Money, as we know, has taken various forms and can be said to have existed since the dawn of civilization. Money is used to buy and sell goods and services. However, in today’s world, what we call money is paper currency; however, money was not always in the form we know it today.
Definition of money
The term “money” is thought to have originated from a Juno temple on the Capitoline, one of Rome’s seven hills. Juno was frequently associated with money in the ancient world.
There have been many different definitions of money in the world over the years, based on various theories.
However, money is a commodity that is widely accepted as a medium of economic exchange, according to economist theory. It is the medium for expressing the prices and values of goods and services; it is freely distributed from sender to receiver and country to country, allowing for exchange; and it also serves as the primary measure of wealth.
Money is a commodity or a means of exchange that is used in nearly every aspect of life and in every country on the planet. However, different countries use different types of money based on what is legally accepted in the country.
Money has been used since the dawn of civilization to exchange goods and services among individuals within a nation, as well as to conduct international trade within and outside the nation.
Functions of money
Money performs several functions as it is seen as the major foundation of economic activity in every society. However, William Stanley Jevons classifies money into four main functions.
- a medium of exchange,
- a common measure of value (or unit of account),
- a standard of value (or standard of deferred payment), and
- a store of value.
Money as a medium of exchange
When money is used to exchange goods and services, it completes its function as a medium of exchange. Money essentially eliminates some of the problems associated with the barter system of exchange, such as the “coincidence of wants.”
In essence, one of the major issues with the barter system was that one party might not have or make the item that the other desired, resulting in a case where there is no coincidence of desires. The presence of a medium of exchange aids in the resolution of this problem because both parties can agree on a measurement of the value exchanged.
Money as a common measure of value
In economics, a unit of account is a commonly used statistical financial unit for measuring the market value of goods, services, and other transactions. A unit of account, also known as a “measure” or “standard” of financial value and fixed payment, is a core requirement for the implementation of commercial payment terms.
Money serves as a foundation for pricing and bargaining. It is required for the development of effective accounting systems.
Money as a standard of value
The “standard of deferred payment” is a widely used method of debt and loan repayment. Money is used to measure the fair value of debts and loans, and its classification as legal tender in countries and states where it exists means that it can be used to settle debts.
Money as a store of value
Money must be able to be reliably saved, stored, and retrieved in order to serve as a store of value and be usable as a medium of exchange when it is retrieved. Before something can be considered money, its value must also remain constant over time.
Although some argue that inflation weakens the currency’s ability to serve as a store of value by lowering its value.
Types of money
Money has taken several forms and types. However, presently, the major recognized modern forms of money are:
- Paper money
- Metal money
- Bank money (Cheques)
- Near money, such as banknotes and treasury bills
- Electronic money
- Fiat money
There have been many different types of money throughout history, most of which are unique to the countries and societies where they are accepted as a means of exchange. Here are a few examples:
- Yap stones
- Cowries
- Leather money etc
Money That Is Sound
In a world where the value of a dollar is constantly changing, it’s more important than ever to have sound money. What is sound money? It’s a currency that has a stable value so that people can trust in it. When the economy is unstable, having sound money can help to stabilize it.
Sound money has been around for centuries and was even used by the ancient Romans. It’s based on the idea that commodities like gold or silver have a universal value. This means that no matter what country you’re in, gold will always be worth approximately the same amount.
During times of economic instability, people tend to flock to sound money because they know that its value won’t change.
Brief history of money
Money has always been important to people and the economy in general, and it has a long history of taking on forms that are closely linked to the technological advancements of the time and economy.
Money, as the most important modern invention, has gone through many processes and evolved in the ways and forms it is represented throughout history.
From the barter system to commodity money, metal money to the invention of the first coin and continued use of coin, to the adoption of paper money to fiat currencies, modern-day money has had to go through a long line of evolution to meet the current technological level of society.
Barter system
Adam Smith, widely regarded as the father of modern economics, argued that the government did not create money and that markets (economies) existed prior to the state. Individuals in society had to rely on one another for subsistence goods prior to the advent of civilization because they specialized in various crafts and forms of labor.
This gave rise to the barter system, also known as “trade by barter,” in which people exchange goods for goods or pay for services by exchanging goods that are generally regarded as valuable.
Bartering is one of the oldest forms of money. It is thought to have originated in around 10,000 BCE, during the Mesolithic period. At this time, people were nomadic and did not have any permanent settlements. Instead, they would meet up in temporary campsites to trade goods and services.
