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How Money Works

Updated: May 16

How money works? That may seem like an easy question to answer, but it’s actually not so simple. The truth is that money doesn’t really exist — it’s simply paper and coins that you can exchange for goods and services in the real world.


This how money works guide will help you understand what money is, how it began, where money comes from, and the future of money. You might even learn something new about money. Let’s get started!

how money works

What is Money

There’s a surprisingly simple definition of what exactly money is. It’s anything that can be easily and readily exchanged for something else.


For example, I have some paperclips in my desk. I could exchange them for a cup of coffee at Starbucks. They aren’t worth as much as that cup of coffee, but they are just as easy to exchange.


Money is anything we can use to easily buy goods and services—it doesn’t need to have value itself, it just needs to be accepted by other people in exchange for something else.



How did money begin?

The history of money is a long and fascinating one. For centuries, people in ancient times traded goods for goods—cattle for wheat, for example.


This led to bartering, which still happens today. Eventually, traders began using gold and silver coins as a way to trade more valuable items. Governments printed paper currency in later years; today most government-issued currency is made of paper or polymer materials like plastic.


In each case, though, it’s clear that many people view money as an item of value itself; it’s not always necessary to have something real on hand when you trade with someone else—so long as they trust that you have something real worth trading in your possession eventually.

what is money book

What are some types of currency

Currencies are what we use to buy and sell things. Most currencies in modern societies are based on fiat money (paper bills or coins) which can be exchanged for valuable resources.


The most common types of fiat currency are dollars, pounds, yen, euros and many others. Each of these fiat currencies can only be traded for goods and services within their jurisdiction (example: Canadian dollars can only be used to buy Canadian goods and services).


Fiat currencies have value because they’re backed by a government who agrees to trade their own currency for something of value (usually gold or silver).


But there are other types of currency out there; they usually fall into two categories: commodity-backed currencies and crypto-currencies.


What controls the supply of money?

The supply of money is controlled by banks, specifically central banks. The Federal Reserve in America and the Bank of England are two examples. Central banks determine how much to print based on economic factors like inflation and unemployment.


They have lots of tools they can use to try to control these factors, but ultimately it’s a pretty inexact science.


The future of money.

The popularity of Bitcoin as a currency is indicative of a much larger trend toward digital payments. Mobile-payment systems, including Apple Pay and Google Wallet, make it easy to transfer money via smartphones; payment apps like Venmo allow users to make person-to-person payments; and even large financial institutions like Bank of America have begun adopting chat bots that answer customer questions with conversational ease.



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