credit is cheap. Hoarding and exchanging with money is costly and inefficient. If the institutional framework allows it (a common trusted agent, legal enforcement…), operating on credit will be more efficient.

What is a bank?

I think the most intuitive way to understand it is to see it as a credit specialist: an agent that is well-known / has a good reputation (whose liabilities are considered very safe) and is specialized in assessing the creditworthiness of third parties (are they good payers? do they have assets to back their promises?). Imagine you want to carry out a deferred exchange (on credit — paying with debt), acquiring a good and handing over a promise of future payment. But nobody knows you, nobody knows whether your promises are reliable, whether you have assets to back them, etc. You can go to the most well-known and reputable person in town and ask them to take your promise and give you one of theirs in exchange (a liability swap). Everyone will accept that person’s promise.

Modern banking emerged, according to John Hicks (A Market Theory of Money), when three businesses coincided in a single agent in England:

Payments and collections system (jewelers, goldsmiths)
Banker’s acceptances (guarantor, insurer)
Bill discounting (merchants)

What is a central bank? The central bank is the bank of banks and of the government.

To go deeper into monetary theory I recommend Perry Mehrling’s course Money and Banking — or as he calls it, “The Money View.” It is available for free on Coursera and YouTube, and his lecture notes are on his website. Below I summarize the main ideas from his first 2 topics.

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The 4 prices of money:

General price level
Exchange rate
Par
Interest rate

Types of money / credit:

Gold
Currencies
Deposits
Securities

Institutions that issue money / credit:

Central bank
Banking system
Private sector

Each institution acts as a market maker in one layer of the hierarchy, managing 2 assets and their rate of exchange. Depending on your position in the pyramid, you will draw the money-credit boundary at a different point: for us, deposits are money because we settle debts with them; for banks, reserves at the central bank are money because that is what they use to settle debts…

The entire pyramid of instruments (and the balance sheets of the institutions) expands and contracts over any interval of time. This expansion and contraction is both quantitative and qualitative (“credit” appears to be — or ceases to appear to be — money), and is guided by 2 underlying and opposing principles (scarcity ≈ monetarism and flexibility ≈ Keynesianism).

What is fiat money and why is it valuable today?

Fiduciary money: based on trust.
Fiat money: a form of fiduciary money issued by government decree without backing.

According to Juan Ramón Rallo (Against MMT), current fiat money (currencies: euros, dollars) is valuable for 3 reasons:

Taxes: the State accepts it to offset our tax liability (avoiding payment in kind).
Central bank assets: which it can sell against fiat to defend its value.
Liquidity: autonomous demand for fiat currency, or a network effect from being the most liquid asset.

That is, even though convertibility no longer exists today, currencies remain valuable because they have underlying assets behind them (tax liability + central bank / State assets) and ultimately because the State / Central bank commits to keeping their value (approximately) stable — by imposing a series of constraints and rules on itself: monetary standard, independent central bank, explicit targets, fixed exchange rate… — and the market believes it. And if euros are valuable because someone has made a commitment, then they are that someone’s liability and our financial asset.