Although the barter system was effective, it was hampered by the double coincidence of wants, which meant that both parties needed to have what the other wanted in order for the barter exchange to be successful.
Sean, for example, has a set of pots but no rice when he wants to cook dinner. Meanwhile, John, his next-door neighbor, has some rice bags but needs a metal pot to cook them in. Both John and Sean could trade a quantity of rice for a metal pot in a barter trade.
It eventually led to individuals amassing goods — also known as commodity money — that people believed no one could refuse, such as animal fur in Alaska, salt in Nigeria, and tobacco in America, Cattle in East Africa, shells in Thailand, etc. These items were not only used to purchase goods but also to pay for marriages, debts, fines, and other expenses.
Despite its effectiveness, the barter system had a number of flaws, including the difficulty of storing wealth, the lack of a common measure of value, the requirement of a coincidence of wants, the indivisibility of certain goods, and so on.
Metal money
As society’s trade volume grew, it became clear that money had some useful characteristics that the barter system couldn’t quite match. Salt, for example, is bulky and prone to liquefaction, making it neither portable nor long-lasting. Whale teeth are not easily divisible because they are difficult to split into two pieces. Shells can be found on any beach, so they’re not hard to come by. As a result, metal money was developed.
Coins, which were made of metals such as gold, silver, and bronze, were first used around 650 BCE. The metal used to make coins determined its value, with gold being the most valuable. Precious metals such as gold, silver, bronze, and copper were used to create metal money.
According to history, the kingdom of Lydia invented the first set of disk-shaped metal coins with stampings on both sides around the 7th century, which were later adopted throughout the world.
Around 650 BCE, coinage first appeared in China. These early coins were made of bronze and copper and had a hole in the center that could be used to string them together. As the Roman Empire grew, coins became more common. The Roman Senate issued the denarius, a silver coin, around 211 BCE.
A mint is a place where money is printed.
Metal coins solved the majority of the problems that the barter system had, but their success soon led to temptation, as sovereigns realized that they could make more money by circulating debased currency worth less than face value by reducing the coins or slipping cheaper base metals into the mix.
Paper money
Metal coins, too, had their disadvantages: they were heavy to carry and move around; transporting them to make large purchases was difficult; they were easily stolen; and counterfeits were plentiful.
Because of these flaws, banks arose in England during the 16th and 17th centuries, where merchants could deposit gold and silver and receive a signed statement stating the amount deposited.
If the merchant needed to buy something, these bank statements could be signed over to another person. Paper currency, such as bank statements, became more widely accepted as a means of exchange as a result of this.
The first European banknotes were issued by Stockholms Banco, which replaced the use of copper plates as a medium of exchange. Banks began issuing paper notes known formally as “banknotes,” which circulated quickly in the same way that government-issued currency does today, inspired by the success of the London goldsmiths.
The issuance of banknotes authorized and controlled by national governments, which are today’s fiat currencies, has gradually replaced the use of banknotes issued by private commercial banks as legal tender.
Previously, the United States’ currency was backed by gold (and in some cases, silver). The gold standard, which backed the US dollar with federal gold, came to an end in 1971 when the US stopped issuing gold to foreign governments in exchange for their currencies.
As a result, the dollar was no longer backed by any physical commodity. The vast majority of money in circulation today is fiat money. This includes, among other things, funds from the United States, Canada, and the European Union.
The difference between currency and money
While it may appear that currency and money mean the same thing and are frequently used interchangeably, money and currency are distinct terms with slight conceptual and usage differences.
For the vast majority of people, currency, specifically fiat currency, is “cold hard cash.” They’re the money in your wallet or purse, whether it’s dollars, pesos, or yen. As a result, currencies, whether in the form of coins or paper, serve as the primary medium of exchange in a country.
Currency, which consists of coins and paper notes in circulation, is the physical money in an economy.
Currency constitutes a minor portion of the total money supply, which is primarily composed of credit money or computerized entries in financial ledgers.
Unlike early currency, which was entirely backed by social agreement and faith in the issuer, today’s fiat money is entirely backed by social agreement and faith in the issuer. Currency, on the other hand, refers to the units of account of various nation states, the exchange prices of which fluctuate.
