What is Money?



Money is the reason that makes the world go around. The economies are based upon the trading of cash for goods and services. Economics experts define the definition of money, its origins from and how much it’s worth. Here are the diverse characteristics of money.

Medium of Exchange

Prior to the invention of the exchange medium–that is, money, people would trade to get the goods and services they required. Two people, each having one item that they wanted were able to sign an arrangement to exchange goods and services.

Bartering in the early days, however, lack the flexibility and transferability which makes trading profitable. For example, if a person owns cows, but wants bananas, they have to locate someone who has bananas but also a desire to eat. What happens if a person comes across someone who is looking for meat, but has no bananas and only offers potatoes? To obtain meat, that person has to find an individual who has bananas, would like potatoes, etc.


The inability to transfer trading goods for barter is exhausting confusing, ineffective, and confusing. However, that’s not the end of the story when a person is able to find someone to exchange meat in exchange for bananas, they may not think of a few bananas to be worth the price of a whole cow. The trade must come to an agreement, and then devising the method to figure out the value of bananas for particular components that belong to the animal.

Commodity currency has solved the problems. Commodity money is a kind of item that is used as a currency. The 17th century and the 18th centuries, for instance, American colonists used beaver pellets and dried corn for transaction. 1 Possessing widely recognized values, these items were used to purchase and sell other items. The items used in trade were characterized by certain traits They were highly sought-after and therefore useful, however, they were also sturdy transportable, lightweight, and easy to store.


A different, more sophisticated example of money that is made up of commodities is one that is a precious metal like gold. For many centuries gold was utilized to support paper currency until around 1970. 2 In the instance of the U.S. dollar, for instance, this meant that foreign governments could accept their dollars and change them for gold using a certain price for gold through an institution like the U.S. Federal Reserve. It’s fascinating that, unlike beaver pellets as well as dried corn (which are used to make food and clothing and food, respectively) gold is a precious commodity solely because people like to have it. It’s not really useful, you aren’t able to eat it and it doesn’t keep you warm in the winter however, the majority of people believe it’s gorgeous, and they are aware that people who think it’s gorgeous. Therefore, gold is a thing that is worth. Therefore, gold is a tangible symbol of wealth, based upon what people’s perceptions.

This connection between gold and money offers an understanding of how money increases its value as a symbol of something that is valuable.


Impressions Make Everything

The other type of currency can be described as Fiat money is a type of money that doesn’t require backing from the physical commodities. The value of these currencies is determined by demand and supply as well as people’s trust in its worth. Fiat money was created due to the fact that gold was the most scarce of resources, and the rapidly expanding economies could not always extract enough gold to meet their currency supply demands. 3 4 In a rapidly growing economy the requirement for gold to provide value for money is very inefficient, especially in the case where its value is generated by perceptions of the people who own it.


Fiat money is the symbol of the people’s sense of worth and is the reason the creation of money. A growing economy seems to be producing other goods that are worth it to its own economy and to other economies. The more robust an economy is, the more its currency will be perceived (and desired) and the reverse is true. But, the perceptions of people should be backed by an economy that is able to create the goods and services that consumers want.

For instance, in 1971 in the year 1971, in 1971, the U.S. dollar was taken off the gold standard. This meant that the dollar could no longer be redeemed in gold and the price of gold was no longer tied to any dollar value. 5 This meant it was possible to make greater amounts of paper currency than gold backing it. the condition of the U.S. economy backed the dollar’s worth. If the economy stagnates and the value of the U.S. dollar will drop in both the domestic market through inflation as well as internationally due to currency exchange rates. The collapse of the U.S. economy would plunge the entire world into a financial dark era, and numerous other nations and organizations are working hard to prevent this from happening.


The value of money (not only the dollar, but all currencies) is determined solely by its buying power determined by the rate of inflation. 6 That is the reason that simply printing new currency will not bring wealth to a nation. The creation of money is an ongoing relationship between tangible objects, our desire to have them as well as our faith in what is valuable. It’s worth it because we desire it, however, we only want it because it will get us the desired item or service.

What is the best way to measure money?

What exactly is available, and what kind of forms do they take? Investors and economists are asking this question to determine if there is deflation or inflation. Money is divided into three categories, so that it is easier to identify to measure:


  • M1 This type of money covers all denominations of physical currency and coins Demand deposits, which include checking accounts as well as NOW accounts, as well as travelers”checks. This is the smallest of the three and is basically the money used to purchase goods and pay for things (see below for the “active cash” subsection further below). 7
  • M2 with wider standards, this category adds all the money that is found in M1 with all time-related deposits, savings account deposits and non-institutional money market funds. This is funds that are easily converted in the form of cash. 8
  • M3 – The most broad type of currency, the M3 includes everything under the term M2. It includes huge time deposits institutions money market funds as well as short-term repurchase agreements and other more liquidity assets. 9


When we add the three categories together and we get the money supply of a nation which is the sum of all money in an economy.


Active Money

The M1 category comprises what’s known as active currency, which is the amount of coins and paper currencies in circulation. 7 The amount of active currency fluctuates throughout the year and is also fluctuated weekly, monthly, and on a daily basis. The United States, Federal Reserve Banks issue new currency to Treasury Department. U.S. Treasury Department. 10 Banks lend money to their customers. This money is considered active money when it’s actively circulated.

