To be concrete, let’s take the US dollar as an example of money. It’s a debt obligation of the Federal Reserve, as the inscription across the top of one of these note indicates.
For comparison’s sake, what about US Treasury notes? They’re debt obligations of the Treasury. If the former is nothing more than an agreed upon convention, then so would be the latter. And so would any number of other securities such as corporate debt, municipal debt, that of foreign sovereigns, etcetera. We can extend that further … if debt obligations aren’t real, then why not equity obligations? Following that reasoning corporate stock isn’t real, and no other security is either.
In each case the security isn’t itself a tangible thing, but represents some kind of obligation of someone else. A form of contract. This distinguishes it from tangible assets like gold and other physical commodities. But if physical tangibility per se were the test of reality, our entire economic system would be a figment of our imaginations. Even if it were, at least an awful lot of people are sharing the same dream. For all practical purposes we can behave as if it’s real.
Are you satisfied that the US dollar is a security … not unlike a stock or a bond? It fluctuates in value just like the others. The only thing that really sets currencies apart in our minds from other securities and obscures their changing value is that we use them themselves as our units of value. We don’t directly notice the change in value because after all, a dollar is always worth a dollar. We only notice that its value fluctuates when we use a third unit, such as another currency, to express its value, or we notice the prices of other things change. If we notice for instance that it takes twice as many dollars as it used to to buy a gallon of gas, a loaf of bread, an ounce of gold, and a share of stock … we surmise that the dollar itself has fallen by half.
Money in general is fantastically useful because it lets us trade with each other without having to barter. If you want a bike and I want a wheelchair, and I have a bike and you have a wheelchair, we can easily trade with each other without it. But if what you want is a bike, I want a washing machine, and a third party wants a wheelchair, it gets complicated. We all have to somehow meet and rotate, and even if we do, the values of our items may not line up exactly. With money, we can all trade without our wants and possessions having to be directly complementary to someone else’s.
If you really want to understand money, I enthusiastically recommend watching the television comedy Raising Hope, Season 4, Episode 2, Burt Bucks. Not only is it heartwarmingly hilarious, but in a half hour it can teach you more about money than a semester of college economics.