What Is Money?
Money is an abstract unit of value that can be bought and sold in markets without reference to anything physical. Money as a medium of exchange has been the primary factor behind all economies in the past and is likely to play the same role in future too. Money is the most widely recognised medium of currency activity, with its power to expand the available funds in a country, stimulate international trade, attract investment, and facilitate payment of taxes and other outstanding balances. As money plays a leading role in international business, its value is subject to drastic fluctuations, sometimes on a daily basis.
Money is any tangible or verified account which is usually accepted as payment of debts and/or goods and payment of taxes in a given country, including various socio-economic contexts. Money is generally accepted and accessible as a medium of exchange in situations where barter systems are not applicable and where a direct transfer of goods is not possible. In most cases, it is a deferred payment or voucher which can be carried around with the debtor and/or the creditor and exchanged in predetermined combinations as a medium of exchange until it is ultimately accepted by the payer. This process of deferred payment is commonly seen in situations where the goods or services that have to be exchanged are very rare in both the short and long run (for example, rare earth metals). Deferred payment usually makes the creditor’s share of the deal more profitable.
The three main takeaways key points are that money comes in many different forms and is normally made use of in different economic arenas and context, ranging from direct exchange of commodities at a market price, to the transfer of goods and services at a market price, to deferred payment or voucher exchange systems. Money has been defined as a “unit of credit” and as a “commodity” because it has been used for interaction in all of these contexts and is typically both good and bad in each. Money has always had an important role in human societies because it has traditionally served as a “reassurance” that goods would be exchanged and that exchange could take place even when the local economy was too poor to support exchanges of goods. Nowadays however, money has taken on a completely new meaning in contemporary societies, mostly due to the globalisation of most markets. Here, money usually refers to a “unit of account,” a “commodity,” or a “virtual currency.”
Historically, money has always been created by a central bank using a printing press. In fact, money has been created by governments since the earliest days of the civilizations, starting with the first recorded transactions in recorded writing. In modern times, the creation of money usually comes from a bank that either creates it through its own banking system, or by private banks acting in its interest. However, banks are not always necessary; private currencies can also be created at the government’s request.
Money, unlike other goods and services, is not traded against another good or service. For example, two commodities – gold and silver – can never be traded against each other directly. Instead, money is traded for goods, services, or for various debts between individuals. This transaction cost, or markup, makes the purchase and sale of money very different from the production of commodities, which have no exchange cost because their production does not involve any transfer of existing goods or services.
Money, unlike commodities, is not produced in large quantities and is generally only issued by a central bank when the amount of cash in its reserves exceeds the monetary base, which is the total value of all outstanding loans. Money, then, serves as a medium of exchange in case of needs for cash between individuals and among various enterprises and institutions. Money, then, is a basic need, since without it there would be no efficient method of exchange. Money, therefore, plays a crucial role in ensuring the maintenance of a country’s economic system. The existence and movement of money therefore, go a long way in determining the level of development of society.