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What is money?

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From the roots:

All of us need to exchange goods and services in order to live in this world. This exchange is facilitated with the help of a common medium called money. It grew out of the disadvantages of barter system of ancient times where goods and services were exchanged for other goods and services.

Barter system had so many problems :

It would work only if there is Double coincidence of wants : I need vegetables and I have eggs to sell. I will have to find someone who has vegetables to sell  in exchange of eggs. 

Measurability and divisibility was debatable :  How much vegetables will i get in exchange of 10 eggs ?

Barter did not help in fixing deffered payments : payments to be made at a future date was difficult to fix because, arrangement of goods at the same quality and quantity at a future date is always uncertain.

Movement of goods on a large scale was difficult : transporting one horse was easy; 1000 horses is not.

And , finally , barter lacked storage of value :  people with perishable goods in possession were not able to store their wealth. So as you see , there are lot of complex problems – measurability , divisibility  storability and transferability.

To overcome these problems , people started using IOUs ( I owe you ) which was an informal note acknowledging a debt or a promise to deliver something at a future date to the other person. Later on these notes gained value and people began trading using these notes.

“A Common medium, accepted by all which can be stored” became the base idea of money and  precious metals found place as a common store of value. During the olden times precious metals, such as gold , silver and bronze were accepted by all. Metals were finite in supply , has a high replacement cost , it was durable , portable and could be stored for a long time. 

These metals later took the shape of coins. History tells that the first coins were made in Lidiya , now part of Turkey. Later on The Greeks took up this idea and also started embossing the faces of Kings and Gods for identification purposes. Money became the medium through which people express the value of an asset , quantify a liability and accept as a common medium to buy and sell. If you check the history of money you’ll find that a lot of things were accepted as ‘money’ in different periods of history. That’s money in simple words.

Since it became a common medium to facilitate exchange, every day you need money to survive in this world – food, clothes, rent, education, treatments, weddings, vacations, toys , telephone, cooking gas, petroleum,  internet – you name it. Without money, it would be impossible for you ‘n me to move ahead in life. So money takes the status of the “basic essential commodity”. Anyone who has abundant quantities of such a basic essential commodity is considered rich. Even the entire division of this world – as poor and rich (whether it’s a person, a family, a community or a nation) is based on how much money they have. Quantum of Money in possession lends status and power to nations, businesses and individuals. It is used as common yardstick to quantify the wealth one has.

If metals were used as storage of value in olden times , metal backed currencies  ( like the US dollar before 1970) were used till recently. Metal backed currencies derived its value from the huge pile of metal ( usually Gold and silver  ) backing it up so that in case anyone wants to take gold instead of the currency , they were free to do so by approaching the government.

After 1970s ,  precious metals backing up the currency in circulation was withdrawn my many and it’s fiat money ( or currencies printed by the government)  that’s circulating as a common medium of exchange.

The money that’s printed by the government and given to the people is called fiat money or legal tender money. The government can stop the circulation of one form of money and introduce another form of money at any point of time. We recently saw how Mr Modi declared the existing Rs 1000 currency notes to be void and introduced new currency notes into the system.

As we saw above, money as a concept,  is constantly evolving with time. The future of money could be something else – for example virtual or digitized money  like bitcoins are already being used as a storage of value and as a medium of exchange by many.

Key ideas :

  • Money is anything that’s accepted by all and  can act as a common medium of exchange. 
  • History has recorded many forms of money such as Sumerian cuneiform tablets (4000 BCE) Cowrie shells (1000 BCE) Athenian drachma (600 BCE) Metal Coins ( 600BCE -1100CE) Bank notes and Digital currencies (2000 – till date ).
  • Before money came into existence , goods were bartered.

 

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