what is money

What is money?

Money is an important component in making the world go round. Modern economies could not function without the exchange of money for goods and services, which is the foundation of economies.

This page fully explains what is money, what it does, how money works and how important it is in modern economies.

 

What is money?

Money is a means serving as a universal equivalent that can be used to express the value of any object, a universal instrument of exchange. Money is a primary component, without which it is impossible to build and develop social relations, and it has its own unique properties and functions.

Money was identified at a certain stage in history and has since evolved depending on the existing economic relations and the needs of society.

Money is also believed to fulfill its purpose only with the participation of people who use the power of money. It is people who can determine the prices of goods, apply for money in the processes of selling and paying, and use it as a means of accumulation. Thus, in theory, any object that performs these functions can be considered money.

Throughout history, mankind has used different kinds of means of payment. The simplest of these were products that were exchanged by their owners for other goods. The emergence of the concept of commodity money is associated with this point in the development of the economic system. In the vernacular of financiers, there are often such terms as fiat, credit, secured, full and half-value money. All of this represents a form of currency that can be used to pay for services, buy products, and repay loans.

The progress of society does not standstill. One era gives way to another, and new means of payment are periodically introduced into economic systems. If you ask a bank what kinds of money exist in our time, the bank officer will tell you about metal, paper, and credit money. They differ not only in the form of production but also in the concentration of value.

In pre-capitalist societies, the role of money was fulfilled by various commodities (animal skins, grain, livestock), gradually it passed to noble metals (gold, silver), the best way to meet the requirements of monetary goods. The increasing complexity of modern payment and settlement relations led to the replacement of metal money by credit money, which took the form of paper money and various entries in bank accounts.

 

Functions of money

In order to better comprehend what is money, it is also important to understand its functions. Modern economic science distinguishes several functions of money:

A measure of value (also referred to as a unit of account)

Different goods are equated and exchanged with each other based on price (exchange ratio, the value of these goods, expressed in a quantity of money). The price of a commodity has the same measuring function as a length in geometry and mass in physics. For measurement, it is not necessary to know in detail the meaning of space or mass, but it is enough to be able to compare the quantity in question with a standard.

 

A unit of money is the standard for commodities. In the context of non-commodity money, the question arises of the use of money as a measure of the value of money itself (the sale of money as a commodity, the exchange of money for money). Several authors think that such a formulation of the question does not make sense. It also depends on the nature of money whether money is a stable measure of value.  Some authors believe that stability is preserved only as long as the mass of goods in value repeatedly exceeds the money. When the commodity-money circulation reaches the level of balance of the commodity and money supply, money loses this function.

The medium of exchange

Money is used as an intermediary in the circulation of goods. For this function, the ease and speed with which money can be exchanged for any other commodity (liquidity indicator) are crucial. When money is used, a commodity maker is able, for example, to sell his goods today and buy raw materials only in a day, a week, a month, etc. At the same time, he can sell his goods in one place and buy them in another. Therefore, money, as a means of exchange, overcomes the limitations of time and space.

Means of payment

Money is used in registering debts and paying them. This function takes on an independent significance for situations of unstable commodity prices. For example, a product was bought on credit. The amount owed is expressed in money, not in the number of goods bought. Subsequent changes in the price of the goods do not affect the amount of the debt which has to be paid in money. Money also fulfills this function in monetary relations with the financial authorities. Money plays a similar role when it is used to express economic indicators.

A means of accumulation

Money, accumulated but not used, makes it possible to transfer purchasing power from the present to the future. The function of a means of accumulation is performed by money that is temporarily not in circulation. Unlike goods, money does not disappear with consumption. However, it must be kept in mind that the purchasing power of money depends on inflation.

World money

Foreign trade relations, international loans, the rendering of services to foreign partners caused the emergence of world money. It functions as a means of payment for all, and a universal materialization of social wealth. Until the 20th century, the role of money in the world was played by precious metals (above all, gold in the form of coins and bullion). Today reserve currencies (at present the US dollar, the Swiss franc, the euro, the British pound, and the Japanese yen) are usually regarded as world money. Other countries' money can also be used for direct international payments. For example, the CLS payment system allows the free conversion of 18 currencies. Any one of them acts as an international means of payment.

Means of forming treasure

If under conditions of natural money, it was necessary to reduce the amount of money in circulation to maintain the balance between the mass of money and commodities, they began to be deposited as treasures. Treasure is different from savings because savings is a form of accumulation of money for a specific purpose; when it reaches the right amount or at the right time, it is spent. Treasure is made without a specific purpose. The main reason for their formation is the inability (or unwillingness) to effectively use the full amount of cash. Treasure begins to be spent when the economy's need for money increases. Under current conditions of symbolic money, the role of treasure in regulating the money supply is insignificant.

 

Types of money

Below are some types of money which will help in understanding what is money:

Commodity money

It is the type of money played by a commodity that has an independent value and utility.  Such goods can be used not only as money: for example, a gold coin can be melted down into a piece of jewelry. Such money is all the commodities that served as equivalents in the initial stages of the development of commodity circulation (cattle, grain, furs, pearls, cowrie shells, etc.), as well as metal money - copper, bronze, silver, gold, platinum full-weight coins.

Fiat money

It is money that has no independent value, or it is disproportionate to its face value. Fiat money has no value but can perform the function of money because the state accepts it as a payment of taxes and declares it legal tender on its territory.

Today the main forms of fiat money are banknotes and bank (non-cash) money. The term "non-cash money" is conditional, since the question is about the settlement of debtors with creditors without the use of cash. During the payment in cash, the owner of money notes uses them directly at his discretion, but during the payment without money, the authorized person makes corresponding claims to the bank, the fulfillment of which does not depend on him. The same applies to the units of the value of electronic non-fiat payment systems (a type of electronic money). With the spread of payment cards and e-money, banknotes are gradually disappearing from circulation.

Credit

Is a future claim on a natural or legal person, a special form of debt, usually in the form of a transferable security, which can be used to buy goods (services) or to pay one's debts. Payment on such debts is usually made within a certain period, although there are variants where payment is made at any time on demand. Loan money carries the risk of default.

 

What is money conclusion

This article concisely explained the concept of “what is money?”. Money has evolved significantly since the days of shells and skins, yet its primary role has remained unchanged. Money, in whatever form it takes, provides a means of exchange for goods and services and permits the economy to flourish by allowing transactions to be performed at faster rates. Therefore, it is important to learn what is money and its functions.

More Money Related Content

what-is-money-laundering-layering

what-is-a-mortgage-and-why-do-you-need-one

hargreaves-lansdown-share-price-review