The image above shows two tokens. They are roughly the same size and both made of metal. Neither has any intrinsic value, but one is considered money and the other only enables video game at play children’s pizza parlors.
The US quarter dollar above is produced by the US Mint (1) and is a token representation of a quarter dollar claim against the US Federal Reserve (in fact, all outstanding physical currency is considered a tokenized claim against the federal reserve). Because the quarter is produced by an agency of the US government and decreed as legal tender it is widely accepted as money.
In a broader sense, money is largely a social construct or convention. We accept a token has value (whether it is made of metal, paper, polymer, …or even code) because we expect that others will also do so readily and easily.
For something to function as money in a society/economy it needs to possess three main properties (…and perhaps a qualified fourth).
Money is also considered fungible => that is a given unit can be replaced with any other unit and considered completely equal in value and utility.
Probably the most obvious benefit of using money is it largely avoids the whole bartering process (note, this is quite different from haggling ). Let’s say you needed some premium grade coal for your furnace and only had Merino sheep to trade. You would not only need to find someone who had the right kind of coal to sell, but was also willing to trade their coal for your sheep. Generally, that’s a tall order. Money clearly solves this problem => sell the sheep for coin and use coin to buy the coal (… hey, there’s that medium of exchange thing again…).
…Products like cigarettes and soap are appealing because they can perform some of the major functions of money. Since there is a consistent demand and market for them, even when they’re not on store shelves, they retain their value. (Unlike an iPod, they never become obsolete.) Since they have standard sizes, they can also be used as a unit of account. You can pay for a candy bar with a few cigarettes, or pay for an old phone with a few packs of cigarettes *
* (From Why Thieves Steal Soap.)
As of December 2021, the Fed estimates there is roughly $2.2 Trillion of currency in circulation (current total, by denomination). Interestingly, as much is one-half of this circulating currency is estimated to be held abroad (mostly in $100 bills).
The physical currency in circulation is considered a small component of the overall money supply in an economy. Other components include demand deposits, savings deposits, and other highly liquid financial products. Taken together, the total money supply in the US is estimated to be roughly $21.8 Trillion as of the end of 2021 (brake down) => view Commercial Banking to see how banking activities expand the money supply.
In theory, an increasing money supply tends to increase a country’s GDP by making more money available for spending on goods and services. The US’s GDP is currently around $24 Trillion (…or see real GDP (hint: inflation adjusted)). The velocity of money is a measurement of the rate at which money is exchanged in the economy. It is calculated as a ratio of GDP to money supply. The US currently has a money velocity of 1.1, which from above is roughly $24T GDP / $21.8T money supply (yeah, more than you ever wanted to know…).