Money is the reason that makes the world go around. The economies are based in the trade of cash to purchase goods and services. The economists define the definition of money, its origins from and how much it’s worth. Here are the diverse characteristics of money.
Medium of Exchange
Before the advent of the currency–that is, money–people used to trade for the items and services they wanted. Two people, each with one item that they wanted could sign an arrangement to exchange goods and services.
Bartering in the early days, however, lack the flexibility and transferability that make trading effective. For example, if a person owns cows, but wants bananas, they have to find someone who has bananas but also a desire to eat. What happens if the person finds one who is in need for meat, but has no bananas, and is able to only provide potatoes? To obtain meat, that person has to find people who have bananas and would like potatoes, and so on.
The inability to transfer trading goods for barter is exhausting complicated, confusing and inefficient. However, that’s not the only problem when a person meets someone would like to trade their meat for bananas, they might not think of a few bananas as worth a whole cow. This kind of trade will require coming to an agreement and figuring out an approach to determine the value of bananas in specific portions that belong to the animal.
Commodity currency was the solution to these issues. It is a form of product that acts 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 that were traded were characterized by certain traits that made them popular and therefore important, yet they were also sturdy as well as portable 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 used as a backer for paper currency, up to around 1970. 2 In the instance of the U.S. dollar, for instance, this meant that foreign governments could accept their dollars and convert them into gold at a certain rate in gold using an institution like the U.S. Federal Reserve. The interesting thing is that, unlike beaver pellets or dried corn (which could be used to create food and clothing and food, respectively) gold is a precious commodity simply because people desire to have it. It’s not necessarily beneficial–you cannot eat it or keep you warm during the night However, the majority people consider it gorgeous, and they are aware that other people think it’s gorgeous. Therefore, gold is a thing that is worth. It is a tangible symbol of wealth, based on the what people’s perceptions.
The relationship between gold and money provides an understanding of how money increases its value, as a representation of something worth it.
Impressions are the basis of everything.
The second kind of currency can be described as the fiat currency that does not require backing from an actual commodity. The value of the fiat currency is determined by demand and supply, and people’s trust in its worth. Fiat money was created due to the fact that gold is an extremely scarce resource and the rapidly expanding economies were unable to mine enough gold to support their currency demands. 3 4 For an economy that is booming the requirement for gold to create value for money is inefficient, particularly in the case where its value is generated by perceptions of the people who own it.
Fiat money becomes the symbol of value to people’s eyes which is the main reason why it is made. A growing economy appears to be able to produce other items that are important to its own economy and to other economies. The more robust economic system, the more its currency will be perceived (and wanted) and in reverse. But, the perceptions of people should be backed by an economy that is able to provide the goods and services people desire.
For instance, in 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 means that it is now possible to make greater amounts of paper currency than gold backing it. the state of the U.S. economy backed the dollar’s worth. If the economy stagnates in the future, the value of U.S. dollar will drop in both the domestic market through inflation as well as internationally, through exchange rates for currency. A collapse of the U.S. economy would plunge the entire world into a darkness, which is why many other countries and institutions are doing their best to make sure that this never happens.
The value of money (not just the dollar but all currencies) is determined solely by its buying power determined through inflation. 6 That is why printing money won’t make a nation richer. The creation of money is the constant interaction between tangible, real objects, our desire to have them and our belief in what is valuable. It is important because we want it however, we only want it to get the desired item or service.
How is Money Measured?
How much money is there and what kind of forms are it taking? Investors and economists are asking this question in order to determine if there is deflation or inflation. Money is divided into three categories, so that it can be more easily identified for measuring purposes:
- M1 The category of money encompasses all denominations of physical currency and coins as well as demand deposits, such as checking accounts as well as NOW accounts; as well as travelers check. This type of money is the most narrow of the three and is basically the money used to purchase goods and pay for things (see below for the “active cash” part further below). 7
- M2 – Based on more broad standards, this category adds all the money that is found in M1 to all related time deposits, savings account deposits and non-institutional money market funds. This is a category that represents cash that is easily converted in money. 8
- M3 – The largest type of cash, M3 blends all the money under the term M2. It includes big time deposit, institutions money market funds as well as short-term repurchase agreements and other more liquidity assets. 9
By combining the three categories to get the country’s money supply, which is the sum of all money in an economy.
The M1 category encompasses what’s known as active currency, which is the amount of coins and paper currencies in circulation. 7 The amount of active money fluctuates seasonalally as well as weekly, monthly and on a daily basis. Within the United States, Federal Reserve Banks provide new currency to Treasury Department. U.S. Treasury Department. 10 Banks lend money to their customers. This money turns into active currency once it’s actively circulated.
