The following succinctly states the definition of money.

Money consists of any economic good, or any claim on such a good, that serves as a general medium of indirect exchange and that acts as a final means of payment.

Although simply stated, this definition requires further explanation to clarify the precise meaning of the terms used. I will describe the important terms in this definition.

An Economic Good

An economic good consists of a resource used by humans and exists in sufficiently limited quantities to give it a market price. Under normal circumstances, air and water represent goods but not economic goods. When the available quantities become limited, those goods become economic goods. Traditional money goods like gold and silver fit the definition of economic good.

A Claim

A generally accepted claim on a money good also serves as money.

A claim differs from a debt because it requires immediate transfer upon demand for the money good. A debt requires a future transfer, even if that transfer happens the next day. This important distinction has confused a lot of people.

Indirect Exchange

The acceptance of a good in exchange with the intent of the receiver to exchange that good for a third good makes that an indirect exchange.

Unlike goods in a direct exchange, which each party expects to consume, at least one party to an indirect exchange expects to exchange the good received for some other good. The expectation of using the good in a future exchange may create more value in the mind of the receiver than any possible consumption.

General Acceptance

To qualify as money, goods used in indirect exchange must be accepted by a fairly wide range of traders.

Not all goods accepted for the purpose of future exchange (indirect exchange) qualify as money. The generally accepted use as a medium of indirect exchange determines whether the good (or the claim) qualifies as money.

Final Payment

When a medium is accepted in payment, it concludes the transaction. It requires no further obligation on the part of the payor, e.g., loans, credit cards, etc. When a buyer pays for a good with money, that concludes the transaction.

Conclusion

Because most of the money used these days represents claims, what ties does it have to the original commodity? What is money today? Bytes, promises, nothing?

The fact that most money used today consists only of claims—claims backed by more and more claims—does not change the definition of money or reduce its usefulness. The acceptance by the public makes a good or a claim useful as money.

Finally, because traders accept money for the sole purpose of indirect exchange, the quantity of a good (or claims) used for money does not (indeed should not) increase. Because of money’s role as a link in goods-for-goods exchanges, any artificial change in the quantity of money distorts the information-passing role of money.

I cannot stress this last fact enough. The need for the market to have a stable (better yet fixed) quantity of money destroys any argument in favor of factional reserve banking and the wild claims of “Modern Monetary Theory.” Artificial changes in the quantity of money cause the misallocation of resources and eventually generalized price inflation.