What is money?
Money is an instrument invented by man to make the exchange of goods and services between people easier. This instrument comes in various forms. Those most used today are coins, bills or electronic data stored in a computer system.
Money stands for an agreement between a giver and receiver - to indicate that the giver owes something valuable to the receiver. As it is regulated by law that everyone has to accept the national money (currency) as means of payment, the receiver can also claim his debt with another person than the giver.
Money as an instrument has some important features. First of all it enables contracts between a large amount of people as money is accepted by all. Every time you pay with money in a shop, you agree with the shopkeeper to fulfill your debt later. The money you hand over is a physical proof of this agreement. Later the shopkeeper can buy something else with your money. You don´t have to fulfill the debt yourself. Money allows the possibility for a transaction without the two parties delivering this product or service to each other at the exact moment.
A second important function of money is the measuring of a certain value. As we express money in certain amounts, we can distinguish with the amount of money we pay how big the debt is we promise to repay at a later moment. The more effort the maker has put into producing a product or service, the bigger the amount in which the debt of the buyer is expressed to make use of the product or service.
The third function of money is the stocking of value. The shopkeeper knows that anybody will accept the money as a proof of your debt. That's why it is not important to him if you really turn your debt into something valuable to him (a product or service), but he treats money as something valuable in itself – even if it is only a piece of paper or metal.
Formerly this 'value stock' was taken more literally as coins were made from rare or precious materials like gold and silver. Money was connected to tangible things everyone accepted as valuable.
Up until this connection (the gold standard) was dropped in the 70's it was put down in law that a banknote gave the owner the right to a certain amount of gold.
Nowadays this connection with precious metals no longer exists. Money is no longer related to something in the physical world, but is completely based on mutual trust: the trust that all agreements based on money will be met. As money no longer has an intrinsic value, this trust has become essential for the whole financial system: everyone has to be able to trust that money represents a real value and that this value will be sustained.
To enhance this trust, it is put down in law that money (in the national currency) has to be accepted as means of payment for the meeting of obligations. That is why we speak of fiduciairy money or 'fiat-money': money that draws its value from legal obligations to accept it as means of payment. This expression is derived from 'fides', Latin for trust, 'fiat' is Latin for 'so let it be'.