What Is Money ?

According to Wikipedia:

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context.

So first of all, money is something that people agree on to call it money. Money doesn’t exist without general acceptance. If I were to take an oak leaf and declare it to be money, I would need the majority of people to agree with my statement. If a vast majority agrees then it becomes money and if they don’t, well then it’s just an oak leaf.

But why was money invented ?

Money is a mean of exchange. It enables commerce or trade which is — still according to Wikipedia :

The transfer of goods or services from one person or entity to another, often in exchange for money. A network that allows trade is called a market.

In ancient times, people would barter which means that they would exchange goods and services for other goods and services. However, the use of money emerge thousands of years BCE.

Depending on the society people would live in, different thing would be regarded as money such as cattle. The more cattle you would own, the richer you would be.

What are the different types of money ?

Across centuries, different types of money have sometimes been used at the same times.

Commodity money

“ [It is] money whose value comes from a commodity of which it is made [and] consists of objects that have value in themselves as well as value in their use as money ”.

Gold, silver, decorated shells, cocoa beans, cigarettes — they were used a lot in prison before being banned — are all examples of commodity money.

Representative money

[It] is any medium of exchange that represents something of value, but has little or no value of its own.

That representative money can be exchanged for something that has an intrinsic value such as gold, copper, silver and so on. It is something that represents a claim on a commodity.

Let’s say for example that you have a piece of paper that says that you have a claim to ten gold bullion/ingots/bars. That is representative money since this piece of paper has no value, it just says that you have a claim to such-and-such. You can then go to some kind of bank where, in exchange for this piece of paper — which, I repeat, just allows you to get your gold — you can get your ten gold bullion.

Fun fact : before 1971, US notes were actually backed by gold meaning that one dollar note represented a certain amount of gold which is a commodity. Therefore, prior to 1971, US notes were representative money — if someone happens to know the amount of gold that you could claim with a one-dollar US note please comment below. 

Fiat money

It is something that the government of a country has declared to be money. It is not back by anything and only has value because a government said so. For instance, on November 8, 2016, the Indian Prime minister announced on National TV the demonetisation of  500 and 1000 rupees bank notes by the end of the year meaning that after that deadline these bank notes wouldn’t have any value whatsoever just because the government said so.

Here are some additional resources you can check out :

Investopedia – The difference between fiat money and representative money

What is money ?

Don’t forget that I am actually learning as I make these articles so please if there’s anything you want to add or share leave a comment below 🙂

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