Money, on the other hand, is sometimes referred to as “commodity money,” and it can be any commodity, from seashells to stones, that can be used as a medium of exchange for goods, services, and debt repayment. Unlike government-issued fiat currency, commodities such as gold and silver have inherent or “use value.”
Precious metals’ value is enhanced by their scarcity. Gold and silver have a limited supply, unlike fiat currency, which can be created at the government’s discretion. The amount of gold and silver that can be mined and sold is limited.
Gold, unlike fiat currencies and their economic systems, is also unchangeable. Although it cannot be created or destroyed, it can change its shape. It was created at the beginning of time and will continue to exist indefinitely.
Timeline of First world countries in history whose currencies have devalued
The French franc
The history of the French franc begins in 1360, when England captured King John II of France during the Battle of Poitiers, a crucial battle in the Hundred Years’ War. In order to pay his ransom, France was forced to mint new gold coins. On one franc coin, King John II is depicted riding away from captivity, while on another, he is depicted fleeing on foot. Two French expressions for these two images, “franc à cheval” and “franc à pied,” became popular. Users began to refer to the coins simply as “francs” very quickly.
The franc became a significant international currency during the nineteenth century as the French economy became more industrialized.
In 1865, France was a founding member of the Latin Monetary Union, an early attempt to unite European economies under a single currency.
The value of the franc plummeted in the roughly 100-year period preceding the adoption of the euro. This was largely due to France’s participation in both World Wars, which required significant wartime spending.
This inflationary pressure, combined with widespread property destruction caused by the fighting, aided the franc’s continued depreciation in the first half of the twentieth century. Despite a brief period of stability in the 1930s, the outbreak of World War II resulted in further erosion of the purchasing power of the French franc.
Despite its turbulent history, the euro has been relatively stable since its adoption by France in 2002. France adopted the euro on January 1, 2002, after a three-year transition period in which both the franc and the euro were treated as legal tender.
Germany
Prior to the Great Depression and massive inflation that brought Germany’s currency crashing down, the Papiermark was the official currency.
Throughout the immediate postwar years, the value of the mark steadily declined. This was due to a confluence of factors, including economic and military aid, capital flight from Germany, barriers to the restoration of German international trade, and a resulting negative balance of payments.
When faced with budget deficits, the German government reverted to a policy that had been in place since the beginning of the war: issuing more money to cover its costs. As a result, the country experienced the highest level of inflation in postwar Europe.
This process was well underway when the mark-to-dollar exchange rate from pre-1914 relation of 4.20 marks = $1, plummeted from 162 marks to more than 7,000 marks in 1922.
The French blockade disrupted Germany’s entire economic life and caused the currency to plummet dramatically.
On July 1, 1923, the mark was worth 160,000 to the U.S dollars;
on October 1, it was worth 242,000,000 to the U.S dollars;
and on November 20, 1923, it was worth 4,200,000,000,000 to the U.S dollars.
Food riots erupted as commercial transactions were replaced by barter. The working classes were crushed by the reduction in real wages, which wiped out the savings of the middle classes and elderly. However, many businesses and industrialists made significant gains.
United States
The United States also is not immune to the currency depreciation. Following the end of the gold standard, the United States currency became the dominant currency, as it was adopted as a standard measurement of medium of exchange by a number of countries.
The dollar, on the other hand, has seen its value plummet over the years. $1 in 1913 has the same purchasing power as $29.83 in 2022, according to the CPI indicator.
The Consumer Price Index (CPI) determines how much a dollar is worth in terms of the goods and services it buys. The CPI compares the prices of a basket of goods and services once a month.
As the value of the dollar falls, so does the cost of living.
Exchange rates indicate the value of the US dollar in foreign markets at any given time. The dollar index, which compares the US dollar to the euro, Japanese yen, pound sterling, Canadian dollar, Swedish krona, and Swiss franc, is a simple way to determine the value of the dollar in relation to the majority of the world’s currencies.
Hyperinflation reduced the dollar’s value by nearly half from 1913 to 1919, but the Great Depression brought deflation, which occurs when prices fall while the dollar rises in value. Following World War II, the global economy expanded, and inflation returned.
In the past, recessions have resulted in deflation, but inflation has followed as the government spends to combat the problem.
Using a CPI inflation calculator, we can start with $100 in 1913 and track its equivalent value in dollars over time.
https://www.thebalance.com/what-is-the-value-of-a-dollar-today-3306105