Money Runs Modern Day Economies.
Money may make the world go around, as the song says. And most people in the world probably have handled money, many of them on a daily basis. But despite its familiarity, probably few people could tell you exactly what money is, or how it works.
In short, money can be anything that can serve as a:
Perhaps the easiest way to think about the role of money is to consider what would change if we did not have it. If there were no money, we would be reduced to a barter economy. Every item someone wanted to purchase would have to be exchanged for something that person could provide.
For example, a person who specialised in fixing cars and needed to trade for food would have to find a farmer with a broken car. But what if the farmer did not have anything that needed to be fixed? Or what if a farmer could only give the mechanic more eggs than the mechanic could reasonably use?
Having to find specific people to trade with makes it very difficult to specialise. People might starve before they were able to find the right person with whom to barter.
But with money, you don’t need to find a particular person. You just need a market in which to sell your goods or services. In that market, you don’t barter for individual goods. Instead you exchange your goods or services for a common medium of exchange—that is, money.
You can then use that money to buy what you need from others who also accept the same medium of exchange.
To put it a different way, money is something that holds its value over time, can be easily translated into prices, and is widely accepted.
Many different things have been used as money over the years— among them,shells, barley, pepper corns, leather, gold, silver.
At first, the value of money was anchored by its alternative uses, and the fact that there were replacement costs. For example, you could eat barley or use peppercorns to flavour food. The value you place on such consumption provides a floor for the value. Anyone could grow more, but it does take time, so if the barley is eaten the supply of money declines.
On the other hand, many people may want strawberries and be happy to trade for them, but they make poor money because they are perishable. They are difficult to save for use next month, let alone next year, and almost impossible to use in trade with people far away.
There is also the problem of divisibility —not everything of value is easily divided, and standardising each unit is also tricky; for example, the value of a basket of strawberries measured against different items is not easy to establish and keep constant. Not only do strawberries make for bad money, most things do.
But precious metals seemed to serve all three needs: a stable unit of account, a durable store of value, and a convenient medium of exchange. They are hard to obtain. There is a finite supply of them in the world.
They stand up to time well. They are easily divisible into standardised coins and do not lose value when made into smaller units. In short, their durability, limited supply, high replacement cost, and portability made precious metals more attractive as money than other goods.
Until relatively recently, gold and silver were the main currency people used. Gold and silver are heavy, though, and over time, instead of carrying the actual metal around and exchanging it for goods, people found it more convenient to deposit precious metals at banks and buy and sell using a note that claimed ownership of the gold or silver deposits. Anyone who wanted to could go to the bank and get the precious metal that backs the note. Eventually, the paper claim on the precious metal was de linked from the metal. When that link was broken, fiat money was born.
Fiat money is materially worthless, but has value simply because a nation collectively agrees to ascribe a value to it. In short, money works because people believe that it will. As the means of exchange evolved, so did its source—from individuals in barter, to some sort of collective acceptance when money was barley or shells, to governments in more recent times.
…shabab khan’s blog| for Independent