When people think of money, the main thoughts are usually how to get more, how to protect what one already has, and how to make good decisions about its use. Money is something that is at least a secondary thought to many of the decisions that we make in life.
Money is a “medium of exchange.” It is one of the greatest philosophical concepts in history. The use of money enables the exchange of goods and services that cannot occur with bartering to occur. When money changes hands, the premise behind the exchange is that it is voluntary and for the purchase of goods or services. An exchange will not occur if both participating parties are not sharing the view that there is a benefit to the exchange. Money is considered superior to the use of the bartering system because the same value is placed on the monetary value but the item being used in the bartering exchange would have different value to both parties (What is Money?).
Money is superior to the bartering system because a particular person looking for a particular good does not need to be found for an exchange to occur. Instead, there only needs to be a market in which services or goods can be sold. Individual goods are not sold. Rather, money is used as a common means of exchange. One provides a good or service and the recipient pays for the good or service with money rather than trying to find another good or service with which to trade. In turn, the person who provided the original good or service, who has received money in return, can then use that money to acquire a good or service for him or herself and again does not need to find someone looking to exchange a particular good or service. This ability to provide the same good or service multiple times to a variety of people led to a specialization of products and services provided by people (Asmundson, 2012).
The use of money has shaped the world in which we live today. Because of this more uniform method of exchange, a division of labor has been able to be made. Since labor can be divided, specialization is also possible. Our modern world, and the worldwide economy on which it is based, is driven on the concept of the specialization of labor to provide both goods and services. It is uncommon in industrialized nations to find communities where self-sufficiency exists. Rather, the most common lifestyle found is working adults who have a special skill and refined it to a point that either the good produced or the service performed is at a higher level that the average person would be unable to do so as well. That being the case, others are willing to pay money to obtain the superior good or service. Since society has become accepting of exchanging money to get a higher quality good or service produced by others, it is expected that money will be exchanged in order to obtain most of the goods and services that one needs. This expectation for a higher quality good or service and the willingness to pay others for it is the mainstay of society and enables society to continue to further specialize the production of goods and services. As long as people are willing to pay others for most of their needs to be met, this system will continue to flourish.
It is also possible to accumulate wealth over a period of time, over a lifetime, and pass wealth on from one generation to the next. Having a uniform system of exchange has made it possible for peaceful transactions and exchanges to occur between people. When the United States was a primarily agricultural society, the farm was usually either inherited by the oldest son or divided amongst the sons upon the death of the father. Eventually, the pieces of the farm were too small to even sustain a family. This is one of the reasons that westward expansion occurred. Rather than needing to divide materialistic goods as the only way or the main way to pass inheritance on to surviving family members, through the use of money, a value can be placed on material goods and the estate can be divided equitably amongst the desired number of survivors.
In order to determine what the value of money should be based on, people considered what always had a significance and value to all of them. It needed to be a non-consumable good that would retain its value so that future exchanges between people would continue to be simple. Almost three thousand years ago, the commodity that people agreed to base the value of money on was the gold coin, and this remains the basis of money even in today’s society. Even though much of today’s monetary exchanges are electronic, they are still based on the value of the gold coin. We, as regular members of society, just do not see the gold coins. We have faith that the electronic exchanges are based on the value of our currency because of the tradition and history of it having been so from before our birth. We trust that the exchange is fair, without really giving any thought to how the transaction is backed. With this trust, the way in which transactions are processed today will continue to function (What is Money?).
In recent times, when the paper form of money became backed by gold and silver, but people no longer needed to carry gold and silver, flat money was developed. On its own, flat money has no value. It only works because people have faith that it has worth. In recent times this faith comes from the government backing the flat money supply. There is a set amount of flat money in the system at any one time. When the value of money goes down as a whole, it is known as deflation. Inflation is when the demand for goods and services remains consistent but there is more money in circulation. The United States checks monthly and makes adjustment when needed to try and maintain a steady amount of money in circulation.
The amount of precious metals available does not affect the money supply. Governments face a situation about determining how much money to print because there is a limited amount of precious metals but no real limit as to how much money can be printed. If too much money is printed, prices will increase. If this happens quickly, people will lose faith in the flat money system.
There have been countries where inflation occurred rapidly and people did lose faith in the flat money of that country. In the 1980s, when this situation occurred in Brazil and Argentina, the countries defaulted to the more stable United States dollar. When this situation occurs it is called de facto, or unofficial, dollarization. It can be difficult for a country to reverse the damage done by the country’s government monopolizing the nation’s currency. Other countries have four methods to restore faith in their currency when it was becoming shaky by the public. In 2005, Turkey eliminated six zeroes from its currency so that 1,000,000 liras became 1 lira. In 1994, Brazil introduced a new currency which it named the real. In both situations, the new currency worked only because the citizens backed the new money. If the money receives the support of the people using it, it is just money .
The Federal Reserve Bank of New York explains money by defining the per capita (per head or per person) supply of money available in the United States. It explains that there are three ways to measure the money supply. These numbers, when combined with the total sum of debt of the United States’ nonfinancial sectors constitute the available money supply. M1 is the narrowest measure of money and is made up of all money that the public has in their hands, including what is in their checking accounts and travelers checks. M2 includes all of the money in M1 plus money in savings accounts, time deposits under $100,000, and money that is in retail money market mutual funds. M3 includes all money in M2, therefore all money in M1, and time-deposits of over $100,000, money in institutional money funds,, money in depository institutions, the Eurodollars that United States residents have in foreign branches of United States banks and all banks in Canada and in the United Kingdom (Moffatt, M).
References
Asmundson, I. &. (2012, September). What is Money? Retrieved from International Money
Fund: http://www.imf.org/external/pubs/ft/fandd/2012/09/basics.htm
Moffatt, M. (n.d.). What is Money? Economics. Retrieved from About.com: http://economics.about.com/cs/studentresources/f/money.htm
What is Money? (n.d.). Retrieved from The Privateer Gold Pages: http://www.the-privateer.com/gold-b.html
