Learn About Money in 5 Minutes
June 27, 2020

Money

By allin5minutes

There are 180 currencies all around the world recognized as legal tender by the United Nations, and the most popular ones are the U.S. dollar, euro, Japanese yen, and British pound.

History of Money

Before money was used as currency, people used bartering as a means of payment. They would exchange the goods they had for the ones they lacked.

Historically representative money was used before coinage. Ancient empires of Egypt, Babylon, India, and China, used tokens made of clay or other materials that served as proof of a claim upon a portion of products stored in the warehouses. People could then use these tokens in the markets or give them to others as payment.

The first known official currency was used by the Lydians approximately in 600 BC in modern-day Turkey. They used gold and silver coins, and the first coin minted featured a roaring lion.

Paper money first developed in China around the 7th century when Chinese merchants started using promissory notes. True paper money developed by the 11th century, and it later spread to Europe.

Golden Florin minted in Florence

Standardized money was good for trade, and a currency called Florin became widely accepted across Europe. Florin was originally a gold coin minted in Florence, and later, many other countries borrowed the name for their own coins.

The development of computer technology in the 20th century allowed people to start representing money digitally. By the 2000s most money existed as a digital currency.

In 2008, a contactless credit card was issued for the first time in the UK. Nowadays you can pay for products using your smartphone or even cryptocurrencies.

Cryptocurrency is a decentralized digital currency that exists outside the control of governments and other authorities. Bitcoin, Ethereum, and Ripple are some of the most popular cryptocurrencies.

Functions of Money

Modern economics textbooks list three functions of money:

  • A medium of exchange – it is a widely accepted token which can be exchanged for goods and services
  • Unit of account – goods and services are measured in a specific currency and can be compared.
  • Storing of value – it can be saved and predictably used at a later time.

Properties of Money

To fulfill all of its functions, money must have these 7 properties:

Close-up of Coins
Symbol of Bitcoin
  • Fungibility – money units must be interchangeable with one another
  • Durability – it must be able to withstand repeated use
  • Portability – it can be easily carried around
  • Uniformity – all units of the same denomination look the same and have the same value
  • Scarcity (limited supply) – the supply of money in circulation is limited
  • Acceptability – it must be generally accepted for transactions
  • Divisibility – it can be divided into smaller units 

Types of Money

There exist several types of money.

Commodity money

Commodity money is money whose value is intrinsic and it comes from the commodity of which it is made. If the money gets destroyed, it can not be replaced. Some examples of commodity money are gold, silver, salt, and tobacco.

Representative money

Representative money has no intrinsic value, and instead, it is backed by a commodity for which it can be exchanged. Examples of representative money include certificates, paper money, and coins.

Fiat money

Fiat money is money whose value is based on a decision from the government which declares that this money must be accepted as a form of payment everywhere. It has no intrinsic value and it is not backed by a physical commodity. Examples of fiat money are the U.S. dollar, euro, and other major currencies around the world.

Fiduciary Money

Fiduciary money is based on a promise that it will be exchanged by the issuer which is often a bank. It is not issued by the government therefore people are not obligated to take it as a form of payment. Examples of fiduciary money are checks and bank drafts.

Commercial Bank Money

Commercial bank money is a debt-created currency by the bank. The banks create new money every time they issue loans and more than 90% of all the money in the world exists as commercial bank money while less than 10% is physical money.

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