Last Updated on October 27, 2021
What Is Money?
Money is the lifeblood of commerce. The exchange of money for items and services is essential to economic activities. Money, according to economists, is anything that can be exchanged for goods and services. Here are some of the money’s varied qualities.
Money is a way to get what you need. People trade goods with other people before money was invented. Money has worth it because it is like gold, which is valuable to most people. Some government-issued currencies are not backed with anything but the stability of the government that issues them.
Money as Medium of Exchange
People would trade before money was invented. They would have to be friends or family for this to work.
In early forms of bartering, people can’t divide and trade things. For instance, someone needs bananas and has cows. They need to find someone who wants both bananas and cows. But if they find someone who needs cows but doesn’t want bananas? That person will need to find the next person with a need for meat and interest in fruit. And that next person needs to find someone who wants bananas and is interested in dairy. This process continues until there’s a match or the person trades their goods for something they want but don’t need.
The lack of transferability of bartering for goods is tiring, confusing, and inefficient. For example, if someone trades with another person for meat and bananas, they may not agree that a bunch of bananas is worth a cow. This trade requires coming to an agreement and devising a way to determine how many bananas are worth certain parts of the cow.
Money has different features like a medium of exchange, measure and standard of deferred payment, store value, and security against future problems. But there are other forms too like insurance against future problems and reward for present sacrifice.
Money as a Measure of Value
Some forms of money are used to measure value while other forms of money can also be used as a form of payment.
How Is Money Measured?
But how much money is there? What are the different types of money? Economists and investors do research to see if there is inflation or deflation.
- M1 – This type of money is cash and coins. It also includes checking accounts and NOW accounts. This type of money is the smallest, but it is used to buy things and make payments for things you purchase or owe from other people.
- M2 – This category is all the money that can be turned into cash, like savings accounts and time deposits.
- M3 – M3 includes all the other types of money, like M2 does. It includes other larger liquid assets.
This is the total of all the money in a country’s economy.
Money as a Store of Value
One feature of money is that it can be saved for later use, which allows people to collect savings over time. The value of the stored savings can fluctuate depending on market conditions. Some currencies are not backed by anything but the stability or strength of the government. If people do not have faith in the stability of a government, they may not see the value of its currency.
Money as a Standard of Deferred Payment
People might be able to trade things for goods and services before money was invented, but it would be difficult to set up a system that specifies when people will receive the traded goods or services. For example, someone might be willing to trade goods for services today, but the person providing the goods and services wouldn’t want to risk losing something they need tomorrow. Money can also be used as a standard of deferred payment because people can make promises about how the money will be repaid in future transactions without actually trading anything at that moment.
Money as a Measure and Store of Debt
Money can be used as a measure of debt, which is the amount owed by one party to another. The debtor specifies how much money will be repaid and when it should be repaid. The creditor receives this information along with an assurance that the debtor will repay the debt. Money can also be used as a means of storing debt because it can be saved for later payment without losing value over time.
Money as Insurance Against Future Problems
When people save money today, they are saving up so they have something to spend tomorrow if their financial situation becomes worse than it is today. People might decide to save money in case resources become scarce or prices increase dramatically after tomorrow’s harvest. People may also want to store money because future opportunities may not be available because of market disruptions.
Money as a Reward for Present Sacrifice
People can use the money to repay themselves in the future for accepting unpleasant or difficult work today. They might accept contract work that pays low wages but offers flexible hours and working conditions. People who save money when their income is low may also be using this feature of money to reward themselves when they experience an increase in income in the future.
How Money Is Created
We will discuss now how it is created in the economy, and how a country’s central bank can control the money supply. This is important because if you want more money in circulation, they can print it. But most of the money isn’t physical bills.
The central bank can pay more money by buying government securities in the market. When they buy these securities, more money is put into the hands of the public. We don’t know how it works, but they just do it.
Alternatively, the Fed can do something called lowering interest rates. This can make it easier for banks to give out low-cost loans or credit. This encourages businesses and people to borrow money and spend it.
The central bank does the opposite. It sells government securities. The money that people pay to the central bank goes away forever. This is because we are generalizing in this example to keep things simple.
A central bank cannot keep printing money without end. If too much money is being printed, the value of that currency will drop. It will go down for a reason called supply and demand. But as long as people have faith in the currency, a central bank can issue more of it. However, if they issue too much money then the value of that currency will go down too. That’s because there is more than enough supply than demand for that certain thing – which would be these coins in this case.
A cryptocurrency (also known as a “cryptocurrency” or “digital currency”) is a form of digital money that may be used to purchase items and services, but which uses strong cryptography to secure online transactions.
The largest cryptocurrency in terms of market cap is Bitcoin, and we will be using that as a reference. Cryptocurrencies are all based on blockchain technology which is the underlying algorithm that allows for trade without a middleman like a bank.
To understand how cryptocurrencies work, you need to understand how blockchain technologies work first. Blockchain technology works similarly to the way DVDs work. Remember those scratch-off symbols on movies used to find out if they were counterfeit? That’s because there are thousands of copies of the movie, but only one real version at any given time.
Cryptocurrency mining is when computers solve complex math puzzles or problems by running an algorithm called proof-of-work. When these problems are solved, it is added to this public ledger called the blockchain. A new block is created with all of the transactions in it.
There are people who use their computer hardware to solve these math problems called miners. They get cryptocurrencies for each transaction they add in a specific time frame called mining rewards. But in Bitcoin’s case, they release something called Bitcoin Cash after certain blocks are solved. There are also transaction fees that exist on Bitcoin’s network which go to the miners as an extra incentive for verifying transactions on Bitcoin’s network.
Bitcoin has its own regulation system where it regulates itself without needing help from anyone else by adjusting variables like mining difficulty or how much currency is put into circulation at any given time through different techniques like halving, encryption, and complex economic factors depending on the needs of the network.
The Bitcoin community has also encouraged others to create their own versions of Bitcoin which are known as altcoins. There are now over 1000 different cryptocurrencies in existence! This is due to the fact that they all run on decentralized networks, so they don’t have one central point where control can be invested.
Some people believe that cryptocurrency is the next big thing because it allows for transfers without a middle man like banks or other institutions where costs can be minimized through efficiencies created by eliminating these middlemen. The United States Department of Justice believes cryptocurrency could even aid organizations like criminal groups because of how difficult it is to trace them once they’re converted into cash according to Interpol’s digital strategy coordinator Chris Dreyer.
What happens when you have too much of something?
When there is an overabundance of that item or resource then its value decreases because it has the same amount as the other items and this causes a drop in value. If we’re talking about cryptocurrency: Over time, this would happen if transactions aren’t verified and added onto the blockchain at any given time. This can cause problems because people won’t accept currencies that lose their values over time so they’ll go back to using good old fashion cash. That’s why Bitcoins aren’t created by central banks – instead, they are created through mining which only adds them to the actual network slowly over time.
However, governments will still try to regulate cryptocurrencies, but since they’re decentralized, messing around with them is pretty hard. In the same way that governments can’t control other forms of money because it’s global, it’s almost impossible to regulate cryptocurrencies because they’re decentralized and don’t have a central point of authority.
What do you think? Is cryptocurrency another global economic shift or just a passing fad?