What is Money
In its most basic form, money is anything that people use to buy goods and services.
In its most basic form, money is any object generally accepted as payment for goods and services or repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as a medium of exchange, a unit of account, and a store of value. Money is used as a medium of exchange to buy and sell goods and services. It acts as a unit of account by providing a common measure of the value of goods and services being exchanged. It also serves as a store of value, providing people with a way to save and invest their money over time.
- Acceptability: Acceptability is when people are willing to accept money in exchange for goods and services.
- Divisibility: Divisibility means that money can be divided into smaller units of currency. It is important for money to be divisible because it makes it easier to use in transactions. For example, if a candy bar costs $1 and someone only has a $5 bill, they would need to get change from the store in order to buy the candy bar. If money were not divisible, this transaction would not be possible.
- Limited Stable Supply: A limited stable supply of money ensures that there is not too much or too little money in circulation, which can lead to inflation or deflation.
- Portability: Portability refers to how easy it is to transport money from one place to another. Money needs to be portable because it allows people to transport their wealth with them easily. This can be helpful in many situations, such as when people move from one place to another or when they need to quickly access their funds in an emergency.
- Fungibility: Fungibility is the property of a good or commodity whose individual units are capable of being substituted in place of one another. Money needs to be fungible because it needs to be interchangeable—if someone gives you a $10 bill, you need to be able to use that $10 bill as if it were any other $10 bill.
- Durability: Durability means that money can withstand being stored for long periods of time without losing its value. Imagine how difficult it is to store a tonne of bananas.
Types of Money
- Commodity money is a type of money that is based on a commodity. The most common commodities used for this purpose are gold and silver. Commodities are chosen because they have certain properties that make them ideal for use as money. They must be durable, portable, divisible, and have a relatively stable value. Gold and silver meet all of these criteria, which is why they have been used as money for thousands of years.
- Representative money is a type of money that represents a commodity. The most common form of representative money is paper currency. Paper currency is not made out of gold or silver, but it can be exchanged for those commodities. This type of money was created to make it easier to trade commodities without having to carry around large amounts of physical gold or silver.
- Fiat money is a type of money that is not backed by any commodity. It gets its value from the government declaring it to be legal tender. Fiat money is not based on anything tangible, so its value can fluctuate quite a bit. This type of money was created to make it easier for governments to print more money when they need it without having to worry about the value of their currency dropping too much in relation to other currencies or commodities.
- Digital commodity money is a type of digital currency that is based on Proof-of-Work. The most common forms of digital commodity money are Bitcoin and Litecoin. Bitcoin was created in 2009 as an alternative to traditional fiat currencies and has become the most well-known and widely used digital currency in the world.