When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. It thereby avoids the inefficiencies of a barter system.
Unit of account
A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a “measure” or “standard” of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt. To function as a ‘unit of account’, whatever is being used as money must be:
Divisible into smaller units without loss of value; precious metals can be coined from bars, or melted down into bars again.
Fungible: that is, one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art or real estate are not suitable as money.
A specific weight, or measure, or size to be verifiably countable. For instance, coins are often milled with a reeded edge, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
Store of value
To act as a store of value, a money must be able to be reliably saved, stored, and retrieved – and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time. In that sense, inflation by reducing the value of money, diminishes the ability of the money to function as a store of value.
Standard of deferred payment
While standard of deferred payment is distinguished by some texts, particularly older ones, other texts subsume this under other functions. A standard of deferred payment is an accepted way to settle a debt – a unit in which debts are denominated, and the status of money as legal tender, in those jurisdictions which have this concept, states that it may function for the discharge of debts. When debts are denominated in money, the real value of debts may change due to inflation and deflation, and for sovereign and international debts via debasement and devaluation.
Money supply
In economics, money is a broad term that refers to any financial instrument that can fulfill the functions of money (detailed above). These financial instruments together are collectively referred to as the money supply of an economy. Since the money supply consists of various financial instruments (usually currency, demand deposits and various other types of deposits), the amount of money in an economy is measured by adding together these financial instruments creating a monetary aggregate. Modern monetary theory distinguishes among different types of monetary aggregates, using a categorization system that focuses on the liquidity of the financial instrument used as money.
Market liquidity
Market liquidity describes how easily an item can be traded for another item, or into the common currency within an economy. Money is the most liquid asset because it is universally recognised and accepted as the common currency. In this way, money gives consumers the freedom to trade goods and services easily without having to barter.
Liquid financial instruments are easily tradable and have low transaction costs. There should be no (or minimal) spread between the prices to buy and sell the instrument being used as money.
Money is simply an exchange. Besides allowing money to help you trade and become successful in life, appreciate the impact money has on society and how vulnerable the money supply system really is. There’s a lot of history behind money. Both good and bad, but the fact remains, whatever mankind invents it is never perfect.
People tend to seek money for different reasons, without actually taking the time to know what it really is. Why do people place so much thought and effort in acquiring it? Make no mistake; like anything else money is a serious investment of your precious resources and time that warrants your scrutiny. Otherwise why bother acquiring it at all?
Money is any object that is generally accepted as payment for goods, services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.
Money originated as commodity money, but nearly all contemporary money systems are based on fiat money. Fiat money is without intrinsic use value as a physical commodity, and derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for “all debts, public and private”.
The money supply of a country consists of currency (banknotes and coins) and demand deposits or ‘bank money’ (the balance held in banking accounts and savings accounts). These demand deposits usually account for a much larger part of the money supply than currency. Bank money is intangible and exists only in the form of various bank records. Despite being intangible, bank money still performs the basic functions of money, being generally accepted as a form of payment.
The word money is believed to originate from a temple of Hera, located on Capitoline, one of Rome’s seven hills. In the ancient world Hera was often associated with money. The temple of Juno Moneta at Rome was the place where the mint of Ancient Rome was located. The name Juno may derive from the Etruscan goddess Uni (which means; the one, unique, unit, union, united) and Moneta either from the Latin word monere (remind, warn, or instruct) or the Greek word moneres (alone, unique).
However, did you know that anything can constitute as money in an economic system? Look around and you may spot children using candy as money between themselves, or card collectors trading basic card types for other more exotic versions. Pick up a History book, and you may also read that at one point in ancient China copper knives were traded as currency, whereas for meso-American civilizations coffee beans were highly prized.
Generally speaking, if it’s collected in mass quantities for the sake of trading it anytime and anywhere then chances are that it’s money. Of course, it’s only money if most people you know are willing to buy it!
Who First Discovered Money?
Money historically evolved from bartering. To trace its origins is extremely difficult, but there is historical information leading back to the greek and roman empires. For now its beginnings remain as mysterious similarly as whom first created fire or invented the wheel. In the past, money was generally considered to have the following four main functions, which are summed up in a rhyme;
“Money is a matter of four functions, a medium, a measure, a standard, a store.”
Money functions as a medium of exchange, a unit of account, a standard of deferred payment, and a store of value. However, most modern textbooks now list only three functions, that of medium of exchange, unit of account, and store of value, not considering a standard of deferred payment as a distinguished function, but rather subsuming it in the others.
Given how anything can be money under the right circumstances, there are particular qualities that make certain kinds more attractive than others:
1) Divisibility- Can be easily cut, added, and measured at any fraction to match a certain price.
2) Valuable non-monetary uses- Has special properties that make it useful in the production processes of other items.
3) Durability- Does not easily lose its physical integrity over time.
4) Scarcity- Is not too plentiful nor too rare to acquire from natural resources.
5) Portability- Its storage does not pose a challenge or threat to other forms of wealth, and can be shaped to fit any container.
Having revewied these five major elements, it’s no surprise to understand why gold and silver have been popular monies for thousands of years. Both metals share in all of the ideal traits, and their only major differences are in their rarity and usefulness. Although no longer in common use among citizens of most developed nations, it’s difficult to say whether both currencies are truly dead. Given their history and continued use in some official coins, there’s a good chance that we may see their revival sometime in the future.
Written by marketingpreneur
Writer.
More About Money Articles