Definitions of Money
It is a medium of exchange, i.e., people use it to exchange what they want.
What Are The Definitions of Money?
Every commodity in this world holds value, utility, or worth. This value and worth determines how prestigious, costly or cheap it suits the masses. This determination will also help the general public understand the worth of goods, services, or commodities they should exchange to acquire the desired item.
Before the advent of "money," people used to trade goods in exchange, commonly known as the "Barter System." It was introduced as a medium of exchange in The Civilization Of Mesopotamia, dating back to 6000 BC. And ended in the 18th century.
What is this money? It is a medium of exchange; people use it to exchange what they want. For individuals, it is an asset. When people work, they create value. Therefore, it is given to people as an asset, as a reward for creating value.
People then use it to exchange services or goods for other people. Markets treat it as a medium of exchange for goods or services. As a result, it makes people's lives more efficient and straightforward.
People no longer need to earn their necessities; they need to exchange them for the value they create. Everyone's quality of life is better as a result. As a result, the frequency of transactions in the market will increase, and the efficiency of market transactions will increase.
Nowadays, most countries in the world will adopt credit money. Take state credit as a guarantee. Create their national currency and allow their citizens to use that currency for transactions. The appearance of it is a product produced with the progress of the economic system.
There is no substitute for its importance. Therefore, this article will explain the function and development of money in detail.
Functions of Money
Economists define three functions: a medium of exchange, a store of value, and a unit of account. Anything that satisfies these three points can be called money. Cigarettes, for example, were used as currency in World War II PoW camps.
Since cigarettes were considered a commodity of considerable value, so everyone started accepting those cigarettes as a valuable commodity and of a suitable size for exchange. And when cigarettes are a quantity of one or two, they have the property of a unit of account.
Cigarettes now took on the character of the currency. Cigarettes were then used as currency by prisoners of war.
1. Medium of exchange
One of the essential properties is the medium of exchange. Both parties must accept it before it can be circulated. People can exchange it for goods or services.
Before the advent of money, people would use the way of barter to exchange, but now with its origin, people will use their goods or services to obtain cash and then use it to exchange for the goods they want.
Take a hunter and a farmer, for example. Hunters live by hunting and hunting for meat in exchange for food that farmers grow. But the farmer is a vegetarian. He does not want meat. Instead, he wants fruits from the farmer.
The hunter cannot then exchange the meat he gets for food. But if they all agree on the value of money, hunters can trade their meat for it, which can be used to buy grain, and farmers can use this money to buy fruit from fruit growers.
Because people recognize the value of their currency, they no longer need to take an inconvenient item and trade it directly. Instead, cash will exist as a portable and quickly transacted medium.
2. Unit of Account
It quantifies the value of different things, making it easier for people to transact. It is a form that sets the price of distinct goods or services and converts the value of goods into different amounts of cash.
This way is more conducive to people's value measurement and value exchange. For example, if one thinks that a pound of beef is worth two apples, one apple is worth two eggs. So what if he wants to trade his five eggs for a pound of meat?
If only in the form of barter, then both the calculation and the exchange process are very tedious. But the power of money is that it quantifies these things directly. So people set up different amounts for these goods, also known as the price of goods.
People can then exchange different amounts for different goods or services. This way also facilitates people's economic activities.
3. Store of value
Since it is supposed to help people transact, it must have some store of value. Therefore, it needs to maintain value for people to recognize its necessity.
For example, a fruit farmer plants some fruit, but the fruit will rot with time, but when people trade, the fruit becomes money. Then people can store the value of their labor for a long time without worrying that the fruit will lose its original value when it rots.
Of course, it may not be the best store of value in the modern world because it may depreciate over time. However, gold may be a better bet as a pure store of value because it is less volatile.
But, it is a medium of exchange that more people accept. So people can exchange it for things they need more quickly, and people will be more suitable to use it as a short-term store of value.
Development of money
It is something that everyone is very familiar with. Modern people need it to live, buy things and enjoy services. Therefore, the existence of money constitutes the current economic trading system.
Today's currency is paper, and each piece of paper is light and easy to carry. But it has a long history. Throughout its history, the state of money has permanently changed.
In primitive society, before the creation of money, people needed to exchange goods in the form of barter. Hunters, for example, may trade skins for fruit. A transaction can be made when both parties need something from the other.
