The latest business news around the world. Written by Market Business News's very own editorial team to deliver reliable, up to date, and honest news.

What is money? Why do we use money?

We live in a world which is revolved around the use of money. We use it to buy our home, to pay for tuition, to travel, to communicate using our mobile phones, to buy a car, and for hundreds of different things. But, what is money exactly?

Money is used as a means of paying for goods and services. It is defined as being any object that has a unit of value, can be stored, and is used as a medium of exchange.

According to the International Monetary Fund, money is:

“A store of value, which means people can save it and use it later—smoothing their purchases over time,” or “a unit of account, that is, it provides a common base for prices,” and “a medium of exchange, something that people can use to buy and sell from one another.”

MoneyWithout money, our current society would not be able to function.

In the past people would use commodities that had a value in themselves (commodity money).

Examples of commodity money that have been used as a means of making exchanges include:

  • gold
  • copper
  • silver
  • salt
  • peppercorns
  • precious stones
  • alcohol
  • even cigarettes.


 

However, modern day monetary systems are primarily based on fiat money. Fiat money does not have any intrinsic value, but it is declared by the government as legal tender – meaning that it can be used to pay “all debts, public and private”. The term stems from the latin word “Fiat”, which means “let it become”, “let it be done”,  or “it shall be”.

chinese fiat money

The earliest known form of fiat money – a Yuan dynasty banknote with its printing plate dating back to 1287.

The history of money

Bernard Lietar wrote in his book titled “The Future of Money: Beyond Greed and Scarcity Toward a Sustainable Capitalism”:

“Money, like certain other essential elements in civilization, is a far more ancient institution than we were taught to believe some few years ago. Its origins are lost in the mists when the ice was melting, and may well stretch into the paradisiac intervals in human history of the inter-glacial periods, when the weather was delightful and the mind free to be fertile of new ideas – in the islands of the Hesperides or Atlantis or some Eden of Central Asia”

Many early cultures and societies used commodity money as a means of paying for goods.

Henry Ford“A business that makes nothing but money is a poor business,” Henry Ford.

The first known coin currency dates back to Mesopotamia (circa 3000 BC), when people used shekels as a medium of exchange. The Sumerian bronze shekel represented one bushel of wheat in value.

Gold and silver coins are thought to have been first used as currency by the Lydians. Historians believe that these coins were first made around 650-600 BC.

Economies then started using systems of representative money. This began with banks or gold merchants issuing redeemable receipts to collect commodity money that had been deposited. Eventually these receipts were accepted as money that could be traded.

Bank notes were first used in China during the Song dynasty. The paper money was known as “jiaozi”.

The functions of money

Money has three main functions:

  • a medium of exchange
  • a unit of account
  • it acts as a store of value.

Every element of society uses money as a medium of making exchanges. For example, producers sell their goods to wholesalers (in exchange for money) and wholesalers then go on to sell their goods to consumers. Money facilitates exchanges in the economy. 

It also acts a unit of account. This means that it is used to measure the value of various goods and services in an economy – essentially serving as a standard of value.

Before money existed (when bartering was the main means in which people traded) it was difficult to store a surplus of value; today people are able to store surplus pur­chasing power and use it at any time.

What would happen if money did not exist today?

If money did not exist, the world as we know it would be completely different. Our societies would be reduced to a barter economy.

Every time any of us wanted to buy something, we would have to exchange it for something the seller would want.

For example, if I specialized in fixing cars and wanted to purchase food, I would have to find a farmer who had a broken down car that needed fixing.

What would I do if I could not find any farmer with a car that needed fixing? Perhaps I would eventually find a farmer who just sold eggs, and I was looking for vegetables.

It is likely that millions of people would starve to death before being able to trade whatever they could offer for the food they sought.

Money is dinero in Spanish, dinheiro in Portuguese, argent in French, Geld in German, деньги in Russian, お金 in Japanese, and 钱 in Chinese.

Video – What is money?