Money Makes the World Go Round

It is common knowledge that money rules the world. People buy essential commodities with money. All values in the economic system are measured in terms of money. Our goods and services are sold for money and that money is in its turn exchanged for other goods and services.

However this has not always been true. In primitive societies a system of barter was used. Barter is a system of direct exchange of goods. But it was a very unsatisfactory system because people’s precise interests rarely coincide. People needed a more practical system of exchange. Various money systems developed based on goods which the members of a society recognized as having value.

Examples of early forms of money are the following rice (China), dog’s teeth (Papua New Guinea), small tools (China), quartz pebbles (Ghana), gambling counters (Hong Kong), shells (India), metal disks (first forms of money, Tibet),and quite a number of others. Gold and silver were once the most common forms of money. However, today money consists mainly of paper bills, coins made of various metals, and checking account deposits.

What is money? Money is anything that is generally accepted by people in exchange for the things they sell or the work they do. Each country has its own basic unit of money. The money in use in a country is called currency. The quantity of money in the economy is central to determine the state of that economy. It affects the level of prices, the rate of economic growth and the level of employment.

Money, in general, has three main uses. The first, and most important is a medium of exchange, or a transaction medium, — that is, something people will accept as a means of payment in the exchange of goods or services, in repaying debts, etc. Without a medium of exchange people would have to trade their goods or services directly for other goods or services. A modern, industrialized country could never function without a medium of exchange.

The second use of money is that it serves as a unit of account. A unit of account is a yard stick for measuring prices and values and a benchmark for comparing them. People state the price of goods and services in terms of money. People use money to specify price, just as they use hours to express time and miles or kilometers to measure distance.

The third use of money is as a store of value. People can save money and then use it to make purchases in the future. Money is both a temporary and permanent store of purchasing power. But modern money has some very serious disadvantages as a means of storing up purchasing power permanently. In the old times, when money was in the form of gold and silver coins, the metal in each was really worth the amount stamped on the coin. But the paper in modern paper money and the metal in most modern coins are worth very much less than the amount stamped on them. As a result, the purchasing power of modern money can change very greatly in a short time. Since money’s real purchasing power is eroded by inflation, there are certainly better ways to store value. Other stores of value include gold, jewels, paintings, real estate, stocks and bonds.

To be convenient, however, money should have several qualities. It should come in pieces of standard value so that it does not have to be weighed or measured every time it is used. It should be easy to carry so that people can carry enough money to buy what they need. Finally, it should divide into units so that people can make small purchases and receive change. So, modern money has the following main characteristic features.

Portability. Modern currency is lightweight and easy to carry.

Divisibility. Today’s money is easy divisible into smaller parts with a fixed value for each unit.

Durability. Modern currency doesn’t spoil. If it wears out, it can be replaced with new coins and paper money.

Stability. While the value of the paper money we use today has been certainly fluctuating over the years, it’s considerably more stable than any other commodity.

The most important types of money are commodity money, fiat money and credit money. The value of commodity money is about equal to the value of the material contained in it. The principal materials used for this type of money have been gold, silver, and copper. Fiat money is paper money the value of which is fixed by government. Most minor coins in circulation are also a form of fiat money. Credit money are documents with promises by the issuer to pay an equivalent value in the standard monetary metal.

In addition to the banknotes and coins in circulation, cashless means of payment were introduced. These include cheques, transfer orders, bank cards and credit cards, which have become more and more popular in recent years. The progress made in computer technology has led to new forms of cashless payments. All these forms of money (i. e. cashless payment) can be called deposit or giro money.