Functions of Money - The Economic Lowdown Podcast Series 

Throughout history, money has taken many different forms: beads, wheels, shells, and cows included. However, there have always been three things that all states share. This eight-minute episode of our Economic Lowdown Podcast Series explains what. You will also learn how commodity, representative, and current fiat money differ.

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Cash is something that individuals utilize consistently. We acquire it and spend it, yet only frequently contemplate it. Financial specialists characterize cash as any broadly acknowledged walking liberty half dollar conclusive instalment for labour and products. Through the ages, money has taken many forms; Examples include cowry shells found in Africa, large stone wheels found on the island of Yap in the Pacific, and wampum, a string of beads used by Native Americans and early Americans. So what are the similarities between these forms of cash?

They all serve the same three purposes for money:

First: Value can be stored in money. If I work today and earn $25, I can keep the money until tomorrow, next week, or even next year because it will keep its value. In point of fact, storing value is more efficient when money is held than when other valuable items, like corn, could rot. Money could be a better store of value, even though it is effective. Over time, inflation gradually reduces money's purchasing power.

Second:

A unit of account is money. Money is like a yardstick—the instrument we use to determine the value of economic transactions. If you're looking for a new computer, the price might be compared to corn, bicycles, or t-shirts. So, for example, your new computer might cost you between 100 and 150 bushels of corn at today's prices. However, you would find it most helpful if the price were set in terms of money because money is a common way to measure value across the economy.

Third: 

Cash is a mode of trade. This indicates that money is widely accepted as a payment method. For example, when I go to the grocery store, the cashier will receive my payment. The following statement appears on U.S. paper money: This note is accepted as payment for all public and private debts. This indicates that the United States government safeguards my ability to pay in U.S. dollars.

Consider life without money to appreciate the benefits it provides to an economy. As an orchestra bassoonist, imagine I have a car that must be fixed. I would have to barter to fix my car in a world without money. To make an exchange, I would need to discover a "coincidence of wants," which is the unlikely circumstance in which two individuals each possess something the other person desires at the appropriate time and location. For example, to drive to my next orchestra rehearsal, I need to locate a mechanic willing to exchange car repairs for a private bassoon concert by tomorrow at 9 a.m. In an economy where individuals have extremely concentrated abilities, this sort of trade would take a mind-boggling measure of time and exertion; in fact, it might not even be possible. However, money lowers the cost of this transaction because.

In contrast, locating a mechanic willing to trade car repairs for bassoon concerts might be challenging, and it is easy to find one helpful to exchange money for car repairs. If I had no money, I would have to look for producers to give me bassoon performances in exchange for their goods and services. Instead, I can offer my 1971 half dollar value services as a bassoon player in an orchestra to people willing to pay for orchestra concerts with money in a money-based economy. I can then use my money to purchase a wide range of products and services.

According to economists, money creation is comparable to the wheel and the inclined plane, two of the greatest inventions of ancient times. However, how did money originate? Commodity money—money that had value because it was made of a valuable substance—was common in early forms of currency. Coins made of gold and silver are examples of commodity money. In addition to the fact that the gold itself was valuable and could be used for other purposes, gold coins were helpful because they could be exchanged for other goods or services; in the following stage-representative form of money replaced commodity money.

Representative money is a certificate or token that can be exchanged for the underlying commodity. For instance, rather than carrying the gold commodity money, you might have taken a paper certificate "backed" by the gold in the vault and represented the gold. It was agreed that the certificate could be exchanged at any time for gold. In addition, carrying the certificate was more straightforward and safer than carrying actual gold. As a result, people began to trust paper certificates just as much as gold did over time.

The use of fiat money, which is still prevalent in today's economies, was made possible by representative money.

Money that has no intrinsic value and does not represent an asset in a vault is known as fiat money. The fact that the government of the country issuing it has declared it to be "legal tender," or an acceptable payment method, gives it value. We accept the value of the money in this instance because the government claims it has value, and other people value it sufficiently to take it as payment. For example, I accept U.S. dollars as my income because I am confident I can exchange them for local goods and services. I feel at ease taking it because I know others will accept it. Fiat currency is the U.S. currency. It does not represent gold or any other valuable commodity held in a vault, nor is it a commodity with high value. However, it is valued because it is legal tender, and people trust it can be used as money.

There have been a lot of different types of money throughout history, but some have been more successful than others because they have features that make them more useful. Durability, portability, uniformity, divisibility, limited supply, and acceptability are characteristics of money. Let's compare two potential examples of cash:

A cow. At various points in history, cattle were used as money.

A stack of 20-dollar bills that are worth as much as one cow.

Let's go over our list of qualities to see how they compare.

Durability.

Despite its relatively long lifespan, a cow's long journey to market can significantly lower its value and put it at risk of illness or death. On the other hand, twenty-dollar bills are relatively long-lasting and straightforward to replace if they become worn. Even better, the long journey to the market protects the bill's health and value.

Portability. The currency fits easily into my pocket, whereas the cow is challenging to transport to the store.

Divisibility. A 20-dollar note can be traded for different categories: a 10, a 5, four 1s, and four quarters. On the other hand, dividing a cow is difficult.

Uniformity.

There are numerous sizes and shapes of cows, each with its value; Cows are rare forms of currency. But, on the other hand, the size, shape, and weight of twenty-dollar bills are all the same; They are uniformly dressed.

Supply is limited. Money must have a finite supply to maintain its value. Even though only a few cows are available, ranchers would probably do everything possible to increase the number of cows opens, lowering their value. The Federal Reserve regulates the supply and, as a result, the value of 20-dollar bills and money as a whole so that money stays worthless over time.

Acceptability.

 Despite their intrinsic value, some individuals may not accept cattle as currency. On the other hand, 20-dollar bills are readily accepted. The government of the United States safeguards your right to make payments in U.S. dollars.

At this point, it appears "udderly" obvious that, in terms of the characteristics of money, U.S. 20-dollar bills are superior to cattle.

In conclusion, money has existed in many forms throughout history, but it has always served three purposes: exchange instrument, value store, and unit of account. Modern economies use fiat money, neither 1971 half dollar value backed by a commodity nor represented by one. Depending on the characteristics of money, even forms of money that share these functions may be more or less valuable.