But this approach is subject to the demands of both sides of the exchange. Moreover, the transaction is complex if one of the two parties does not need the other's goods. So as society developed, the first currencies began to appear.
Modern historians believe the first form appeared in China about 4,000 years ago. The earliest form of currency in China was a seashell. Shellfish are generally about 2.2 cm long and 1.6 cm wide.
These seashells are a kind of shellfish growing in shallow tropical and subtropical sea areas, and they look small and exquisite, solid and durable. Ancient people could use these shellfish to count and trade.
Shellfish became the currency of the people of that time. People recognized this form, so shellfish were given the property of money. These currencies were used to conduct transactions between tribes and between families. As a result, people no longer need to barter.
In the late Shang Dynasty of China, with the progress of smelting technology and economic development. The demand for it is also increasing. At this time, the number of shellfish has been unable to meet people's trading needs.
People began to use metals as currency. The coins were based on shellfish. They were made of bronze. It was the world's first metal currency. Because it is created artificially, people can control its weight and size.
And make sure they are similar in size and weight. This is because real seashells can not match the advantage. Metal currency was similar to modern coins.
They are easy to store and trade. In ancient times, when people went shopping, they would carry this metal currency with them for transactions. Different metal currencies exist worldwide, such as China's qin coin, Charlemagne's silver penny, etc.
But the currency has its drawbacks. This currency is not suitable for considerable distances. Since it is metal, carrying it in large quantities makes it very heavy and inconvenient. But as the range of transactions increased, people needed a more convenient currency when traveling or living far away.
Paper money was invented around this time. The earliest paper currency is called "jiaozi." In China's Song Dynasty, merchants invented jiaozi to conduct more convenient transactions when they were out. This is essentially a certificate of deposit.
There are many folk jiaozi deposits. The essence was something like today's banks. The depositor delivers his cash to the deposit office, which issues a certificate of deposit. People can use these certificates of deposit to trade directly.
Recipients of certificates of deposit can withdraw the currency at local deposit offices. But, of course, each time, these deposits will charge a certain fee as storage fees. But this is trivial for business people who need to make significant transactions.
This form was soon promoted, and people began to use this jiaozi to facilitate trading. This was the original paper currency. Although the notes themselves have no value, the credit of the depository is good, so they give value to the notes.
Today, every country in the world issues its paper currency. The notes are made of cotton, linen, and plastic. Every country is different. Most fiat currency today is backed by government credit. They can be used in the country of issue.
With the development of technology, people want more convenient payment methods. CBDC (central bank digital currency) could be a future form of money.
It is a digital currency, but it is issued and managed by central banks, unlike bitcoin and other digital currencies. And it would not use blockchain technology.
Compared with traditional online payment methods, its transactions do not need to rely on the bank and can directly realize real-time remittances and accounts. In addition, transactions can be made without an Internet connection.
In the fight against financial crime, digital currency could track monetary units and keep people's money and property safe. But for now, for most countries, such a currency is still in the planning stages.
China has begun issuing a central bank digital currency, E-CNY, with public pilot tests starting in 2021. However, digital currency is still developing rapidly, and it may be that in the future, people will no longer need to carry any cash and only need an electronic device to complete all payments.
Conclusion
The importance of money to human economic activities is fundamental and elemental. Without it, people could only live in a barter economy, where people could only barter for something, and both sides had to satisfy the condition that they needed each other's goods.
Such transactions greatly restrict the circulation of goods. People cannot buy what they want whenever they want. But we no longer had to barter with sellers when the currency was invented.
People can trade unrestrictedly in a free market without finding a specific person to exchange goods with. This makes it easier for people to do business. In addition, it increases the size of the market. As a result, demand is easier to meet.
Money has helped human development and has been with us ever since.
It has experienced thousands of years of development since ancient times, from the ancient shell to the later metal money, then to the present paper currency; the future digital currency will also be promoted.
Its currency changes all the time. But what does not change is its nature. The medium of exchange, unit of account, and store of value, has always been essential attributes of money for humans.
To understand its history is to understand the economic history of humankind. The different forms at other times also represent the economic conditions.
It will always accompany our future economic activities, no matter what changes take place in its form.
Researched and authored by Lay Shang | Linkedin
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