Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context.
However, money doesn’t have any inherent value.
It is simply pieces of paper – or numbers on a computer screen.
A car has value because it can help you get to where you need to go. Water has a value because it has a use; if you don’t drink enough of it you will die.
Money has no more use than any other piece of paper until, as a country and an economy, we assign value to it. Now – it didn’t always work this way.
In the past money was in the form of coins, generally composed of precious metals such as gold and silver. The value of the coins was roughly based on the value of the metals they contained, because you could always melt the coins down and use the metal for other purposes. Until a few decades ago paper money in many Western countries was based on the gold standard or silver standard or some combination of the two.
Many of you have heard me say this over and over again. But here it is:
It’s NOT the money we want – but rather what money can provide us.
Money – well the bits of paper and some coins – is really a tool used for bartering. Or exchanging value. The use of barter-like methods may date back to at least 100,000 years ago, though there is no evidence of a society or economy that relied primarily on barter. Bartering really only came about to facilitate value exchange between strangers or different communities.
Many cultures around the world though, eventually developed the use of some sort of commodity money. That means money that was linked to a commodity or a tangible thing.
The Mesopotamian shekel (circa 3000 BC) was a unit of weight, and relied on the mass of something like 160 grains of barley.
Societies in the Americas, Asia, Africa and Australia used shell money – often, the shells of the cowry). According to Herodotus, the Lydians were the first people to introduce the use of gold and silver coins and it is though that the first stamped coins were minted around 650–600 BC. Further studies indicate that the Song Dynasty introduced the world’s earliest paper money.
The system of commodity money eventually evolved into a system of representative money. This occurred because gold and silver merchants or banks would issue receipts to their depositors – redeemable for the commodity money deposited. So rather than having to cart around the actual commodity money – of gold, silver, cloth, salt, shells, etc – these items were ‘represented’ by a receipt.
Eventually, these receipts became accepted as a means of payment and were used as money. Hence these receipts were representing the commodity. And was the first, real instance of using paper as means of representing value exchange.
These receipts then become more elaborate and are now recognised as Paper money or banknotes.
Now, this was all based on moving from commodity money to representative money. Then in 1971 President Nixon announced that the United States would no longer exchange dollars for gold and the ‘gold standard’ of the representative system ceased.
Modern currency is now referred to in economic circles as Fiat money. This is where is gets really interesting.
What started out as commodity money become representative money (all used for trading or bartering). The latter as it was simply too impractical to cart around carts of oxen to acquire goods or services.
And if these representative money, which was then based on the value of Gold as the representative, has ceased. How was money valued??
Fiat money or fiat currency is money whose value is not derived from any intrinsic value. Or from any guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order (a “fiat”).
So how does a ten-dollar note have value and some other pieces of paper do not? It’s simple:
Money is good with a limited supply and there is a demand for it because people want it.
The reason I want money is so I can use my money to get goods and services from others. They can then use that money to purchase the goods and services they want. And so on. Goods and services are what ultimately matter in the economy.
Money that has no inherent value. The value of money is called into being rather than being inherent in and of itself.
Money has value because people believe that they will be able to exchange this money for goods and services in the future. This belief will persist so long as people do not fear future inflation or the failure of the issuing agency and its government.
Some interesting origins about money words:
Fee – This word comes from the German word for cattle, vieh.
Shell out – The use of shells as currency among Americans, Polynesians and later, the European colonists, led to the phrase “shell out,” meaning “to pay.”
Salary – At one point, Roman soldiers were paid part of their wages in salt. The Latin word for “salt” is salarium.
Dollar – A count in a Czechoslovakian town called Jachymov started minting silver coins in 1519. The coins were known as talergroschen, which was eventually shortened to talers. Many nations have currency named for some variation of the word taler, including the word “dollar.”
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