Understanding the principles of Money
History
Barter system is said to have started at least 100,000 years ago, though there is no evidence to prove that a society depended on barter. Shekel was the first unit of weight and referred to s specific weight of barley. Eventually societies started using shell money and then gold and silver coins came about. Commodity money then changed into representative money, as gold and silver merchants or money lenders would issue receipts to their depositors which was redeemable for the commodity money that was deposited.
Functions
Medium of Exchange: The main use of money is that of a medium of exchange. It is used to allow the exchange of goods and services for a value that is accepted by all. Although it is this use contradicts its function as a store of value.
Unit of Account: This is a standard numerical unit of measurement of the market value of goods, services and other transactions. It is also known as a measure of relative worth. A unit of account is a prerequisite for all debt related commercial agreements. However to enable the function of unit of account money must be divisible into smaller units without loss in value, one unit must be equivalent to another, and must be of a specific weight so removal of any material is easy to detect.
Store of Value: This means that money must be able to be saved, stored and retrieved and then be used as medium of exchange.
Standard of deferred payment: This is an accepted way to settle a debt, a unit in which debts are denominated and the status of money as legal tender, in those jurisdictions which have this concept.
Types of Money
Commodity money is money where the value is derived from the commodity from which the money is made, like, precious metals, conch shells, pearls, etc. The commodity in itself constitutes the money and vice versa. Even today some gold coins like Krugerrand are based on this concept. They bear no face value stamped on them as they value directly according to their gold content.
Representative money is like tokens or certificates that can be reliable exchanged for a fixed quantity of commodities. Its value is related to the commodity that backs it, while it is not made up of that commodity.
Fiat Money is money as we know it today. Its value is declared by the government. This means that it is accepted as a form of payment within a country for all debts, public and private. It can be in the form of notes or coins.
Commercial Bank money or deposits are claims against financial institutions that can be used for buying goods or services. The forms of this money are checks, drafts, debit cards or even credit cards. This form of money is rapidly increasing in usage, and is said will soon make fiat money redundant.
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