Money is a commodity accepted by general consent as a medium of economic exchange. It is the medium in which prices and values are expressed. It circulates from person to person and country to country, facilitating trade, and it is the principal measure of wealth.
The first use of paper money occurred in China more than 1,000 years ago. By the late 18th and early 19th centuries, paper money and banknotes had spread to many other parts of the world.
The use of metal for money can be traced back to Babylon, prior to 2000 BCE. Standardization and certification in the form of coinage did not occur except perhaps in isolated instances until the 7th century BCE. Historians generally ascribe the first use of coined money to Croesus, king of Lydia, a state in Anatolia.
The first use of paper money occurred in China more than 1,000 years ago. By the late 18th and early 19th centuries, paper money and banknotes had spread to many other parts of the world.
The use of metal for money can be traced back to Babylon, prior to 2000 BCE. Standardization and certification in the form of coinage did not occur except perhaps in isolated instances until the 7th century BCE. Historians generally ascribe the first use of coined money to Croesus, king of Lydia, a state in Anatolia.
Fiat money or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order .
The development of computer technology in the second part of the twentieth century allowed money to be represented digitally. By 1990, in the United States all money transferred between its central bank and commercial banks was in electronic form. By the 2000s most money existed as digital currency in bank databases. In 2012, by number of transaction, 20 to 58 percent of transactions were electronic .
Characteristics of Money
- Durable: A good currency is durable enough to be used more than just one time. It should not be perishable. A perishable good or article should not be used as a currency because it cannot be used multiple times and also cannot be stored for future transactions. Therefore, to conserve the future-oriented use-value of the money, a currency must be durable.
- Easily recognizable: The users of the money must be ascertained of its authenticity. In other words, the currency must be universally recognized. An unrecognized currency or money leads to disagreement with the exchange terms. A recognized currency ensures trust in the money system as well as its acceptance.
- Stability: A currency must be stable in terms of value. In simple terms, money should have a constant or increasing value. Money cannot be unstable whose value keeps drastically changing. An unstable currency can give room to the risk of a sudden drop in value which can hamper the acceptance and authenticity of the money system.
- Portable: A currency must be portable and can be conveniently transported from one place to another. The money must be divisible into various quantities making its use better. Money if not portable can lead to an exceeded cost of transportation of the currency itself. Therefore, money should be able to be divided into further smaller units to facilitate smooth transactions of various quantities of goods. Secondly, it should be easily transferable and portable.
Functions of Money
- Medium of exchange: Money is the generally accepted medium of exchange that is used to make all the transactions. Ex- payments of goods, payment of tax, etc.
- A measure of Value: Money expresses the value of every service as well as goods. Therefore, it is a common denomination.
- Standard of deferred payments: Money is considered the standard for future payments. Ex- The payment of the electricity bill on the upcoming due date.
- Store of value: It means that money is capable of being stored and transferring the purchasing power from today to the future. Ex: Using the money in a savings account to buy new furniture.
- Distribution of social income: Income can easily be distributed with the help of money. Ex: Distribution of total money earned by a school in the form of salaries, wages, utility bills, etc.
- Basis of Credit Creation: The "store of value" function of the money helps in credit creation by the banks. Ex: Using the money of demand deposits as a tool for credit creation.
- Liquidity: Money is the most liquid asset of the economy. Ex: Credit cards, debit cards, cash.