What Is Money?
What Is Money?
Money is a general term denoting the actions of money in society. Money has various uses and value, and can be defined as a complete standard of exchange in which items of various values are generally accepted as payment of goods and/or services and payment of debts, including taxes, in a specific political or socio-cultural context. Money may be regarded as a social commodity and is a basic necessity for the maintenance of a society’s economy. Since money is the measure of value and is usually the only binding force in societies, money is widely regarded as the most important thing in the world, socially, and economically.
As indicated by its definition, money is a product that can be bought and sold on the market. It serves various purposes including as a universal unit of account and as the means of payment in certain transactions. In the light of this extensive use of money, it becomes evident that it must have a fixed rate of exchange. The process of money generation, storage, and circulation plays a crucial role in its valuation as well as in its maintenance.
Money is produced and exchanged during transactions involving goods and services that have been bought and sold over time. Usually, money is created through a central bank either by government printing presses or mints. Money is created in quantities of currency units that can be used as legal tender in payment of debts and taxes. Money has no other function other than as a medium of transaction costs in politically mature societies.
Money is a Fiat Money System, i.e., it is not linked to any particular national currency but is exchangeable in any domestic currency. This feature renders money substitutes useful in international trade. For example, a British Pound is usually equivalent to US Dollar, but if you want to purchase imported goods from Japan under the pound, you will need to convert your monetary unit to Japanese Yen first. Thus, money is essentially a Fiat Currency System. In such a system, money is a fiduciary media (a legal tender instrument) that facilitates transactions between a foreign country and its domestic market.
Money in the economy is a very important commodity due to the important role it plays in the process of the transfer of goods between producers and consumers. Without money, the existence of an economy would come to an abrupt halt as each producer and consumer would cash in his goods after a particular period of time, resulting in hyperinflation (possessing greater value than what is possessed), which would make trade impossible. Money, therefore, acts as the link between producers, consumers, and the overall economy. It makes transactions possible between any two parties.
A market-determined money is a unique kind of Fiat Money System, which may be freely circulate within the economy as a non-tangible, physical asset. This medium of exchange may be collected, kept, or handed over to people who need it most. This form of money is distinct from physical assets because its circulation is not by barter transactions, but by the supply and demand function of the market, dictated by supply and demand prices in the market. This is unlike physical assets whose circulation is by possession of the commodity in hand or by payment of money or other legal tender, such as gold or currency. Money, therefore, serves as the measure of value and the standard of price against which all other commodities may be traded. It is the measure of value used in the calculation of supply and demand in the market.
The function of money is further exhibited when money is converted into other commodities. For example, when I give you a dollar bill, you can either take it as exchange money (a good that has no value except as money) or you can redeem it into a redeemable money (a good having a redeemable value). Hence, money is both a medium of exchange and a commodity money. When I pay you for the service of having your car washed, you can take the money as a gift and use it for washing your car and also you can redeem it for a certain amount of money when you get your car back.
Money, therefore, is a very important part of our economy. Without money, there would be no efficient and effective distribution of goods and services among people. Money facilitates trade by establishing and creating relationships among people. Without money, people would be forced to conduct all their business transactions through physical money such as cash. However, money is valuable only to the extent that people perceive it as valuable. This value, referred to as the “future value” of the currency, is equivalent to the present value of all future transactions, referred to as present value of money.