What Is Money ? Why Is So Important ?What Is Fiat Money ? Explained -Basic Concepts Of Economy Part 4

What Is Money ?

Everyone uses money. Through money we get the things we wanted.But, what exactly is it? What is the use of it ?

Money is a Medium of Exchange i.e. something that people can use to buy and sell from one another.Money is also a Unit of account  which provide a common base for prices. Money has a Storage value ie people can save it and use it later. In other words, money is something that holds its value over time, can be easily translated into prices, and is widely accepted.

Evolution Of Money :

Barter System:

#Before the development of a medium of exchange, people would barter to obtain the goods and services they needed. This is basically how it worked: two individuals each possessing a commodity the other wanted or needed would enter into an agreement to trade their goods e.g. trading oranges for apples or wheat for clothes etc.Issues with this system:Central to this system of exchange was a “Double coincidence of wants”e. in order to trade, you must have what I want, and vice-versa.

The problem of divisibility: In the absence of a standard measuring technique, it was difficult to decide how much quantity of one good was equal to that of another.

Using Gold, Silver etc as mediums of exchange:

Over time, people started using gold, silver and other metals as mediums of exchange e. commodities were traded in return for an equivalent value of gold. The key point to be understood here is that money is valuable merely because everyone knows everyone else will accept it as a form of payment.g. gold was difficult to mine, limited in supply and considered precious by the people, it was thus readily accepted as a form of payment.

Currency backed by Gold:

Over time, instead of carrying the actual metal around and exchanging it for goods, people found it more convenient to deposit precious metals at banks and buy and sell using a note that claimed ownership of the gold or silver deposits. Anyone who wanted to could go to the bank and get the precious metal that backs the note.

Eventually, the paper claim on the precious metal was delinked from the metal. When that link was broken, fiat money was born.

Fiat Money:

Fiat money is materially worthless but has value simply because a nation collectively agrees to ascribe a value to it. In short, money works because people believe that it will.Today, most of the world’s money is fiat money, meaning it is accepted as money because: A government says that it’s legal tender ( i.e. the money is backed by the full faith and credit of the government that issues it), and the public has enough confidence and faith in the money’s ability to serve as a storage medium for purchasing power.

Leave a Reply

Your email address will not be published. Required fields are marked *