The fluctuating demand for cash is an constantly fluctuating active cash total. For instance, many people cash-checks or withdrawals from ATMs during weekends and so there’s more cash in circulation during the weekdays than the weekend or on a Friday. Cash demand among people is lower at certain times, following the holiday season of December as an example. 11


How Does Money Get created

We’ve discussed the reasons and the way in which money, a symbol of value produced in the economy But another significant aspect regarding the economy and money is the way a nation’s central bank (the central bank of the United States is the Federal Reserve or the Fed) can affect and influence the supply of money.


If the Fed is looking to increase the amount money available, possibly to stimulate economic growth it can surely print it. But, the physical bills make up just a tiny fraction of the total amount of money.

Another method for the central bank to expand the quantity of money available is to purchase government fixed-income securities that are available on the market. If the central bank purchases these securities from the government they put money into the market and directly into the hands public. What does a central bank, such as the Fed make money for this? It’s not as difficult as it seems it is that the central bank creates the money and then transfers it to the sellers of these securities. 12 Alternatively you could say that the Fed may reduce prices of interest by allowing banks to provide credit or loans at a low cost–a process known as low-cost money. This encourages both individuals and businesses to take out loans and spend.


To decrease the quantity of money or perhaps to lessen inflation in the first place, the central bank does the opposite by selling government securities. The money the buyer gives the central bank basically removed from circulation. Remember that we are merely generalizing this case to make things clearer.

Keep in mind that as the people are able to believe on the value of their currency the central bank is able to issue more. However, should the Fed issues too much money, its value will decrease just like everything else with a greater supply than demand. Thus the central bank is unable to just print money according to what it wishes.


History of American Money History of American Money

Currency Wars

The 17th century was a time when Great Britain was determined to ensure the control of the American colonies as well as the natural resources that they had control over. In order to achieve this they British reduced the amount of money available and banned colonies to issue coins on their own. Instead, colonies were required to exchange trade with English bill of exchange which could only be exchanged for English products. Colonists were compensated for their goods using the same bills and were effectively shut out of trading with other nations.

The colonies went back to a bartering system that included ammunition cigarettes, tobacco, nails pellets, and any other item which could trade. Colonists also took whatever foreign currency they could and the most well-known was the massive gold Spanish dollars. They were referred to as”pieces of eight” because the moment you needed to change money it was easy to pull out your knife, and then cut the coin into eight pieces. We can derive the phrase “two bits” which means a quarter one Dollar. 13


Massachusetts Money

Massachusetts was among the first state to stand up against the country of its birth. It was in 1652 that the Massachusetts state issued their own coins made of silver which included coins like the Oak Tree and Pine Tree shillings. The state overturned the British law which stipulated it was only monarchs of the British empire could issue coins. They did this by establishing the date of all of their coins in 1652. This was in a time period where the monarch was not in place. The year 1690 was when Massachusetts was also the first state to issue paper currency, dubbed the bills of credit.

Conflicts among America and Britain increased through the time the Revolutionary War broke out in 1775. The colonial rulers declared independence and instituted the currency known as Continentals to fund their side of the conflict. The problem was that each government printed the amount of money they needed, without linking it with any type of currency or standard, and so the Continentals saw high inflation and then were eventually useless. This was a setback for government officials from preventing the American authorities from using any paper currency for more than 100 years. 13


The aftermath of the Revolution

The chaos of the Revolutionary War left the new currency system of the nation a total destruction. A majority of the currencies issued by the newly created United States of America were not functional. The issue wasn’t solved till 13 years on, in 1788, when Congress was given constitutional authority to issue money and control its worth. Congress set up a national currency system and introduced dollars as the primary currency. 14 There was also a bimetallic standard which means that both gold and silver could be evaluated in and used to create paper dollars.

It took a long time to take all foreign currency and other currencies that competed with state currency removed from circulation. Bank notes were around for a long time, however, because the banks issued more banknotes than could cover with coins These notes were frequently traded at a lower value than the its face price. 16


At some point it was decided that eventually, the United States was ready to test the paper currency. In the 1850s in the 1860s, the U.S. government created more than $400 million of legal tender to fund its fight against the Confederacy during the American Civil War. They were referred to as greenbacks since their backs were made of green. The currency was backed by the government and declared that they could use it to repay the public and private debts. However, its value did fluctuate based on the North’s successes or failures at various stages of the conflict.

The aftermath of Civil War

In February 1863 in 1863, the U.S. Congress passed the National Bank Act. This law established the monetary system that saw national banks could issue notes that were backed with U.S. government bonds. It was the U.S. Treasury then worked to remove state bank notes from circulation, so that national bank notes would be the sole cash currency. 18




In this time of reconstruction the economy, there was a debate about what was a bimetallic test. Some advocates advocated for using only silver to support the dollar while others advocated for gold. The issue was settled in the year 1900, with The Gold Standard Act was adopted, which made gold the sole currency backing the dollar. This meant theoretically, you could have your money in paper and exchange it for the equivalent worth in gold. In 1913 the Federal Reserve was created and was given the authority to control the economy through controlling the amount of money available and the interest rates for loans.

The Bottom Line

Money has seen a significant change from the time of shells and skins however its primary function isn’t changing at all. Whatever shape it takes, money serves as a means of exchange of goods and services and helps the economy grow because transactions can be executed with greater speed.