What Is Money?

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The Oxford definition of money is:

A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.

Payment for work; wages.

The assets, property, and resources owned by someone or something; wealth.

Everybody uses money, and as I've said before, some (including me) think of it a necessary evil.

The most obvious ‘function’ of money is simple: it makes it easy for people to buy and sell things. Money is considered essential to the workings of the modern economy.

Money is also used to help price things. When you buy something, you are often charged pounds and pennies.

The price could be listed in other units (bags of rice, pints of milk, etc) but money offers a shared standard, making it easier to compare prices.

The Four Different Types of Money:

  • Commodity Money

Commodity Money is probably the oldest type of money. It builds on natural resources that act as a medium of exchange, store of value, and unit of account. This type of money originates from the bartar system, where goods and services are directly exchanged for other goods and services of the same kind. The important thing to note about commodity money is that its value is defined by the vital value of the commodity itself. In other words, the commodity itself becomes the money. Examples of commodity money include gold coins, beads, shells, spices, etc. which can be swapped.

  • Fiat Money

The government declares fiat money to be legal tender, which requires all people and firms within the country to accept it as a means of payment. If they fail to do so, they may be fined or even put in prison. Unlike commodity money, fiat money is not backed by any physical item. By definition, its essential value is significantly lower than its face value. The value of fiat money is taken from the relationship between supply and demand. In fact, most modern economies are based on a fiat money system. Examples of fiat money include coins and bills etc.

  • Fiduciary Money

Fiduciary money depends for its value on the confidence that it will be generally accepted as a medium of exchange. Unlike fiat money, it is not declared legal tender by the government, which means people are not required by law to accept it as a means of payment. Instead, the issuer of fiduciary money promises to exchange it back for a commodity or fiat money if requested by the bearer. As long as people are confident that this promise will not be broken, they can use fiduciary money just like regular fiat or commodity money. Examples of fiduciary money include cheques, bank notes, or drafts.

  • Commercial Bank Money

Commercial bank money can be described as claims against financial institutions that can be used to purchase goods or services. It represents the portion of a currency that is made of debt generated by commercial banks. More specifically, commercial bank money is created through what we call fractional reserve banking. Fractional reserve banking describes a process where commercial banks give out loans worth more than the value of the actual currency they hold. At this point just note that in essence, commercial bank money is debt generated by commercial banks that can be exchanged for “real” money or to buy goods and services.

I used this for inspiration!:

https://edu.bankofengland.co.uk/knowledgebank/what-is-money/

You could also look here to see more about the history etc.

https://en.wikipedia.org/wiki/Money

I found the above helpful!

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