Money

What is Money?

Money is considered to be one of the greatest inventions of humanity along with the alphabet and wheel. Its role in a society's life is still very important. As Shakespeare wrote: "Gold makes white out of black and a hero out of a coward". So what is money?

Money is anything used by a society to purchase goods and services or resources. The members of the society receive money for their products or resources; then they either hold that money or use it to purchase other products or resources, when and how they see fit.

Before money was in general use, people traded goods and services for other goods and services. This system of the exchange of goods and services without the use of money is called barter system. For example, one family may raise vegetables and herbs on a plot of land; and another may weave cloth. To obtain food, the family of weavers trades cloth for vegetables, provided that the farming family is in need of cloth.

The trouble with barter is that the two parties in an exchange must need each other's product at the same time, and the two products must be roughly equal in value. It may work well when few products, primarily the necessities of life, are available. But even very primitive societies soon developed some sort of money to eliminate the inconvenience of trading by barter.

Over the years, different groups of people have used all sorts of objects as money -whale's teeth, stones, beads, seashells, salt, furs, tobacco, copper crosses, and such metals as gold and silver. Such items are known as commodity money.

The first coins made of gold and silver appeared in China in the IX century BC.

Alexander the Great (356-323BC) was the first emperor who engraved his image on the coin of his empire. Later almost all the other monarchs followed suit.

The use of paper money began in the early XVII century. Today, the most commonly used objects are metal coins and paper bills, which together are called currency.

Money has been called "the root of all evil." It has also been described as the "lifeblood of commerce." But however you may look upon it, money remains in great demand. Many economists give three main reasons, or demands, for money:

1.  The need for money for payment of wages, rents, debts, and the costs of food,

clothing, and shelter. This type of need is called a transaction demand. The money is needed for transactions of daily life. The transaction demand is the strongest among lower income people. They need almost all their money for the necessities of life. People with higher incomes can set aside part of their income for investments and savings.

2.   The need for money for expenses that may arise in the future. The money is set
aside for a "rainy day," usually in a bank account; it is not usually invested in
ksttgrVtra¹. <m vsky pwjyscte ijnat the. money must be at baud vffeea needed. The
demand for this "rainy day" money is called a precautionary demand. It is held as
a precaution in the event of future needs.

3.    The need for money for investment purposes. People may want to invest money in
business, land, buildings, or antiques. These investments are risky. But people
who invest in them are using their money to earn money. The demand for this
money is called investments demand. There is always a chance of losing money in
such investments. When the demand for money is for very risky projects, it is
called a speculative demand.

The Functions of Money

We have already noted that money aids in the exchange of goods and services for resources. And it does. But that's a rather general way of stating money's function. Let us look at three specific functions of money in any society:

1.      Money Serves as a Medium of Exchange A medium of exchange is anything that is accepted as payment for products and resources. This definition looks very much like the definition of money. And it is meant to, because the primary function of money is to serve as a medium of exchange. The key word here is accepted. As long as the owners of products and resources accept money in an exchange, it is performing this function. Of course, these owners accept it because they know it is acceptable to the owners of other products and resources, which they may wish to purchase. For example, the family in our earlier example can sell their vegetables and use the money to purchase cloth from the weavers. This eliminates the problems associated with the barter system.

2.      Money Serves as a Measure of Value A measure of value is a single standard or "yardstick" that is used to assign values to, and compare the values of, products and resources. Money serves as a measure of value because the prices of all products and resources are stated in terms of money. It is thus the "common denominator" that we use to compare products and decide which we shall buy. Imagine the difficulty you would have in deciding whether you could afford, say, a pair of shoes if it were priced in terms of yards of cloth or pounds of vegetables— especially if your employer happened to pay you in toothbrushes.

3.      Money Represents a Store of Value Money that is received by an individual or firm need not be Јised immediately. It may be held and spent later. Hence money serves as a store of value, or a means for retaining and accumulating wealth. This function of money comes into play whenever we hold on to money—in a pocket, a cookie jar, a savings account, or whatever. Value that is stored as money is affected by fluctuations in the economy. One of the major problems caused by inflation is a loss of stored value: as prices go up in an inflationary period, money loses value. Suppose you can buy a Sony stereo system for $1,000. Then we may say that your $1,000 now has a value equal to the value of that system. But let us suppose that you wait a while and don't buy the stereo immediately. If the price goes up to $1,100 in the meantime because of inflation, you can no longer buy the stereo with your $1,000. Your money has lost value because it is now worth less than the stereo.

Important Characteristics of Money

To be acceptable as a medium of exchange, money must be fairly easy to use, it must be trusted, and it must be capable of performing its functions. Together, these requirements give rise to five essential characteristics:

Divisibility The standard unit of money must be divisible into smaller units to accommodate small purchases as well as large ones. American standard is the dollar, and it is divided into one-hundredths, one-twentieths, one-tenths, one-fourths, and one-halfs through the issuance of coins (pennies, nickels, dimes, quarters, and half-dollars, respectively). These allow people to make purchases of less than a dollar and of odd amounts greater than a dollar.

Portability Money must be small enough and light enough to be carried easily. For this reason, paper currency, is issued in larger denominations— multiples of the standard unit. Five-, ten-, twenty-, fiffy-, and hundred-dollar bills make our money convenient for almost any purchase.

Stability Money should retain its value over time. When it does not (during periods of high inflation), people tend lo lose faith in their money. They may then turn to other means of storing value (such as gold and jewels, works of art, and real estate). In extreme cases, they may use such items as a medium of exchange as well. They may even resort to barter.

Durability The objects that serve as money should be strong enough to last through reasonable usage. No one would appreciate (or use) dollar bills that disintegrated as they were handled or coins that melted in the sun.

Difficulty of Counterfeiting If a nation's currency were easy to counterfeit—that is, to imitate or fake—its citizens would be uneasy about accepting it as payment. Even genuine currency would soon lose its value, because no one would want it. Thus the countries that issue currency do their best to ensure that it is very hard to reproduce.