The fluctuating demand for cash is an constantly fluctuating active cash total. For instance, most people cash their paychecks or use ATMs during weekends and so there’s more cash available when it’s a weekday than the weekend or on a Friday. Cash demand among people decreases during certain times of the year, such as after the Christmas season in December For instance. 11
How Does Money Get Made
We’ve talked about the reason and how money, which is a representation of value produced in the economy But another significant aspect in the context of 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 that is in circulation, perhaps to spur economic activity it can surely print it. However, physical bills constitute only a small portion 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. When the central bank purchases these securities from the government and puts the money in the market and in the hands of the public. What is the procedure for a central bank like the Fed make money for this? It’s not as difficult as it seems it’s because the central bank creates the money and then transfers it to the companies that sell security. 12 Alternatively you could say that the Fed may reduce prices of interest permitting banks to offer credit or loans at a low cost–a process called cheap money. It also encourages both individuals and businesses to take out loans and spend.
To decrease the quantity of money and possibly to lower inflation the central bank performs reverse and sells government securities. The money the buyer gives the central bank basically removed from circulation. Be aware that we’re generalizing this case to simplify things.
As the people are able to believe to the money, the central bank is able to issue more. However, when the Fed issues too much money, its value will fall like anything else that is more plentiful than demand. So the central bank is unable to just print money according to what it wishes.
History of American Money History of American Money
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 were in charge of. In order to achieve this it was necessary that the British restricted the supply of money and banned colonies to create coins that were their own. Instead, colonies were required to exchange trade with English currency bills which could only be exchanged for English products. Colonists were compensated for their goods using these bills and were effectively shut out of trading with other nations.
The colonies went back to a barter system that used ammunition cigarettes, tobacco, nails pellets, and any other item which could trade. Colonists also took whatever foreign currency they could find and the most well-known was the huge gold Spanish dollars. They were referred to as”pieces of eight” because they were a necessity when you needed to exchange money you took out your knife, and then cut it into eight pieces. This is how we got the phrase “two bits” that is a quarter one dollars. 13
Massachusetts is the very first state to stand up against the country of its birth. It was in 1652 that the Massachusetts state issued the state’s own coinage of silver, including coins like the Oak Tree and Pine Tree shillings. The state evaded the British law that stipulated that the only monarch in the British empire could issue coins, and they did this by dating 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 introduced the very first printed money , known as bill of credits.
The tensions that existed between America and Britain increased up to the point that Revolutionary War broke out in 1775. The colonial leaders declared their independence and instituted the currency known as Continentals to fund their side of the conflict. The problem was that each government created as much money as they needed, without linking it with any assets or standards, which meant that the Continentals were subject to an explosion in inflation and eventually were eventually useless. This setback discouraged government officials from preventing the American administration from using paper currency for nearly 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-formed United States of America were not functional. The issue wasn’t solved for 13 years after, in 1788, when Congress was given constitutional authority to issue money and control its worth. Congress created a national monetary system and established dollars as the principal instrument of currency. 14 There was also a bimetallic standard which means that both gold and silver could be assessed in the same way and used to create paper dollars.
It took years to remove all foreign currencies as well as those competing with state currencies removed from circulation. Bank notes were circulated all the 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 attempt to use paper money once more. In the early 1860s in the 1860s, the U.S. government created more than $400 million of legal tender to fund its war against the Confederacy during the American Civil War. They were known as greenbacks due to their backs being covered in green. The currency was backed by the government and declared that they could use it to repay both private and public debts. However, its value did change in accordance with the North’s successes or failures during certain phases of the conflict.
The aftermath from the Civil War
In February 1863 The U.S. Congress passed the National Bank Act. The act created the monetary system that saw national banks issued notes that were backed with U.S. government bonds. In 1886, 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 there was some debate on what was a bimetallic test. Some advocated using silver as the currency while others favored gold. The issue was settled in the year 1900, with The Gold Standard Act was approved, making gold the sole source of backing the dollar. This meant that it was possible that you could have your money in paper and exchange it for the same worth in gold. In 1913 the Federal Reserve was created and granted the power to direct the economy through controlling the supply of money and interest rates on loans.
The Bottom Line
The way we use money has drastically changed from the time of skins and shells however its primary function isn’t changing at all. No matter what the form it takes, it provides us with a means to exchange of goods and services and helps the economy grow because transactions can be executed with greater speed.