Money (Meaning and Explanation)

We explain what money is, its creation, history, functions and other characteristics. Also, what types of money exist.

What is money?

The money It is a type of asset or good that is accepted within a community as a means of payment for their economic and commercial exchanges. These assets or goods serve as a unit of account and store of value, that is, they serve to measure the value of things on the same scale, thus facilitating exchange and transactions between people.

Usually, when talking about money we will immediately think of the bills and coins with which we buy things on the street. However, these objects are only representations of the expressed value, that is, they do not have a value in themselves, but rather have a value accepted by convention.

For example, a 100 dollar bill is equivalent to said value, that is, it is exchangeable for goods or services until it reaches that value, but in itself it is just a piece of paper, or in the case of coins, a few minted pieces of metal.

Since its invention, money has played an important role in societies, and Throughout history it has acquired very different forms and presentations. In pre-Columbian South American societies, for example, the cocoa bean or the manioc root (cassava) were used as a unit of exchange. In other geographies that same task was fulfilled by salt, barley, silver, gold, among other materials.

Today, however, we have cash (coins and bills), checks, or simply figures in our virtual accounts, but the principle of how money works remains the same.

Characteristics of money

Commonly, money has no value in itself, but has an exchange value that is abstract and symbolic that is, a value determined by convention.
Said conventional value expresses fundamentally the same thing although the scale of representation varies (for example, how many dollars or how many pesos are equivalent to payment for one hour of manual labor).
It must be issued by an authority that certifies its value and control its circulation, a role that the central banks of each nation play in the modern economy. They can decide how much money to print and when to remove damaged pieces from circulation, for example.
It can be expressed in many different ways: cash (notes and coins), checks, etc. In most of them it circulates from one hand to another in an anonymous but consensual manner: I accept the money because others will accept it from my hand too.
The money It is part of an economic system supported socially and institutionally and in this it differs from any other similar good. For that reason we cannot buy with a newspaper clipping, or with a bill that we draw ourselves.

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history of money

Money did not always exist: primitive communities did not know it, nor did they need it, since they managed their assets in a common and tribal way. This changed during the so-called Neolithic Revolution, in which sedentary lifestyle and agriculture changed man's ways of life, thus giving rise to private property and the need for exchange, since agricultural production supplied a little variable set of edible goods.

That's how it came about barter, the first system of merchandise exchange which consisted of directly exchanging some goods for others: the fisherman offered his surplus in fish to the farmer and the farmer in return offered him his surplus in fruits.

But this system, which works relatively well in small communities with few needs, had many drawbacks on a larger scale: barter had no single scale of value always depended on what others liked or needed, and did not allow savings.

For example: What would the fisherman do if the farmer no longer wanted fish? How many fish equal how many apples? What to do with the fish that nobody wants and that will be rotten tomorrow?

To solve these problems, certain goods began to be used as a means of payment since they were in constant demand and were more durable. Thus, societies that experienced the Age of Metals, such as the ancient kingdoms of Mesopotamia (around 2,500 BC), used various precious minerals: gold, silver, etc., which could be stored and which were universally accepted.

But then it emerged, for example, the drawback that the gold nuggets did not always have the same concentration of the metal, or sometimes they were not gold but some other similar but less valuable mineral. To avoid this, in ancient China around 1000 BC. C., small swords or tools were forged with the metal and used as currency in exchange instead of the raw mineral.

But a better system emerged around the 6th or 5th century BC. C., with the minting of the first coins: a process that consisted of working the precious metal in such a way that the king's authority certified its true value (its content of gold, silver or whatever), generally printing on it the face of the monarch and some official inscription or glyph.

functions of money

Money, broadly speaking, fulfills the following three functions:

It serves as a medium of exchange. Thus facilitating commercial transactions and avoiding the difficulties of assigning a common value, typical of barter. Furthermore, it is accepted by the entire community without distinction, and it is a lightweight good, easy to transport and accumulate.
Serves as a unit of account. That is, as a unit of measurement to express the value of goods and services, and thus be able to establish a scale regarding what is cheap and what is expensive. In addition, it allows savings, debts, etc. to be expressed in common terms.
It serves to preserve value. Since it normally does not deteriorate from one day to the next, nor is it perishable in the short and medium term, so the money received from today's sales can be used next week to buy other goods or services. This allows savings, investment, loans, etc.

types of money

There are various forms of money, depending on its presentation and the system used to maintain its value. Thus, we can distinguish between:

Merchandise or “real” money This is known as money that consists of goods or merchandise of their own value, exchangeable for others and also usable in themselves. This is the case of the cocoa beans that certain pre-Columbian cultures traded.
Representative money Money whose value is not its own, but of exchange, that is, it represents a value backed by some “real” asset: oil, gold, silver or even other currencies of greater value, such as the dollar used for the international reserves of the countries.
“Fiat” money or by decree Lacking intrinsic value, this money is decreed by the State and obtains its value from confidence in the economic solidity of the State. This is the case of the dollar, the yen, the euro and many of the strongest currencies in the world.
Trust money Its name comes from the Latin voice trusttranslatable as “trust”, since precisely its value comes from the trust that the community places in it. So it is not backed by any asset of intrinsic value, but rather by a promise to pay by the issuing entity. Seen this way, it works in a similar way to fiat money, and is the predominant reserve currency model in the entire world.
Electronic money or e-money In this case, it is money that does not have a tangible form of presentation, but rather exists within computer systems and is issued electronically. This is the case of money mobilized in bank money transfers, and also of electronic currencies such as bitcoin.

Money creation

Obviously, money cannot be created by just anyone. Under the banking system that exists today, there are only two mechanisms available to create money by States:

Legal money This mechanism can only be implemented by the Central Bank of each nation, and involves various processes of minting and printing banknotes. This is how only cash is generated.
Bank money For their part, private and commercial banks can issue money to grant loans, depositing it in their clients' accounts and with partial support in their cash ratio. Said money is normally electronic.

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