Forgot your password?

The Basics of Money

By Edited Jul 28, 2015 4 22

LooseChange (24902)

I like to think that in each of our hearts there's a little Mr. Crab screaming "Money money money money money money!" every time we pass by a crumbled dollar bill, a quarter or even a penny. At the least, I know that this much is true for myself; I'm guilty of eyeing open wallets and the occasional loose change. For others, the voice may be much gentler.

Yet no one can deny that we tend to seek more money in general for different reasons without taking the time to know what it really is, which is a shame considering this economy and the amount of effort we place in acquiring it. Make no mistake; like anything else money is a serious investment of your precious resources that warrants your scrutiny. Otherwise why bother earning it at all?

If you are curious about the stuff in your pocket, I invite you to read onward. You might discover a new perspective you never had before.

What Is Money?

This can be a somewhat difficult question. From practical experience, most of us can agree that money is that which can be traded for most every good, debt or service in a market. Simply put, it is a medium of exchange.

However, did you know that anything can constitute as money in an economic system? Look around and you may spot children using candy as money between themselves, or card collectors trading basic card types for other more exotic versions. Pick up a History book, and you may also read that at one point in ancient China copper knives were traded as currency, whereas for meso-American civilizations coffee beans were highly prized.

Generally speaking, if it's collected in mass quantities for the sake of trading it anytime and anywhere then chances are that it's money. Of course, it's only money if most people you know are willing to buy it!

Who First Discovered Money?

Money historically evolved from bartering, making efforts to trace its origins extremely difficult. For now its beginnings remain as mysterious as whomever first created fire or invented the wheel.

Ideal Properties of Money

Given how anything can be money under the right circumstances, there are particular qualities that make certain kinds more attractive than others:

1) Divisibility- Can be easily cut, added, and measured at any fraction to match a certain price.

2) Valuable non-monetary uses- Has special properties that make it useful in the production processes of other items.

3) Durability- Does not easily lose its physical integrity over time.

4) Scarcity- Is not too plentiful nor too rare to acquire from natural resources.

5) Portability- Its storage does not pose a challenge or threat to other forms of wealth, and can be shaped to fit any container.

Having revewied these five major elements, it's no surprise why gold and silver have been popular monies for thousands of years. Both metals share in all of the ideal traits, and their only major differences are in their rarity and usefulness. Although no longer in common use among citizens of most developed nations, it's difficult to say whether both currencies are truly dead. Given their history and continued use in some official coins, there's a good chance that we may see their revival sometime in the future.

DummyCoins (24882)

(Not every currency is perfect. Take these fake 1-oz aluminum coins of yours truly for example: What was once a precious metal before the late 1800s can now get you, at best, a pack of bubblegum per pound.)

Why Money Is Essential For Economic Life

Simply treating money as a "medium of exchange" does not do it justice in demonstrating its vast importance to society. Imagine, if you will, a world without money:

1) Business would be blind- Without a reliable common denominator between differing sorts of wealth, there would be little to tell whether you were richer or poorer than your neighbor. Simply measuring how much "stuff" you have wouldn't be enough; you can always have a lot of nothing.

2) Trading collapses- Unless everyone became one hive-mind in a hurry, we would be at the mercy of what economists call "the lack of coincidence of wants" as we struggled to exchange anything at all. Customer service gets a whole lot nastier.

3) Production comes to a crawl- In a world without any efficient means of trade, the factories and production lines that require readily available inputs would be dead. Things get boring fast.

4) Humanity devolves into barbarianism- While a few traders may still exist, most people would eventually realize new and exciting careers in plundering. Post-apocalypse here we come!

Market Money Versus Government Money

Depending on your geographical location, you may be restricted into using only a set of officially-prescribed monies whether by direct decree or through indirect legal rules that give one money legal advantages over another in the marketplace. Such mandates are called "legal tender laws". Here are a few examples for those of us living in the United States:

§ 5103. Legal tender
United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.

§ 486. Uttering coins of gold, silver or other metal
Whoever, except as authorized by law, makes or utters or passes, or attempts to utter or pass, any coins of gold or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of the United States or of foreign countries, or of original design, shall be fined under this title [1] or imprisoned not more than five years, or both.

(Source: U.S. Code)

"Is this a good thing?"

That is a subject of hot debate between many economists. In a nutshell, the disagreement is over whether government interference in market processes is beneficial or not. Should people decide for themselves what is money for their business, or should governments decide for them? Even though I have my own positions on the matter, I will leave it up to you to think for yourself what ought to be the case.

Moving Forward

Now that you've taken the time to know the basics of money, I hope you later embark on the journey of knowing it even further. Besides just helping you be a more successful entrepreneur, appreciating how money works also helps you see how amazing civilization actually is. There's a lot of great History behind money, and it grows every time you trade it with a stranger. It's the ultimate means to a peaceful end.



