We all use money day in and day out, whether that money comes in the form of cash, credit, a check, or an app on your smartphone. No matter what currency, all money has one thing in common: it must be divisible.
To say that money is divisible means that a government produces money in units that you can break down into smaller amounts. Variable units of money allow for the exchange of goods or services to facilitate equal transactions. For example, in the U.S., Federal Reserve Notes range from $1 to $100 and coins from 1 cent to 99 cents.
Before money existed, people used whatever they had on hand to barter in exchange for goods and services. Today, divisible money alleviates the need for bartering. Read on to learn more about what divisibility means and how it serves our economic system.
What Makes Money Divisible?
Before forms of money as we know it today existed, bartering was the simplest form of economic interaction whereby you could trade something you had for something you wanted.
Imagine you are on vacation in a foreign country with the wrong currency and no usable or valuable money. You see a beautiful painting for sale, but you have nothing monetary to offer. You do, however, have a solid gold ring that you no longer want.
After speaking to the seller, he agrees to give you the painting in exchange for your ring. That, in its most basic form, we call bartering — the exchange of goods or services for a different good or service without the use of money (source).
But there are some problems with bartering. First, both parties need to agree, which is often not the case. And, one item must be equal or nearly equal in value to the other for the exchange to occur.
In our complex, modern economic system, bartering is not at all ideal. If you think about each time you go to the grocery store to buy food, you’d need to barter in equal amounts for each item you need. Determining the value of a single apple becomes entirely subjective.
Thus, money plays a significant role in obtaining and exchanging goods and services equally and fairly.
What Is Divisibility?
Divisibility means that, in order to facilitate transactions, you can divide the money you have into smaller quantities to match the price of the good or service you wish to obtain (source).
In other words, with bartering, you must exchange one item for another. In contrast, using money allows you to offer a larger sum and subsequently receive a smaller sum in return if the value of the product you want is less than the amount of money you provide to the seller.
Money, then, is divisible into small increments so you can more precisely match the value of the commodity you want. This is why divisibility is crucial in a complex economic environment.
The divisibility of money is one of the essential characteristics of money. Other characteristics include durability, transportability, and “non-counterfeitability,” among others. We’ll briefly go over these broader characteristics of money later in the article. But first, we will focus exclusively on divisibility.
Why Is Money Described as Divisible?
Economists describe money as divisible because you can break it down into smaller sums. For example, in the United States, there are seven denominations of Federal Reserve Notes and six denominations of coins.
The table below reflects the variable denominations of money that are in circulation and that we use today.
|Paper Money (Notes)
|1 cent (penny)
|5 cents (nickel)
|10 cents (dime)
|25 cents (quarter)
|50 cents (half-dollar)
At one point, the U.S. also issued larger bills in denominations up to 5 and 10 thousand dollars, but that is no longer the case.
Additionally, you’ll rarely see or use a $2 bill or a 50-cent or $1 coin, though they still may be in circulation. Regardless, if you obtain these denominations, they are redeemable at full face value (source).
If you look at the numbers above and understand basic division, you’ll notice that these numbers are easily divisible. For instance, you can break a $20 bill down into two $10 bills or four $5 bills. You can do the same with change — you can break down a quarter into two dimes and one nickel.
Additionally, one aspect pertaining to the divisibility of money is that it is uniform in nature. Hence, a $20 bill does not change worth — it’s the same size, shape, and value regardless of when or how you obtain it. The uniformity of money also allows for an equal exchange system in a way that bartering cannot (source).
Examples of Divisibility
Remember that the idea of divisibility means that you can purchase goods of varying values without resulting in an unequal exchange.
That means that the smaller the division, the better. In this way, your choice to purchase a car is as simple (mathematically, at least) as purchasing a pack of gum. The only difference is the value of the commodity.
Because the lowest incremental amount of both paper money and other credit or bank account balances is one penny, you can, in essence, sufficiently divide the money you have so that it accurately matches nearly every good or service in existence.
If the denominations of money that we use stopped at the $5 or $10 bill, for example, purchasing something small, such as a bag of M&Ms, would be increasingly difficult as the value of a bag of candy is sufficiently less than the dollar amount you would offer in exchange.
To continue with our example of purchasing a bag of candy, let’s imagine for a moment that you stopped at the local coffee shop and wanted to purchase a coffee and a bag of candy.
The coffee will cost you $3, and the bag of candy $1. So if you pay with a $20 bill, you will receive $16 in return. In essence, this is the characteristic of divisibility.
|Amount You Will Receive in Return
One Bag of Candy
-One $20 bill
-One $10 bill
-One $5 bill
-One $1 bill
What Does Divisibility Mean in Economics?
In terms of math and money, divisibility focuses on denominations of money that you can break down into smaller increments and variable amounts. If you are taking a math class, you’ll learn a lot about divisibility with whole numbers.
If you’d like to understand more about similar mathematical concepts and numbers, take a look at “Is 0 an Irrational or Rational Number?”
