We explain what money is, its creation, history, functions and other characteristics. Also, what types of money are there.
What is money
Money is a type of asset or good that is accepted within a community as a means of payment for your economic exchanges and commercial. These assets or goods serve as a unit of account and store of value, that is, they serve to measure the value of things in the same scale, thus facilitating exchange and transactions between persons.
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 have a value accepted by convention.
For example, a 100 dollar bill is equivalent to that value, that is, it is exchangeable for goods or services until reaching that value, but in itself it is just a piece of paper, or in the case of coins, some pieces minted of metal.
Since its invention, money has played an important role in societies, and throughout the history it has taken on very different forms and presentations. In pre-Columbian South American societies, for example, the grain of cocoa or the cassava root (yucca) were used as a unit of exchange. In other geographies that same task was fulfilled by salt, barley, silver, gold, among other materials.
Today, on the other hand, we have cash (coins and bills), checks, or simply figures in our virtual accounts, but the principle of operation of money 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 essentially expresses the same thing even if the scale of representation varies (for example, how many dollars or how many pesos are equivalent to the payment of an hour of manual labor).
- It must be issued by an authority that certifies its value and controls its circulation, a role that in the economy modern meet the banks central of each nation. 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 (bills and coins), checks, etc. In most of them it circulates from one hand to another in an anonymous but consensual way: I accept the money because others will accept it from my hand as well.
- Money is part of an economic system endorsed socially and institutionally, and in this it differs from any other similar good. For that reason we cannot buy with a cut of Newspaper, or with a ticket that we draw ourselves.
History of money
Money did not always exist: primitive communities They did not know him, nor did they need him, since they administered their property in a common and tribal way. This changed during the so-called Neolithic Revolution, in which sedentarism and farming changed the ways of life of man, thus giving rise to the private property and to the need for exchange, since agricultural production supplied a fairly variable set of edible goods.
In this way, barter arose, the first system of merchandise exchange, which consisted in directly exchanging some goods for others: the fisherman offered his surplus in fish to the farmer and the farmer in return offered his surplus in fruit.
But this system, which works relatively well in small communities with few needs, had many drawbacks on a larger scale: Barter did not have a unique scale of value, always depended on what others liked or needed, and did not allow for saving.
For example: What would the fisherman do if the farmer no longer wanted more fish? How many fish are equal to how many apples? What to do with the fish that nobody wants and that tomorrow will be rotten?
To solve these inconveniences, certain goods began to be used as a means of payment, since they had a constant demand and were more durable. Thus, the societies that knew the Age of metals, like the ancient kingdoms of Mesopotamia (around 2,500 BC), they used various precious minerals: gold, silver, etc., which could be kept and which were universally accepted.
But then, for example, the drawback arose 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 they were used as exchange currency instead of the mineral in the raw state.
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 would certify its true worth (its content of gold, silver or whatever), generally printing the face of the monarch and some official inscription or glyph.
Thus was born the first form of money, simultaneously in China, India and Lydia (Anatolia). Since then, money has not stopped changing shape. Each empire issued its own currency and some were so coveted that they were assumed as their own by their neighboring kingdoms. The first banknotes were issued in China, around the 9th century, as a way to move large amounts of coins that were not practical to carry with you on the street.
The first European banknotes emerged in Sweden in 1661, hand in hand with the emergence of banks and credit: the Bank of Stockholm, led by the Dutchman Johan Palmstruch (1611-1671), gave those who deposited their precious metals in it a receipt that could be saved or traded, and that it functioned as the first voucher in history.
Until 1970, the different currencies of the world were backed by the gold standard, that is, the money in circulation in a country was a reflection of the amount of gold that was in its central bank. So, in principle at least, one could take a bill and go to the bank to withdraw its value in gold.
Currently the latter is no longer necessary, since the complex economic system assigns value to some currencies over others depending on their demandThe more confidence there is in the value of a currency, the more it will be coveted above the rest, and this is what distinguishes “strong” currencies from “weak” ones.
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 to assign a common value, typical of the barter. In addition, it is accepted by the entire community without distinction, and it is a light good, easy to transport and accumulate.
- It serves as a unit of account. This 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 you to express savings, debts, etc. in common terms.
- It serves to preserve value. Since it does not normally deteriorate overnight, nor is it perishable in the short and medium term, so that the money received in today's sales can be used next week to buy other goods or services. This allows savings, investment, the loan, etc.
Types of money
There are various forms of money, depending on its presentation and the system used to sustain its value. Thus, we can distinguish between:
- Merchandise or "real" money. It is thus known to money that consists of goods or merchandise of own value, interchangeable for others and also usable in themselves. This is the case of the cocoa beans with which certain pre-Columbian cultures traded.
- Representative money. The money whose value is not its own, but of exchange, that is, it represents a security backed by some "real" asset: Petroleum, gold, silver or even other currencies of greater value, such as the dollar used for the international reserves of the countries.
- Money "fiat" or by decree. Lacking intrinsic value, this money is decreed by the Condition and it derives its value from the 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.
- Fiat money. Its name comes from the Latin voice trust, translatable 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 by a promise of payment by the issuing entity. Seen this way, it works in a similar way to fiat money, and is the predominant model of reserve currency throughout the 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 transfers of money, 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 set in motion by the Central Bank of each nation, and involves various processes of minting and printing banknotes. Thus only cash is generated.
- Bank money. For their part, private and commercial banks can issue money to grant loans, depositing it in their accounts. customers and with a partial backing in its cash ratio. Such money is normally of an electronic type.