Aug 20, 2010 1:50pm
Another ideal quality of money is that it is fungible (i.e. easily capable of substituting value for a high number of goods between most if not all people).

For instance a gold coin has higher fungability compared to a house. Although the house is worth a lot it cannot be simply exchanged in value for normal every day items like groceries or gas. To be used as money it must be easy to substitute value and also should be able to substitute value between all people.

Afterall - some people may find baseball cards to have high value however this will not be the case with the population at large. Some people will see no value in baseball cards. In this circumstance baseball cards are not fungible and would not make good money.
Aug 20, 2010 4:50pm
very nice to know in detail about money thanks
Aug 20, 2010 8:27pm
chezfat, perhaps I'm mistaken but it seems as if you may have mis-construed what it means to be fungible. Fungibility has little to do with marketability as much as it does have to do with the commodity in question being easily substituted by another commodity SIMILAR to itself, not for "a high number of goods between most if not all people".

For example, diamonds have similar molecular properties to one another yet they are not very fungible; one diamond can be undoubtedly unique to another. Thus if I loaned you a bag of diamonds, I won't just accept any diamond bag from you in the future; each diamond you give must be at least of similar quality to the ones before them. A very difficult task indeed! But if I loaned you, say, gold then as long as you brought back gold of equal amounts then I'd be happy...maybe.

You see, fungibility is one of those gray areas of money that I felt best to leave out. Depending on the situation, the material in question can be more or less fungible. If you loaned me a pure-gold ornament weighing one pound, and I instead returned to you one pound of gold bullion, you'd be right to be angry even though I gave you back equal amounts of gold.

Nevertheless, thanks for the input. It made for some delightful pondering!
Aug 21, 2010 11:43pm
Very interesting analysis on fungability - I'll be honest I haven't really pondered the intricacies of the term before I just know it on a conversational level even though it never really comes up in even educated conversation... you could probably write an entire article on the topic but I digress.

From my understanding it is the ability of a commodity (anything can be a commodity not just "commodities" - an Ipod could be a commodity in this senario) to be transferable between people as an exchange of worth. In your example the value of a bag of diamonds is relative to the quality of the diamonds in the bag. The fungability however is the ability to exchange that value for other goods or commodities. A bag of valuable diamonds may be highly valuable but the fungability or the ability to exchange that value for something else of equal valuable may be severely limited.
Aug 22, 2010 12:08am
I think we're on the same page. I never liked the term fungibility myself; it's often way too vague and complicated to bother mentioning for an introductory topic. It also doesn't help that many authors have their own interpretation of what fungibility is; austrian economics treats it a bit differently from neoclassical economists from what I've found. That's probably why I misunderstood you in the first place.

As always, your comments are welcome chezfat. ;)
Sep 12, 2010 3:54am
Grats on the first page =)
Sep 12, 2010 10:23pm
Thank you very much Zack. I like your art by the way. ;)
Sep 12, 2010 11:47am
Spam deleted!
Sep 13, 2010 6:43pm
Congrats on a well done article that deserves the feature it is today:) tweeting it for you!
Sep 13, 2010 6:56pm
I really appreciate that vetochemicals!
Sep 13, 2010 11:55pm
GOLD GOLD GOLD!!! The people's money!!
Sep 20, 2010 12:23am
Definitely deserved the feature, great article!
Oct 16, 2010 1:34pm
Nicely written article. The necessary downside to fungibility is that it reduces heterogeneous forms of labour into one abstract form of labour .
Oct 23, 2010 5:09am
Nice article money is evrything
Oct 28, 2010 8:34pm
Very interesting, especially in the present climate!
Nov 11, 2010 4:53am
nice article, congratulations on being on first page!
Jan 3, 2011 3:08am
this is a great article. I especially like how the basics of money is written in much detail.
Jan 3, 2011 4:51pm
Not a fan of money right now with the way that the govenments of the world are continually devaluing it. Gold is the best investment right now, I buy more of it when I can.

My last purchase of gold is a third more valuable now than when I bought it. Hugely better than all the stocks that lost value in the same period and having money in the bank that is worth less after one year in there despite the addition of interest.
Jan 4, 2011 3:15pm
Wow guys. I'm surprised this article is still being featured! Nice to see that money is being taken especially seriously in these troubled times.
Jan 7, 2011 4:20pm
Nice thought provoking article. Hadn't really thought about money / the origins of it like this. Thanks for sharing!
Jan 20, 2011 7:04am
Jan 21, 2013 5:50pm
Nice job getting on the front.
Add a new comment - No HTML
You must be logged in and verified to post a comment. Please log in or sign up to comment.

Explore InfoBarrel

Auto Business & Money Entertainment Environment Health History Home & Garden InfoBarrel University Lifestyle Sports Technology Travel & Places
© Copyright 2008 - 2016 by Hinzie Media Inc. Terms of Service Privacy Policy XML Sitemap

Follow IB Business & Money