Money (Image Source: Unsplash)

Money is a good that is widely acknowledged as a means of economic exchange. It is the primary indicator of wealth and the means by which prices and values are conveyed. As money, it travels anonymously from one person to another and from one nation to another, allowing commerce.

What is Money?

Any tangible object or verifiable record that is commonly accepted as payment for products and services as well as the repayment of obligations, such as taxes, in a certain nation or socioeconomic setting is referred to as money. Money serves as a medium of commerce, a unit of account, a store of value, and occasionally a standard of postponed payment. These are its four main purposes.

Since practically all modern monetary systems are based on unbacked fiat money with no intrinsic value as a commodity, money was historically an emerging market phenomenon.

Since it has been deemed legal tender by a government or regulatory body—in the instance of the US dollar, this means it must be recognized as payment for “all debts, public and private,” within the boundaries of the nation—it derives its value from social convention. Good money can lose its value in situations that undermine public confidence, such as the spread of counterfeit currency or domestic hyperinflation.

According to the definition being employed, the money supply of a nation includes all current banknotes and coins in circulation as well as one or more different types of bank money (the balances held in checking accounts, savings accounts, and other types of bank accounts).

Bank money makes up by far the majority of broad money in industrialized nations. Bank money’s worth is recorded on the accounts of financial organizations and may be converted into physical notes or used for cashless transactions.

History of money

Although there is no evidence of a culture or economy that depended exclusively on barter, the usage of barter-like practices may stretch back at least 100,000 years. Non-monetary societies, on the other hand, operated primarily on the concepts of the gift economy and debt. When bartering did take place, it was generally between total strangers or possible foes.

Commodity money was subsequently adopted by many civilizations throughout the world. The Mesopotamian shekel was a weight unit based on the mass of around 160 grains of barley. The phrase was initially used in Mesopotamia around 3000 BC.

A system of representational money gradually replaced the commodity-based money system. This happened as a result of banks or gold and silver merchants issuing receipts to their depositors that could be redeemed for the commodities money placed. These receipts were eventually utilized as money and were frequently accepted as a form of payment. The Song dynasty is when paper money or banknotes were first utilized in China. Promissory notes, which had been in use since the 7th century, gave rise to these banknotes, known as “jiaozi.” They were used alongside coins, but they did not replace commodity money.

In the decades following World War II and the Bretton Woods Conference, the majority of nations adopted fiat currencies pegged to the US dollar. The American currency was then pegged to gold. The United States government stopped allowing the dollar to be convertible into gold in 1971. Following this, a large number of nations delinked their currencies from the US dollar, leaving the majority of the world’s currencies supported only by their respective governments’ declarations of legal currency and the capacity to be used as payment for products. Fiat money, in the opinion of proponents of modern money theory, is also supported by taxes. States generate demand for the currency they produce by levying taxes.

How Money Is Produced

Money is generated in the current economic systems through two processes:

Legal tender, often known as narrow money (M0), is money produced by a central bank through the coin and note printing and minting processes.

The money generated by private banks through the recording of loans as deposits of borrowing clients, with partial support represented by the cash ratio, is known as bank money, or wide money (M1/M2). Bank money is currently produced electronically.

The majority of money is produced as M1/M2 by commercial banks lending in the majority of nations. Contrary to some common beliefs, banks do not only serve as middlemen, lending out the savings that savers deposit with them, and they do not rely on M0 (central bank money) to produce fresh loans and deposits.

Market stability

The term “market liquidity” refers to how quickly a good may be exchanged for a different good or converted into a country’s official currency. Due to its widespread acceptance and recognition as a common currency, money is the asset that is most liquid. In this approach, the availability of money allows customers to quickly exchange products and services without the need for bartering.

Financial products that are liquid are simple and inexpensive to trade. The prices to purchase and sell the instrument being used as money should not (or should have very little) spread.

Types of money

1. Commodity

Many objects, including naturally rare precious metals, conch shells, barley, pearls, and many other valuable goods, have been utilized as commodity money. Commodity money value is determined by the commodity from which it is derived. Money is made up of commodities, and commodities are made up of money. Gold, silver, copper, rice, Wampum, salt, peppercorns, huge stones, adorned belts, shells, wine, cigarettes, cannabis, confectionery, and other goods have been used as mediums of trade. In different commodity valuation or pricing system economies, these elements were occasionally utilized in tandem as an indicator of perceived value.

Commodity money is comparable to barter in that it gives a simple and automated unit of account for the commodity that is being used as money. Although some gold coins, such as the Krugerrand, are regarded as legal tender, their face value is not recorded on either side of the coin. The reasoning for this is that the focus is placed on their direct relationship to the current value of their fine gold content. The gold content and legal tender face value of American Eagles are imprinted.

