topic / Money

Money

Almost every society now has a money economy based on coins and paper notes of one kind or another. But this has not always been true. In primitive societies a system of barter was used. Barter was a system of direct exchange of goods. Somebody could swap a sheep, for example, for anything in the market-place that they considered to be of equal value. Barter, however, was a very unsatisfactory and wasteful system because people's needs seldom coincided. People needed a more practical system of exchange. Various money systems developed based on goods which, as people thought, had value. Cattle, grain, teeth, shells, feathers, skulls, salt, elephant tusks and tobacco have all been used as money. But precious metals took over because, when they were made into coins, they were portable, durable, recognizable and divisible into larger and smaller units of value.

A coin is a piece of metal, usually disc-shaped, which bears lettering, designs or numbers showing its value. Until the 18^th-19^th centuries coins were given monetary worth based on the exact amount of metal they contained in them. Nowadays the governments choose the face value to give to coins. Coins have been made of gold, silver, copper, aluminum, nickel, lead, zinc and in China even from pressed tea leaves.

Paper money is easier to handle and much more convenient in the modern world. But credit cards, cheques, banker's cards are increasingly replacing paper money and no wonder that in several years paper currency will no longer be used.

Money has 4 functions: a medium of exchange or means of payment, a unit of account, a store of value and a standard of deferred payment.

Money as the medium of exchange is used in one half of almost all exchange. Workers exchange labour for money, people buy or sell goods in exchange for money as well. People do not accept money to consume it directly but because it can be used to buy things, they wish to consume. Serving as a medium of exchange has for centuries been an essential function of money.

The unit of account is the unit in which prices are quoted and accounts are kept. In Britain, for example, prices are quoted in pounds sterling, in the USA in dollars, in Russia in rubles. It is usually convenient to measure the medium of exchange as well as to quote prices and keep accounts in. But the higher is the inflation rate, the greater is the probability of introducing a temporary unit of account alongside the existing units for measuring medium of exchange.

Money is a store of value, because it can be used to make purchases in future. For money to be accepted in exchange, it has to be a store of value. Besides money, houses, stamp collections, interest-bearing bank accounts serve as stores of value.

Money serves as a standard of deferred payment. When money is borrowed, the amount to be repaid next year is measured in units of national currency (pounds of sterling for the UK, rubles for Russia).

Thus, the key feature of money is its use as a medium of exchange. For money to be used successfully as a means of exchange, it must be a store of value as well. And it is usually convenient to make money the unit of account and standard of deferred payment.

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Answer the questions.

1. What is the difference between barter and money based economies?

2. Why was barter system unsatisfactory and wasteful?

3. Why did precious metals replace other goods used as money?

4. How coins are given monetary worth nowadays?

5. What are the main functions of money?

6. How important is the function of money as a medium of exchange?

7. When can a temporary unit of account be introduced?

8. Is money the only good that can serve as a store of value?

9. What measures can a seller take if money does not fulfill its function as a store of value properly?

10. When is money used as a standard of deferred payment?