What is money?
Money is a medium for exchange, used to buy or sell goods or services. It can be anything that helps us exchange something for something that we want to buy, such as a commodity or a piece of paper that has been approved by the government.
Understand the basics of Money.
Money can be anything, a cup of grains, an animal or any service, or a paper with a sign that we can use to buy some goods or services we want. In ancient times people exchanged Goods on behalf of other goods that’s called the barter system. If I want a cup of grain and I have a hen, I have to find a person who has grains and wants to buy a hen so we both exchange our things.
But in this barter system, people were facing multiple issues like double coincidence of wants that were hard to find. Another problem in the barter system is the transaction cost of exchange, for exchanging goods people have to put in very high effort and time.
The introduction of money helped people to do transactions easily with the help of an intermediary goods called a common medium of exchange. Initially, people used agricultural goods and cattle as a common medium of exchange (money).
In later times rulers or kings introduced some metal currencies called coins as a medium of exchange and that became easier to carry and maintain for the longer term.
During the Song Dynasty in China (AD 960-1279) first known paper currency was launched in the world. Paper currency is easier to carry and transferable in comparison to coins and with paper currency different values of money are introduced.
What are the properties of currency?
Durable
Money should be durable to maintain its useful value for a longer period because the same piece of money can be exchanged many times in a shorter period. If money degrades in a shorter time and with fewer transactions, it becomes less useful and incurs a larger transaction cost.
Fungible
Fungible means money has the same value to exchange the goods like with coins of a particular weight and purity like gold or silver coins that value can be understandable and can be exchanged for anything valuable as same as the coin. In the barter system, the concept of fungible is worthless because, with the double coincidence of wants, the same value of both exchange goods is rarely possible.
Portable
Money should be easy to transfer as we can easily carry some coins and lots of currency for the shorter or longer journey but we can’t take our cow for a longer journey to exchange, let’s imagine you are on a Europe trip and you are carrying 100kg of grains to exchange for goods and services.
Easy to Divide
Money should be in different types of tender small to large for easy transactions because we can’t use small coins for every big transaction and neither can give larger currency for chocolate.
Recognizable
We always say money can be anything but at least it has something to recognize as money. In current times it’s easy to recognize money due to government signs or some protocols but in ancient times people easily copied the coins issued by their rulers or Kings.
Stability
The value of money should be stable, which means if the value of a coin is $5 then it must be $5 after many years or after many transactions. But in ancient times if we used our cow for a transaction, during the time the value of the cow would decrease which caused instability in the market and we never calculated our wealth.
What are the uses of money?
Money is used as a medium of exchange but apart from the medium of exchange money is used for various purposes. Like,
Unit of account
Money is used in exchange for goods and services which means we can use money to evaluate the value of particular goods and services too, like car A is worth $100 and that cow is cost for $4.
Store of value
Money can be used as a store of wealth to spend in the future, like we can save currency or we can buy land to store the value and in the future, we can use that value for other transactions too.
Deferred payment
A proper system of money helps us in future payment like we can borrow an amount from someone in exchange for a promise of payback them with predetermined returns. Like we can commit someone to pay some particular amount after completion of a project.
Type of Money
Commodity Money
Commodity money is a type of money that has its materialistic value like precious metal coins or a bag of grains which is still used in exchange in undeveloped economies and has its own value apart from the exchange value.
Fiat Money
Fiat money is a type of money that doesn’t have its materialistic value. It is just accounts as value because they are backed by government authorities.
Fiduciary money
Fiduciary money is a type of document or paper that is backed by an institution or government to commit future payments.