What exactly is money, and how does it get its value? The concept is simple enough, but there’s a lot of confusion surrounding it. Money is any good that is generally accepted as payment. Currency, by contrast, is a specific medium of exchange (US Dollars, Japanese Yen, Ithaca Hours, Beenz, etc.), created specifically for use as money. However, just because a currency is intended to be used as money doesn’t automatically make it so. If people don’t value a currency enough to accept it as payment, it isn’t really money. So how does money come to be valued in the first place?
Commodity money is the simplest and earliest answer to this value problem. Commodities such as gold, salt, cigarettes, and barley have at times seen widespread use as direct forms of payment. Since the commodities themselves are already valued, the payee doesn’t have to worry about whether they’ll be accepted as payment by others. Closely related is representative money, which consists of tokens (coupons, certificates, etc.) that can be redeemed for a fixed quantity of the commodity that the token represents.
Fiat money is what we typically use today. Currencies issued by national governments are fiat currencies. They are usually not intrinsically valuable or redeemable for valuable commodities. What makes a fiat currency valuable is that the issuing government accepts (and typically requires) it for payment of taxes. This generates enough demand to keep the currency viable as money.
There have been numerous attempts to introduce local currencies and promote their use as money, with varying degrees of success. Some of them are or were localized versions of fiat currency (backed by local governments) or representative currency (such as company scrip). Most lack any backing at all. This is the case for Time Banks, LETS, and currencies styled after Ithaca Hours. To the extent that these currencies are successful, they achieve their value from local enthusiasm, as well as from the donations and activist labor which maintain the project and provide free advertising for participating businesses.
While it is possible to use AEIOU to create unbacked currencies (or even fiat currencies, assuming there’s some sort of government backing), its design is centered around creating (representative) commodity currencies.
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