Money is an abstraction that describes the ability to purchase goods or services. It represents the exchange of one quantity of money for another. Money is the most widely used currency in the world. Money is also the most abstract object or typically accepted legal document which is normally accepted as payment for specific goods and services, repayment of debts, and settlement of accounts, including taxes, in a specific country or socio-cultural context.
Money has two basic characteristics that distinguish it from all other commodities and currencies. First, money is never a commodity and as such cannot be traded like commodities. Second, money is never a direct source of wealth, i.e., money can neither be produced nor obtained by bartering. Rather, money is a medium of exchange-the first safest medium of exchange in the world, accessible to everyone and forever lasting. Money, as money must necessarily be, is usually a deferred payment that enables certain individuals to purchase goods and services without having to pay for them immediately. Without money, there would be no exchange of goods and services-and therefore no possible benefit of exchanging them.
Money is generally accepted as a medium of exchange because it is both universal and non-specific, and because most people universally agree that money is a good thing. Money, being the potential source of wealth, is normally a fungible good that can be easily transformed into commodities, and also back again, through what economists call “a magic process”. Because of this property of money, it is often seen as the ideal form of exchange, since prices of commodities generally are determined by supply and demand and are not affected by political factors, technological advancement, and other external factors. Money has historically always been seen as a highly flexible and easily tradable good.
Historically, money comes in three forms. Strictly speaking, money is traditionally defined as a commodity or “real” good. Real goods are generally accepted for what they are worth, with no allowance for any subjective interpretation. Fiat money, on the other hand, is recognized as legal tender, but does not come anywhere close to matching the property or goods it represents. This makes Fiat money a highly inefficient form of money, and even in its purest form is a weak form of currency, since it is not tied to anything concrete or physical and can easily be converted into virtually any substance, including gold.
With the advent of fiat currency, which can be used to purchase just about any substance that you wish, it has become necessary to have a legal method of exchanging one form of fiat currency for another. Since money is not tied to anything tangible and can essentially be transformed any time it is needed, the problem of Fiat money has been solved. This system is known as the Fiat System, and its most common form of legal tender is the “fiat currency”, which is created at the governments discretion through the operation of a central bank.
The most commonly used forms of Fiat money are the US Dollar, the Euro, the Japanese Yen, and the Australian Dollar. In order to be considered legal tender, each of these currencies must be issued with a backing by a nation. When all of these nations issue their currency based on an identical definition of value, then this becomes known as “real money”, which can be traded back and forth between any of the nations involved without any questions being asked. There are of course no physical assets that are backing these currencies, so trust is not required. This makes the exchange of Fiat money very easy to do, which explains why so many people prefer to transact their business this way.