2. Representative

The British economist William Stanley Jevons used the term “representative money” in 1875 to characterize the currency of the time. Representative money is money made up of token coins, paper money, or other tangible tokens like certificates that can be consistently exchanged for a defined amount of a commodity like gold or silver. Representative money has a direct and stable relationship to the commodity that backs it, although not being constituted of that product.

3. Fiat

Fiat money, also known as fiat cash, is money with no intrinsic worth or guarantee that it may be turned into a valued item (such as gold). Instead, it only has value because of government decree (fiat). Usually, the government designates fiat money (typically notes and coins issued by a central bank, such as the Federal Reserve System in the United States) to be legal tender, making it illegal to refuse to accept the fiat currency as payment for all public and private debts.

Some bullion coins, such as the Australian Gold Nugget and the American Eagle, are legal tender; nonetheless, they trade based on the market price of the metal content as a commodity, rather than the face value of the coin (which is usually only a small fraction of their bullion value).

4. Coinage

These considerations resulted in the metal itself being the store of value: initially silver, then both silver and gold, and at one-time bronze as well. Copper coins and other non-precious metal coins are now available. Mined metals were weighed and pressed into coins. This was done to ensure that the person receiving the coin was receiving a known weight of precious metal. Coins might be counterfeited, but they also introduced a new unit of account, which aided in the development of banking.

The final link was given by Archimedes’ principle: coins could now be easily tested for their fine metal weight, and so the worth of a coin could be ascertained, even if it had been shaved, debased, or otherwise tampered with (see Numismatics).

5. Commercial bank

Commercial bank money, often known as demand deposits, are claims against financial organizations that may be used to buy products and services. A demand deposit account is one from which monies can be taken at any moment by check or cash without notifying the bank or financial institution. Banks are required by law to refund monies kept in demand deposits immediately (or ‘at call’). Demand deposit withdrawals can be made in person, by cheque or bank draught, by using automated teller machines (ATMs), or by utilizing internet banking.

Commercial bank money is created through fractional-reserve banking, which is a banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the rest while maintaining the simultaneous obligation to redeem all of these deposits on demand. Commercial bank money differs from commodity and fiat money in two ways: first, it is non-physical, with its existence reflected only in the account ledgers of banks and other financial institutions, and second, there is some risk that the claim will not be fulfilled if the financial institution becomes insolvent.

The practice of fractional-reserve banking grows the money supply (cash and demand deposits) beyond what it would be otherwise. Because of the presence of fractional reserve banking, most nations’ wide money supply is a multiple (higher than 1) of the quantity of base money generated by the central bank. The reserve requirement or other financial ratio criteria established by financial authorities determine that multiple (known as the money multiplier).

6. Paper

Carrying significant amounts of gold, silver, or other metals proved difficult and exposed them to loss or theft, according to experience. More than a thousand years ago, paper money was used for the first time in China. Paper money and banknotes were become widely used in other regions of the world by the late 18th and early 19th centuries. Fiduciary money—promises to pay specific sums of gold and silver—became the majority of the currency in use, replacing actual gold and silver. These guarantees were first given out by people or businesses in the form of banknotes or transferable book entries that became known as deposits.

Though initially representing claims to gold or silver on deposit with a bank or a merchant, deposits and banknotes underwent changes. The banker (or merchant) could issue more claims to the gold and silver than what was being kept in safety since they knew that not everyone would claim their balance at once. The difference might then be invested or lent by banks at a profit. However, during difficult times when borrowers defaulted on their loans or in cases of overissuance, banks were susceptible to failure.

7. Electronic or digital

Money may be represented digitally thanks to the advancement of computer technology in the second half of the twentieth century. By 1990, all money transmitted between the US central bank and commercial banks was in computerized form. Most money existed as digital currency in bank databases by the 2000s. In 2012, electronic transactions accounted for 20 to 58 percent of all transactions (dependent on the country).

In the early 2000s, non-national digital currencies were created. Flooz and Beenz, in particular, had acquired traction prior to the Dot-com boom. There was little innovation until the 2008 invention of Bitcoin, which introduced the notion of a cryptocurrency – decentralized trustless money.

Function of money

The fundamental purpose of money is to make it possible to distinguish between buying and selling, allowing trade to proceed without the dreaded double coincidence of barter. In theory, credit may serve this purpose, but the seller would want to know the likelihood of payback before giving credit. That necessitates obtaining considerably more information about the customer and entails informational and verification expenses that using money does not.

