Everyone uses money. We all want it, work on it and think about it. Although the creation and growth of money seems somewhat intangible, money is how we get what we need and what we want.
The task of determining what money is, where it comes from and what it costs belongs to those who devote themselves to the discipline of economics.
Here we look at the multifaceted characteristics of money.
What is money?
Before the development of the medium of exchange — i. e., money — people would exchange goods and services that they need.
Two people, each of whom possessed certain goods that the other wanted, entered into a trade agreement.
This early form of barter, however, does not provide portability and divisibility, which makes trading efficient. For example, if you have a cow, but you need bananas, you should find someone who has not only bananas, but also a desire for meat. What if you find someone who has a need for meat but no bananas and can only offer you rabbits? To get his meat, he or she must find a person who has bananas and wants rabbits … and so on.
The lack of tolerance for barter goods, as you can see, is tiring, confusing and inefficient. But this is not where the problems end: even if you find someone with whom to trade meat for bananas, you might not think that a bunch of them costs a whole cow. Then you will need to develop a way to share your cow (a messy business) and determine how many bananas you are ready to take for certain parts of your cow.
To solve these problems, commodity money came: a type of product that functions like a currency. For example, in the 17th and early 18th centuries, American colonialists used beaver skins and dried corn in transactions; with generally accepted values, these goods were used to buy and sell other things. The types of goods used for trade had certain characteristics: they were widely desirable and therefore valuable, but they were also durable, portable and easily stored.
Another, more advanced example of commodity money is a precious metal, such as gold, which has been used for centuries to return paper currency until the 1970s. For example, in the case of the American dollar, this meant that foreign governments could take their dollars and exchange them at a certain rate for gold with the US Federal Reserve. Interestingly, unlike beaver skins and dried corn (which can be used for clothing and food, respectively), gold is precious solely because people want it. This is not necessarily useful — after all, you cannot eat it, and it will not keep you warm at night, but most people think it is beautiful, and they know that others think it is beautiful. So, gold — this is what you can safely assume. Consequently, gold serves as a physical icon of wealth based on people’s perceptions.