What is money and what are its uses?

Adam Smith in 'The Wealth of Nations'[1] shows us that the fundamental, true measure of the value of an object is labor-objects which need more labor to make, in general, are worth more than objects which need less labor to make. Allowance must be made for different skills and training involved: an object (or service) of labor of a few hours is sometimes worth more than the object of labor of many days, due to the higher skill and training required in the former.

However, it is inconvenient to talk about objects in terms of their labor content or units of labor they save the buyer; and since most objects are exchanged with one another rather than with labor itself, money becomes a more convenient measure of value.  This is the reason goods (and services) are quoted in money prices; but we must not forget that the true value of goods is measured in labor. You exchange the produce of your labor with the produce of others' labor. You get paid for your labor in money, and you exchange that money with the goods produced by other people's labor, is the real exchange going on in the world. Labor is the true price of all objects; money is their nominal price only.

There are two main uses of money; 1) As a facilitator for buying and selling of goods and services by being a unit to measure their value, e.g. 1 kg of potatoes for 1 Euro, and 2) As a measure of someone's worth, e.g. Maria is worth a million dollars. The use of the same term money to denote these two has caused substantial confusion for humanity, as covered by Adam Smith. However, the primary use of money is the former-a unit of the measure of the value of goods and services.

When considered as a measure of value of goods and services, money may be thought of as similar to the unit of mass, the kilogram (kg) or the unit of length, the meter (m), which from the Système Internationale (SI) units conventions, are standardized units of measuring mass and length.

We must remember that the kilogram and the meter are not absolute measures. When you measure something with a weight scale, it is never a completely accurate reading-because of the calibration errors in the weight scale against the 1 kilogram international prototype in Paris[2], which is the standard unit of mass in the SI convention (i.e. when you buy 1 kg of something, it is never really 1 kg). This error, the difference between the mass and the actual mass if you had the prototype in your hands, is tolerated depending on your applications-if you are measuring something ultra-sensitive, you need a very accurate and calibrated scale; whereas for most goods, an error of let's say 1% is acceptable (the 1 kg of oranges you weighed are really 990 g if the oranges were weighed by the Paris prototype, but you can live with this error.). Furthermore, the prototype of mass in Paris is itself a variable (recent attempts to put them in terms of physical constants notwithstanding)[3] and susceptible to drift over time-what it was a hundred years ago is not what it is today, because of corrosion, loss from use and wear and tear, etc. The point is-that even for a physical unit like the kilogram, there is no absolute measure, but we carry on our lives quite well despite the uncertainties and errors.

However imperfect it may be, money (a dollar or a yuan, for example) is a measure of value just like the kilogram for the mass. Different observers will give a different value for mass, length, etc. for an object depending on the accuracy of the tools they have, or how much experience they have with similar objects; the same is true for value, wherein an object can be assigned different values by different observers.

Value may be considered to be a fundamental property of all objects just like the mass or the length, and we can say:

Object properties: Mass (kg), Length (m), Value (dollars, yuans, etc.), and other properties.

The most common use of money is to measure the value of objects. I came up with a global currency based on this idea of money. It is called the Smith Unit, details here.

Role of the banks and financial system
I have come across a lot of confusion in investment and financial circles on the meaning of money and the role of the banking and financial system.

The primary role of the banking system, who are dealers in money (they buy and sell money, which includes loans in money with interest rates) is to aid the fundamental exchange of goods (and services) with each other. The banking system, supervised by a central bank like the US Federal Reserve, serves as an intermediary between the exchange of goods- for goods normally are exchanged for money, and then that money is used to buy other goods.

The banking system serves the role of a marketplace enabler like eBay or Alibaba is assisting transactions-but does not decide or has any role to play in deciding the value of the objects. Buyers and sellers assign money value to the objects, and eBay assists in promoting a smooth transaction between these parties. eBay can also give out loans to the buyers and charge them an interest for that; but that does not mean that eBay is deciding the value of the objects or the interest rate. The buyer is the ultimate decision maker because she has the right to not buy the object at the first place, because she may not like the price of the object or may not like the interest rate which eBay wants to charge (if she wants to borrow from eBay to pay the seller).

eBay could also come up with its own currency, and call it an eBay unit or "points" as is done by some gaming companies. You could use these points to buy objects on eBay. There's nothing sacred about currencies and money, and once you agree on a system of exchange like using eBay points to buy things on eBay, you can carry on your life perfectly well (after all, you can buy pretty much anything on eBay). How would you get these points to buy objects from eBay? You could assign 20 points for every  US dollar, for example, and that would then aid you in converting all your existing monies into eBay points. An eBay point would be worth US $0.05 in that sense, but would be variable with other currencies (tracking the variation of the US dollar with other currencies). Once you have your eBay account with 10,000 points, no matter what currencies you used to get those points in the first place, all that matters to you is the prices of objects on eBay in these points and how you can use these 10,000 points to buy these objects.  The points take a life of their own, and are the only things which matter for buy/sell transactions on eBay.

What if eBay decides to give points to people for free-or loan points to people who are likely to default (i.e. not give the points back)? Well the whole system depends on eBay being pragmatic in its handing of points, and not doing this. Otherwise the marketplace collapses, and eBay itself goes bankrupt. Therefore, it is in eBay's self-interest to not give away free points, or to give loan in points very carefully, only to people who are unlikely to default. The maximum point loans which eBay can loan out without it itself going bankrupt is limited by the total assets held by eBay.

Understanding the banking and financial system becomes much easier if you realize that they are like the operators of eBay who facilitates transactions but do not decide the value of the transactions or the terms of payment, including the interest rate. More on the role of banks here.