The combination of money’s functions has historically been a source of much debate, with some saying that they should be further divided and that a single unit cannot handle them all. One of them is that the function of money as both a medium of exchange and a store of value clashes with one another since its function as a store of value necessitates retaining it without using it, whilst its function as a medium of exchange necessitates circulation.

Others counter that preserving value just delays the trade, but this does not lessen the fact that money is a kind of exchange that may travel through time and space. All liquid instruments, regardless of whether they constitute a generally accepted tender, are collectively referred to as “financial capital,” which is a more broad and general phrase.

1. Metric for value

A unit of account is a common numerical financial unit used to assess the market worth of products, services, and other transactions (in economics). A unit of account, which is sometimes referred to as a “measure” or “standard” of comparative worth and delayed payment, is a need before any business transactions involving debt may be created.

Money serves as a common unit of measurement and exchange. Thus, it serves as a foundation for price quotation and haggling. It is required for the creation of effective accounting systems.

2. Method of exchange

Money serves as a medium of exchange when it is utilized to facilitate the exchange of commodities and services. As a result, it does not suffer from the drawbacks of a barter system, such as its inability to guarantee “coincidence of desires” over the long term. For instance, in a barter system between two parties, one side might neither produce nor own the thing that the other desires, showing the absence of a coincidence of wants. By allowing the former to spend time on other things instead of being forced to simply meet the wants of the latter, having a medium of exchange can solve this problem. The latter can search for a party that can provide them with the thing they want while using the means of trade.

3. Store of worth

Money must be able to be consistently saved, preserved, and recovered in order to serve as a store of value. It must also be predictable to be used as a medium of exchange after it has been retrieved. Additionally, the money’s worth must endure throughout time. Some claim that because inflation lowers the value of money, it loses some of its capacity to serve as a store of wealth.

4. Deferred payment standard

While some books, especially older ones, identify the standard of postponed payment, other writings include this under other functions.

In those countries that have this idea, a “standard of delayed payment” is a unit in which debts are denominated, and the status of money as legal tender says that it may function for the discharge of obligations. When obligations are expressed in monetary terms, inflation and deflation, as well as debasement and devaluation for sovereign and international loans, may affect the real worth of the debts.

Properties of money

Desjardins claims that “many economists and professionals in the area agree” that money has the qualities of being a store of value, a unit of account, and a medium of exchange. He claims that money must be in order for it to do these numerous tasks:

  • To be fungible, each unit must be capable of being replaced by another (i.e., interchangeability).
  • Able to resist repeated usage; durable.
  • To divide into smaller units.
  • Portable: capable of being carried and moved.
  • Acceptable: The cash must be accepted as payment by everyone.
  • Limited supply: The amount that is available for use must be restricted.

Monetary crimes

Laundering of money

The practice of turning criminally obtained funds into supposedly lawful cash or other assets is known as money laundering. However, the term “money laundering” has come to be synonymous with other types of financial crime in a number of legal and regulatory frameworks. It is also sometimes used more broadly to refer to financial system abuse, which includes financing terrorism, tax evasion, and circumvention of international sanctions.


Imitation cash created without the state’s or government’s legal approval is known as counterfeit money. A type of fraud or forgery is the creation or use of counterfeit money. Almost as old as money itself, counterfeiting.

Coinage from the Lydian period, which is considered to be among the first western coins, has been recovered as plated replicas. In the past, hard-to-fake items like shells, valuable metals, and rare stones were frequently used as currency. Prior to the invention of paper money, base metals were frequently combined with pure gold or silver to create counterfeit currency. The creation of papers by legitimate printers in response to false instructions is a type of counterfeiting.

The Nazis faked British pounds and American dollars during World War II. Due to their exceptional quality and resemblance to the actual U.S. dollar, some of the best counterfeit banknotes in circulation today are known as Superdollars. Since the Euro’s introduction in 2002, there has been a sizable amount of counterfeiting, but far less than there has been for the U.S. dollar.


Money is derived from the Latin word moneta, which means “coin,” through the French term monnaie. It is thought that the Latin phrase came from a temple dedicated to Juno on Capitoline, one of Rome’s seven hills. Juno was frequently linked to money in ancient times. The mint of ancient Rome was housed at the temple of Juno Moneta in Rome. The names “Juno” and “Moneta” may have originated from the Etruscan goddess Uni, whose name meant “the one,” “unique,” “unit,” “unity,” and “unified,” and from the Latin word “monere,” which means to remember, warn, or educate, or from the Greek word “moneres,” respectively (alone, unique).

Specie, which derives from the Latin in specie, which means “in kind,” has been a common name for coin money in the Western world.

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