In economics, one reason that divisibility is so important for the exchange of goods and services is that uniform currency allows for use in a broad economy. And, the value of the increments of money you obtain remains the same, regardless of how you divide money into different denominations.
In other words, if you have a $10 bill and your friend has two $5 bills, the value that each of you holds is the same. The latter is simply a smaller denomination, but both of you have $10 that you can use to purchase a good or service.
Money is not the only currency we can and have utilized in our modern economy. Gold is one example of a form of currency that works well with some characteristics of paper money, but not all.
It is indeed divisible, but not easily. While it is rare, hard to find, hard to produce, and nearly impossible to counterfeit, it is a soft metal that is not so easily physically divided or obtained by most people.
Remember, too, that before gold, you could have used any number of other items as “money.” The problem, as we’ve discussed earlier, is that an equal exchange can be challenging.
Sure, you can technically divide most goods, but the utility would make the exchange senseless after that division. For example, you cannot separate your bike into two pieces and still use it, even if what you want in exchange is worth only half of your bicycle.
The Divisibility of Digital Currency
There will likely be other iterations of money, especially as digital currency becomes more widely accepted. More recently, bitcoin came into play as the first usable, fully digital currency.
There are certainly growing advantages to bitcoin. For example, it is divisible down to 100 million pieces called “satoshis” (source). But, unlike paper money, its value changes and fluctuates with the market, making it both unstable and unviable.
Imagine that on Monday, your $10 bill could buy you a sandwich at your local sandwich shop. But on Tuesday, the value of your $10 bill dropped, and now you can only purchase a pack of gum. That would be both frustrating and make you wary of purchasing anything at all.
So, while bitcoin, like Federal Reserve Notes, does retain one essential characteristic of money, divisibility, it does not meet all of the others. Next, we’ll take a quick look at the broader concept of why money functions well in a complex economy, meeting each of the requisite characteristics.
For more on currency, read “Specie or Species: Why Specie Is Not the Singular Form of Species.”
Properties of Money in a Complex Economy
We’ve already mentioned the main characteristics of money, including durability, divisibility, portability (or transportability), and “non-counterfeitability.” However, there are a few other characteristics in addition to these that make money efficient as an exchange system.
These include uniformity, which we’ve also touched on, limited supply or scarcity, and acceptability.
Durability of Money
Because there are billions of cash transactions in the United States per year, the currency we use must be durable. To be durable simply means that money must have the ability to withstand wear and tear or damage.
While the paper money we use is at risk of ruin, the specifically designed texture is more durable than regular paper. It is 75% cotton and 25 % linen, and this combination makes counterfeiting a lot more challenging.
Additionally, should you end up with paper money that you’ve inadvertently torn in half, you can redeem it with the U.S. government through a program called the Mutilated Coin Redemption Program (source).
Portability or Transportability of Money
The idea of portability is fairly simple — the size and weight of money matter when it comes to movement. You can easily carry cash and change in your pocket, of course, as well as credit cards and checks.
Prior to the advent of electronic transactions, Federal Banks used very large bills for exchanges, as high as $100,000. Those bills, however, were not circulated publicly, and, today, we use bills only as large as $100. The limited denomination of money makes it freely usable and portable.
“Non-counterfeitablity” of Money
To say that you cannot create counterfeit money would be false. Of course, it is possible to “print” fake money, but it is exceedingly rare and certainly not as easy as one would think. Part of the role of the government is to restrict and regulate the quantity of money in circulation, which sustains the value of the money we use.
There are also ways to identify counterfeit money with images on coins, specifically formulated ink and paper, and high levels of security around the production of money. Today, U.S. paper money has watermarks, microscopic printing, and magnetic strips to aid in preventing counterfeit money circulation.
Uniformity of Money
We’ve already talked a little bit about uniformity, but it is an important characteristic. As we’ve previously said, all $10 bills (and other notes) retain the same value. They are the same size and shape, too. The face value will never change, regardless of the design itself.
This is drastically different from a bartering system — all cows are clearly not the same size, for example. The uniformity of money alleviates this problem.
Limited Supply or Scarcity of Money
Ensuring a limited supply of money further prevents counterfeit money production and helps sustain the value of money over time. If you could create or print money or have as much as you want at any given moment, the value would inherently diminish.
For money to hold onto its value, it must be scarce, which is why the government regulates the amount of printed money in circulation to sustain an effective economic exchange system.
Acceptability of Money
The last characteristic of money is acceptability. This aspect is somewhat self-explanatory, but more specifically, it means that the government has ensured that money will always be a legally acceptable form of payment. This article was written for strategiesforparents.com.
If you owe someone a debt, you can use money to pay that debt, and your money is acceptable in various forms.
Divisibility is a key characteristic of money and allows you to break down denominations of money into smaller amounts to take part in equal, fair exchanges of goods and services. But divisibility is not the only essential characteristic — other characteristics are just as crucial in sustaining a complex economic system.
Nonetheless, the divisibility of money is an important factor in understanding how we exchange goods and services in a modern economy without the need for bartering or unfair exchange systems.