You use it every day, but could you explain what it actually is? Most people can’t — and that’s by design. Understanding what money really is might be the most important financial lesson you never got in school.
What Is Money, Really?
At its core, money is a tool that solves a problem: the double coincidence of wants. Before money existed, you had to find someone who both had what you wanted and wanted what you had. A fisherman who needed shoes had to find a shoemaker who wanted fish — at the exact same time. Money eliminated that friction by acting as a universal middleman.
For thousands of years, societies chose money that had three essential properties: it was a store of value (it held its worth over time), a medium of exchange (people universally accepted it), and a unit of account (you could price everything in it). Gold, silver, and copper coins met all three criteria naturally. Nobody had to pass a law forcing people to use gold — they chose it because it worked.
How Money Changed in 1971
For most of modern history, paper currency was a receipt — a claim on real gold held in a vault. One US dollar meant you could walk into a bank and exchange it for a fixed amount of gold. This system kept governments honest because they couldn’t print more receipts than the gold they held.
That changed on August 15, 1971, when President Nixon ended the gold standard. Overnight, the dollar became fiat currency — money that has value only because the government says so. The word “fiat” literally means “by decree.” Since that day, nothing physical backs the US dollar. Its value rests entirely on trust in the US government and the Federal Reserve’s management of the money supply.
The consequences have been staggering. Since 1971, the dollar has lost over 87% of its purchasing power. A basket of groceries that cost $20 in 1971 costs over $160 today. This isn’t because goods became more valuable — it’s because each dollar became worth less as trillions of new ones were created from thin air.
Sound Money vs. Fiat Money
Austrian economists draw a sharp line between sound money and fiat money. Sound money — like gold or Bitcoin — has a limited supply that no single authority controls. Fiat money can be printed in unlimited quantities by central banks, which consistently choose to expand the money supply to fund government spending and manage economic cycles.
This isn’t conspiracy theory — it’s documented policy. The Federal Reserve’s own data shows the M2 money supply grew from $900 billion in 1971 to over $21 trillion by 2024. Every new dollar created dilutes the value of every existing dollar. This is the hidden tax called inflation, and it hits hardest on savers, retirees, and workers whose wages don’t keep pace.
Why Bitcoin Enters the Conversation
Bitcoin was designed as a direct response to the fiat money problem. It has a hard cap of 21 million coins — ever. No central bank, no government, no CEO can change that number. New bitcoin enters circulation through mining on a predetermined schedule that cuts in half roughly every four years (an event called the halving). This makes Bitcoin the first monetary asset in history with a supply that is mathematically guaranteed to be scarce.
Does that make it money? It passes the test: Bitcoin functions as a store of value (it has outperformed every other asset class over any 4+ year period since its creation), a medium of exchange (you can send it anywhere in the world in minutes), and a unit of account (goods and services are increasingly priced in satoshis). Whether you use it today or plan for retirement with it, understanding what money is is the first step to understanding why the system is changing.
Go Deeper
This is a topic worth spending time on. Here are some of the best video explanations we’ve found — each one covers a different angle of what money is, how it works, and why it matters for your financial future:
- What is Money? — A clear breakdown of money’s core function and why it matters.
- The Problem With Money — How modern money creates systemic issues most people don’t see.
- Hard Money Explained — Why scarcity matters and what separates hard money from fiat.
- Economics in One Lesson — Foundational economic thinking applied to money and policy.
- What Gives Money Value? — Trust, scarcity, and the forces behind monetary value.
- What Gives Bitcoin Value? — Applying the same question to the world’s first decentralized money.
- The Hidden Cost of Money — How inflation silently transfers wealth from savers to borrowers.
- Why Gold? Why Bitcoin? — A side-by-side comparison of humanity’s two hardest moneys.
- Sound Money and Austrian Economics — The philosophical roots of honest money.
Ready to see what sound money means for your retirement? Try the Bitcoin Retirement Calculator and explore what happens when your savings are denominated in a currency that can’t be printed. For more on why the dollar keeps losing value, check out Your Dollar is Shrinking — our visual breakdown of purchasing power since 1971.