Money: what it is – Economics Dictionary

money concept

We call money any asset or asset accepted as a means of payment or measurement of value by economic agents for their exchanges and also fulfills the function of being a unit of account and a store of value. The coins and banknotes in circulation are the final form adopted by economies as money.

properties of money

It is a unit of account, which allows setting the prices of goods and services. Without it we wouldn’t know how much they cost.

It is a means of payment, since it is accepted by all people to pay for the purchase and sale of goods and services.

It is a store of value, which means that it retains its value over time, since it has the ability to buy goods and services in the future.

Money Functions

Money fulfills several functions and when a monetary expression fails to satisfy any one of these functions, the individual immediately looks for some other substitute.

Among the functions of money we find that:

– Streamlines the division of labor.

– Allows economic calculation establishing comparisons between costs and expected returns.

– Allows expressing heterogeneous goods in common units.

– Facilitates trade.

– It allows postponing purchasing decisions and preserving the yields obtained from the factors of production.

– In many countries different goods have been used to replace some of the functions of official money, for example, the function of value deposits.

types of money

1- Sign money: this is represented by fractional coins and bills in which the value of the material with which it was made is much lower than its value as money. In other words, these coins and banknotes receive extremely high denominations compared to the paper or metal with which they are produced. In the case of token money, the value is granted by the entity that supports and issues it.

2- Commodity money: in this case, money can be used as a commodity for consumption or trade, or to use it as a means of exchange. Either way, this medium of exchange has the same value.

3- Legal tender money: this is the money that a certain government recognizes as acceptable to cancel debts and also as a means of payment. Thanks to legal support, national money has the possibility of being accepted in most exchanges.

4- Bank money: in this case, the money is generated by bank deposits and is made up of: time deposits, savings deposits and demand deposits.

5- Promissory note money: this money is based, in most cases, on the debt of a credit institution. Demand bank deposits, which are transferred by check, belong to this class of money. When an individual signs a check, what he does is that the debt is transferred to the bank, who will give the money to the individual who received the check.

6- Electronic money: this is the money that is only exchanged electronically, for this the computer and the internet are usually used, so the user never comes into physical contact with it.

7- Credit money: this consists of a paper whose issuer can be a bank or government and is the one that guarantees it to pay its equivalent value in metal.

history of money

In the Neolithic, with the appearance of agriculture and livestock, the first production economy appeared and surpluses were produced, that is, goods that did not need to be consumed. This gave rise to the possibility of feeding people who did not need to work in agriculture or livestock and could dedicate themselves to producing other products, such as ceramics, and exchange it for the surplus produced. This allowed the first form of trade, barter, directly exchanging goods and services for others. Over time, this form of exchange was deemed inefficient.

The history of money begins around the 5th to 7th century BC with the first coinage by the Lydian people. The first coin was made with electro, an alloy of gold and silver, to be able to pay the army troops. The decorative motif on the coin was the head of a lion, a symbol of royalty.

7th century BC In the Asian kingdom of Lydia, the minting of electro (gold and silver alloy) coins begins on a large scale. 338 BC Coins are minted in Republican Rome. 268 BC First silver coin in Ancient Rome: the denarius (where the word “money” comes from). 845 Paper money is issued in China but, poorly controlled, leads to inflation and government bankruptcy. 1189 Florence minted silver guilders, (The gold ones were minted in 1252). 1250 Jaime I. of Aragón issues paper money. Other European kingdoms of the same period issued paper money in times of crisis, but only as a temporary measure. 1284 Venice mints its own currency: the cequi, which will become the gold ducat, whose purity and use last until the Venetian Republic falls in 1797. First half of the 14th century Bills of exchange or written payment orders are created ( payable to a certain person at a certain place). These were the medieval drafts or bills of exchange, in different denominations. 1608 The first checks are used in the Netherlands. 1613 Copper coins, usually of little value, are generalized in Europe. 1681 The check, which originated in the Netherlands decades earlier, comes into use in England 1690 The Massachusetts Bay Colony first prints paper money in North America 1718 The first bank notes are issued in England. 1729 B. Franklin publishes his essay on the necessity of paper money. His ideas succeed years later with the War of Independence of the 13 Colonies and the birth of the US 1787 The dollar is introduced in the US. The word dollar comes from the thaler (thaler), the main monetary unit among those used until then in Europe. 1787 The minting of dollars begins in the United States. 1792 The Bank of England is authorized to issue money beyond the statutory limits, until then inviolable 1944 At the end of World War II, the allies established a new financial system in the Bretton Woods agreements, in which it was established that all currencies would be convertible into US dollars and only the US dollar would be convertible into gold bullion at a rate of 35 dollars per ounce for foreign governments.