Key Takeaways From A Basic Introduction To Money

21.10.2021
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Key Takeaways From A Basic Introduction To Money

 

Money has always been the most important thing in any society. It is used for different purposes like shopping, investing, budgeting, etc. Money is any tangible item or verified account which is normally accepted as payment for certain goods and services and settlement of unpaid debts, including taxes, in a specific country or socio-cultural context. This money is usually accumulated by governments and then used to satisfy various needs.

 

Let us have a look on how the role of money has changed over the years. Prior to this evolution money was nothing but a piece of metal or a bag with a certain value, which could be exchanged for certain other things. But now that it is mentioned, it becomes clear that money was never intended to be used for the social purposes as mentioned above. It was created just to facilitate business transactions and increase the scope for economic activity. Economists and other social scientists opine that money was made with the basic purpose of enhancing the power of business in society.

 

Money as we know now evolved out of barter exchanges, where goods were traded with the help of small pieces of metals like gold and silver. In this way goods could be exchanged instantly for other goods, and therefore direct exchange of money for goods took place. People could make use of this medium for carrying on monetary transactions. However, this process became non-beneficial in case of non-monetary transactions, where goods could not be traded directly. For instance, many goods cannot be traded directly if they are being transported through a medium like water or air. So money became the medium through which such goods could be traded.

 

The second transformation of money was brought about by the introduction of the first national currency. This was the first time in history when money was actually created, issued and circulating as a distinct unit of account. This money system was based on precious metals and other valuable materials. This money system gradually gave way to paper money, which was issued by governments and eventually replaced physical money. Paper money systems have been very popular ever since, though there are those who still believe in the use of metals for the unit of account.

 

Though money was introduced for facilitating direct transaction costs, it has taken quite sometime to reach the position it holds today. It is no longer feasible to carry out trade without this unit of account. Also, the cost of trading commodities, including money, is extremely high, owing to the effects of double coincidence. Double coincidence means that if two events occur at the same time, the effect of one transaction will be multiplied by the other event, making the total amount of the transactions extremely high. Thus, trade and financial movements are highly affected by double coincidence. The total value of all money transactions can reach up to trillions of US dollars daily.

 

The concept of money is useful only if it is used for purchase of goods and services from other parties. In order to use money as a transaction cost, however, a system must be put in place to ensure that the money that enters and leaves the economy is not defected. A popular approach to ensuring double coincidence is the use of the mark of currency. The use-value of a particular currency increases whenever another country’s goods and services are priced lower in the United States. Mark of currencies usually vary according to the strength of the US dollar.

 

Another important lesson to learn is that it is difficult to obtain hard and liquid assets without some form of exchange system, such as a physical money system or the use of gold. Gold, unlike most other goods, is not generally accepted as a universal medium of exchange. However, it does stand out as a highly valuable asset when it is rare, rarest of precious metals. These two concepts, especially when combined, can give a strong foundation for a thriving market economy.

 

Money and its role in society is necessary, but money substitutes cannot be used by the market unless the government and their chosen banks provide a viable substitute. Governments have typically chosen to issue paper currency, such as the US dollar. While this has helped the system function, the mark of currency acts as a constraint on the amount of money that can be loaned and spent. Private bank notes, which are essentially a return form of currency, act as money substitutes if there is no functioning financial market because the issuing bank does not have access to financial assets that it can lend.

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