Something works well as money when it is durable, portable, divisible, uniform, limited in supply and widely accepted. Gold and silver scored well on many of these, which is one reason they were used for thousands of years. Paper money is portable and divisible, but it only works when people trust the issuer.

In the United States today, money comes in two main forms. Currency means physical coins and paper bills. Bank deposits are balances in checking and savings accounts. Measures of the money supply, such as M2, show that deposits are far larger than currency.

Federal law makes U.S. coins and currency, including Federal Reserve notes, legal tender for debts. However, the dollar is not backed by gold today. Instead, its value depends on trust in the U.S. economy and on the Federal Reserve’s efforts to keep prices stable. When inflation is high, money loses purchasing power, so it becomes a weaker store of value.

Finally, note an important difference: money is not the same as credit. Credit is a promise to pay later. When you swipe a credit card, you are borrowing from the card issuer, and you still owe that money.