Economists say that the invention of money belongs to the same category as the great inventions of antiquity, such as the wheel and the inclined plane, but how did money develop? The first forms of money were often commodity money—money that had value because it was a substance that had value. Examples of commodity money are gold and silver coins. Gold coins were valuable because they could be used in exchange for other goods or services, but also because the gold itself was valued and had other uses. Commodity money has given way to the next level – representative money. If an object can be held and converted into money in the future without loss of value, it is considered a good store of value. Various assets are considered stores of value because of their divisible, durability and portability. Risk aversion is the central concept behind a store of value, and prices are maintained when there is constant demand for the underlying item. For example, gold and other precious metals are stores of value because they offer benefits without loss of value due to their extended shelf life. Some economists consider cryptocurrencies such as Bitcoin and Ethereum to be a good store of value. Its characteristics – such as scarcity, divisibility , decentralized security network and ownership of value transfer – make it a good store of value. Large sums of money are hoarded for its store of value.
However, large price changes can mean that money does not survive its usefulness as a store of value. Especially in the event of rising inflation, purchasing power decreases and costs are imposed on the owners of money; Therefore, the liquidity restriction is binding. Money has taken many forms over the centuries: shells, wheels, pearls and even cows. However, all forms have always had three things in common. Find out what`s happening in this eight-minute episode of our Economic Lowdown podcast series. You will also learn how commodity money differs from representative money, and how both differ from fiat money today. For most of history, various commodities have played the role of money. Initially, trading agents used assets and commodities such as gold as a medium of exchange, based on their intrinsic values, durability, and portability. The functions of money are universal, and its determining property is based on the function it performs, such as purchasing power between merchants over time. Fiat money is a currency that has no intrinsic value and does not represent any assets in a vault anywhere.
Its value comes from the fact that it has been declared “legal tender” by the government of the issuing country – an acceptable form of payment. In this case, we accept the value of the money because the government says it has value, and other people appreciate it enough to accept it as payment. For example, I accept U.S. dollars as income because I am convinced that I can exchange dollars for goods and services in local stores. Because I know others will accept it, I feel comfortable accepting it. The U.S. currency is fiat money. It is not a commodity of great value in itself and it does not represent gold – or any other valuable asset – stored somewhere in a safe. It is appreciated because it is legal tender and people trust its use as currency. An asset, currency or commodity that retains its value over a long period of time Workers who are paid in a currency with high inflation will prefer to spend their income quickly rather than save it. [4] When a currency loses its store of value, or more precisely, when a currency loses its future purchasing power, it does not function like money. This leads people to use currencies from other countries as substitutes.
[4] To appreciate the amenities that money brings to an economy, consider living without money. Imagine that I am a musician – one in an orchestra – who has a car that needs to be repaired. In a world without money, I would have to trade for car repair. In fact, I should find a coincidence of desires – the unlikely case where two people each have something the other wants at the right time and place to make an exchange. In other words, I should find a mechanic willing to trade in car repairs for a private bassoon concert until 9am tomorrow so I can go to my next orchestra rehearsal. In an economy where people have very specific skills, this type of exchange would require an enormous amount of time and effort. In fact, it might be almost impossible. Money reduces the cost of this transaction, because while it can be very difficult to find a mechanic who trades auto repairs for bassoon concertos, it`s not hard to find one who trades auto repairs for cash. In fact, without money, any transaction would require me to find producers who would exchange their goods and services for bassoon shows. In a money-based economy, I can sell my services like in an orchestra to those who are willing to pay for orchestra concerts with money.
Then I can take the money I earn and pay for a variety of goods and services. This form of input cannot handle values with commas or dollar signs. You can only make a store of value an asset, currency or commodity that retains its value over a long period of time. An item is considered a store of value when its value is stable or increases over time but does not depreciate. Money is something that people use every day. We earn it and spend it, but we don`t think about it often. Economists define money as any good that is widely accepted as final payment for goods and services. Money has taken various forms over the centuries; Examples include cowrie shells in Africa, large stone wheels on Yap Island in the Pacific, and pearl necklaces called wampum, which were used by Native Americans and early American settlers. What do these forms of money have in common? They share the three functions of money: The most common store of value in modern times was money, money, or a commodity such as a precious metal or financial capital.
The purpose of any store of value is risk management due to stable demand for the underlying asset. [1] Until 1993, the United States was a gold standard country, meaning it used gold to guarantee its reserves. Investors could exchange their dollars for a lot of gold. The end of the gold standard concept gave the Federal Reserve even more power to influence macroeconomic factors such as inflation, unemployment rates and economic performance. After that, the implementation by the United States of a fiat currency, which is legal tender issued by the government but not guaranteed by a commodity. Representative money is a certificate or token that can be exchanged for the underlying commodity. For example, instead of carrying the money from the gold commodity, the gold could have been stored in a bank safe, and you could carry a paper certificate representing or “supporting” the gold in the safe. It was assumed that the certificate could be exchanged for gold at any time. In addition, the certificate was easier and safer to carry than real gold.
Over time, people have come to trust paper certificates as much as gold. Representative money led to the use of fiat money – the one used today in modern economies. In the past, precious metals were used by many economies to facilitate trade. For example, precious metals – such as gold, silver and platinum – served as stores of value because of their portability and divisibility capabilities. 4 This law recognizes that abortion is illegal and punishable A Interest-bearing assets are also considered a store of value because they generate income while preserving value. On the other hand, a commodity like milk is a bad store of value because it is perishable and decays and becomes worthless over time. A B C D 9 A person sits on a freely rotating laboratory stool that has no friction In summary, money has taken many forms over the centuries, but money has three functions everywhere: store of value, unit of account, and medium of exchange.
