Money is all that asset or good that is generally accepted as a means of collection and payment to carry out transactions.
Contrary to what may be believed, money is not only the metals and papers that we are used to seeing as coins and bills respectively, but all those kinds of assets that a community accepts as a means of payment. Naturally, physical money was created to facilitate transactions.
Before money existed, transactions were carried out through barter. Imagine that I am dedicated to raising chickens and you are growing wheat, we can reach an exchange agreement. Like for example, I give you a chicken in exchange for a kilo of wheat. The problem arises when you are not interested in chickens. How would I get to buy you the wheat? If I could sell the chickens to someone else and she gave me something that you would be interested in trading, then I could already buy you wheat. This is how money was born.
But not only physical money (cash) is considered money. Electronic money or any asset that can be used as a means of payment or collection is also money. An invoice, for example, which is a collection document, is also money, since its holder or whoever is endorsed has the right to collect the indicated amount. The same happens with checks, promissory notes or bills of exchange, since as they are legal and commonly accepted mechanisms, they give their holder the right to pay or their creditor the obligation to pay. A credit card or a guarantee is also credit for the same reasons, since they are accounting entries backed by an economic amount.
Characteristics of money
Therefore, once we know what money is, let’s see its main characteristics to strengthen this concept.
And we must know that money, to fulfill its role in the economy, must have the following characteristics:
- It must be standardized. That is, their units have to be of the same value and quality, and there should be no physical differences between them.
- It must be widely accepted and recognizable. In other words, it must be recognized as a means of payment and, therefore, as a security. A value recognizable by the rest of the public.
- It must be divisible. This, with the aim of allowing low value transactions.
- It should be easy to transport. Precisely the reason why money was born, avoiding the transport of gold to the places where it was wanted to trade.
- It should not deteriorate easily or quickly. Well, if it deteriorates, it would lose its value as a currency.
Functions of money
Having seen the characteristics that money must present to consider it as such, let’s see its main and essential functions in the economy.
And it is that, as with the characteristics, money fulfills a series of main functions in the economy, which we will see below:
- It is a unit of account and price pattern : Money, as we know, is a unit of account that simplifies the pricing of goods and services.
- Medium of exchange : It is the function that distinguishes it from the rest of the financial assets of the economy. For money, unlike other assets, is a medium of exchange accepted by everyone.
- It is a means of payment : The money is used to cancel or settle debts, so we speak of a clear means of payment.
- It is a deposit or reserve of value : money, in its function of deposit or reserve of value, is used to store purchasing power or purchasing power over time. However, inflation is the sign that this value is not the safest. Therefore, for this, other assets are sought that economists call "asset or safe haven."
Uses of money
Money has become indispensable in the life of the human being. This is because the uses given and the functions it performs, outlined above, are practically irreplaceable by any other known method.
In this sense, in addition to the functions indicated above, we could say that the three main uses that are given to money are the following:
- Unit of account: In this sense, using it to determine the price of each thing.
- Means of exchange: To be able to carry out commercial transactions through payments and collections.
- Deposit of value: Having the coins and bills of value in themselves they serve to provide savings so that families and companies can use it for emergencies without deteriorating.
Originally, money was created as a means of payment to precisely avoid barter, and to be able to effectively value all goods through the same channel, currency. The coins were also initially created as intrinsic value, that is, they were worth their composition in gold. The coins had value because they were made of gold and silver, and they were worth their weight in this precious metal; whereas today money is fiduciary, that is, we grant a generally accepted value that is marked by the currency itself. We know that a 2 euro coin is worth two euros because we accept it, however its composition is barely worth 20 cents.
The article how banks create money can help you better understand what money is today.
Advantages and disadvantages of money
To finish, and having known what money is, its characteristics, its functions and its uses, it is time to know what the advantages of using it are, as well as the disadvantages that it, like everything else, presents.
In this sense, let’s start with the advantages.
Advantages of money
Among the advantages that money has, it is worth noting the following:
- Money is used to calculate how much different goods and services are worth.
- Being an asset, money allows you to maintain wealth. Therefore, they can be treasured.
- Money is generally accepted by society, thus facilitating transactions.
- By expressing the value of goods, money facilitates the relationship between each and every one of them in any place and at any moment of time.
- Money helps the capitalist system work and expand.
Disadvantages of money
But like everything, money also has its disadvantages:
- Well, in the same way that it allows the expansion of capitalism, this also has its drawbacks.
- Money encourages credit, and credit encourages indebtedness. Massive borrowing can be bad for the economy.
- Money encourages consumption, which could lead to mass consumption that goes against sustainable development plans.
- Well, in the same way that consumption increases, production increases to the same extent.
- Money is, in short, a double-edged sword. Well managed, it is the tool. Mismanaged, the destruction of any empire.