May 25, 2024

What is money?

Money is one of the most fundamental elements in any economy. Without money, we would have to barter, just like in ancient times. So we would exchange services or goods.

For example, the easier it is to communicate in conversations using the same language instead of using facial expressions and gestures, money ensures that each exchange is simple without complexity.

In countries that have lost faith in money, barter economy is often preferred. The main reason for these countries where barter economy is preferred is due to hyperinflation . For example, in the past, when the Soviet Union was disintegrating towards the end of 1980, people started to use cigarettes as a currency.

Of course, it must be said again that barter economies are not efficient. To understand this, it will be enough to think that you have to offer a different and attractive product or service every time you go to the store.

History of Money and Historical Development of Money

For hundreds of thousands of years, humans used primitive methods of barter, giving shells and gems for food and other important commodities.

The first use of a currency began approximately 5,000 years ago, with the shekel in present-day Iraq. It was the first currency, but as you can imagine, it was not a currency as we know it today. This currency represented a certain weight of barley for a certain amount of gold and silver. Thus, the shekel eventually became a currency.

The British currency was named the pound for a similar reason. Because it was equivalent to a pound of silver in weight.

The Romans and Ancient Greeks used gold and silver coins. The Latin “denarius” has evolved into Dinar in various countries such as Algeria and Jordan. The dinar’s d was used as an abbreviation for the English penny before the decimal system was introduced in 1971. The Portuguese and Spanish equivalents of money “Dinero” and “Dinheiro” are also based on this origin.

The first banknotes were printed and widespread in China in the 7th century. The idea of ​​paper banknotes came to Europe 1000 years later, in 1661, with Sweden’s Stockholms Banco.

What are the functions of money?

Although it is the main medium of exchange, money has two different basic functions. We can examine them respectively as unit of account and store of value .

The first of these is a unit of account. That is, it is a criterion by which goods and services are priced, that helps us to evaluate. On the other hand, another and second function of money is that it functions as a store of value. That is, it does not lose its value over time.

However, of course, whether paper money fulfills this function is a separate issue today. When it comes to both dollar bills and euro bills or pounds, we know what constitutes money. However, any exchangeable unit can serve as a substitute for money.

Examples of this are gold, jewellery, or cigarettes, as was the case in the Soviet Union. On the other hand, money today is more effective than ever at keeping the invisible flow of credit between lenders and buyers.

What Are The Currency Types?

When it comes to money types, we can talk about two types of money. The first of these can be defined as commodity money , while the other can be defined as legal money . So let’s examine both types of money and see what they mean.

Commodity Money

Although it is not really a currency, it has real value. Probably one of the best examples of commodity money is the precious yellow metal, also known as gold. Because gold is used as a basic metal in both jewelry and industry.

Apart from gold, there are also various examples of commodity money. A number of examples include silver, copper, brass, corn, alcohol, and cigarettes, among other commodity coins. They have real value just like gold.

Legal Money

This is money that is not a real other. Also known as “fiat money” in English. It means “let it be” in Latin. We can translate it into Turkish as “Itibari money”.

What we call legal money means that governments legally assign a certain value to worthless pieces of metal and paper. This system is widely used in modern, developed economies.

The Federal Reserve and the US Treasury issue dollar bills. The Bank of England issues pound notes such as 5, 10, 20. In Turkey, the Central Bank issues banknotes such as 5, 10, 20, 50, 100 and 200.

Essentially, paper money could be exchanged for commodity money. Technically, citizens could demand a certain amount of gold against dollar bills.

However, since 1971, this change has been ended with a decision made by the former US President Nixon. Thus, the dollar literally became a legal currency. For more information on this, check out our Bretton Woods article, as well as our accompanying gold standard article.

Finally, it should be noted that the stability of fiat currencies is based on people’s belief in the country’s legal system and the government’s economic credibility. In this respect, it is very important to know this little note.

What is the Importance of Money?

The importance of money , both in human life and in the economy in general, cannot be ignored. One of the important ways to determine the health of an economy, especially given the importance of money in the development of the country, is to calculate the money flowing in that economy.

When people have more money, they feel rich and spend more. Businesses also order more raw materials and increase production to meet the increasing demand. This increases economic growth, especially share prices.

What Does Money, Liquidity and Liquidation Mean?

When it comes to money, the concept of liquidity should also be mentioned. Liquidity is a measure of how easily an asset, such as a house, a bar of gold or some silver, can be converted into money or other values ​​that can be used as money.

To give a few different examples for better understanding, stocks of large companies are quite liquid. Because the shares of large companies can be sold and sold without much effort, because buyers can be found easily. Other than that, real estate, for example, is illiquid because it takes a relatively long time to sell property.

On the other hand, businesses also try to turn their goods into cash by making liquidation sales. This act of turning into cash carried out by businesses is also called as liquidation.

To sum it up, money is not just a medium of exchange. It is more than just stocks of money in circulation and money in bank accounts. It’s kind of a basic mindset. The value of banknotes and coins in our pocket is actually much less than what is written on it. The real value of electronic money transfers from one bank to another is even less.

That’s why money should be supported with confidence. It is important to believe that both the payer has money and the government will prevent the currency from depreciating.

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