Money is a means of payment and also a measure of value. For this reason, it is useful in human society since it makes possible the exchange of goods and services of all kinds and allows people to specialize in a specific productive activity. We can say that money has four main functions: it is a medium of exchange, a unit of account, a store of value, and a means of payment of future debts.
- That it serves to make payments (and collections) in all types of contracts.
- That it is generally accepted is to say: that everyone recognizes it as value for those payments and collections.
Medium of exchange
Money is used to buy and sell goods and services: people buy things in exchange for giving money and merchants provide those things in exchange for receiving money.
Before money existed, exchanges were made through barter, one gave one thing in exchange for another.
For example, a person who is dedicated to walking dogs for others and charges €10 for every hour a dog walks, at the end of each day will have generated income that they will use, in turn, to meet their needs. such as buying food, paying rent, or going to the movies.
If money did not exist, that person would only have to walk the dogs of the one who sells him food, the one who rents his house and the owner of the cinema who, in exchange, would provide him with what he needs. Thanks to money, his income is abstract and he can walk the dogs of anyone who pays him for it and then get what he needs.
In addition to this quality of being abstract, money is something that is not bulky or heavy and that can be carried in your pocket without any problem, it has the value of something valuable but it does not weigh.
Money is a unit of account that is expressed in numbers.
Each thing (physical good or service) has a value that is expressed in money; that value may be its market price or it may be the cost of producing it.
To fulfill this function, it is necessary for money to be expressed in a currency that exists in large and smaller units (for example, the Euro and Euro cents) without changing its value.
It is also necessary that it be indeterminate, that is, a Euro is worth the same as another Euro, it does not matter if it is paid with one currency or another, when an amount is received it can be returned by paying another equal amount, it does not have to be in the same way or with the same coins.
Accounting could not exist if there were no money, the currency is used as a measure of all accounting elements that always have a value in that currency.
Store of value
It can also be used to save it as savings, money has a known and relatively stable value, which allows it to be used to save it as part of our heritage.
The problem is that the value of money is not totally stable, on the one hand, there is inflation, which normally causes it to lose value over time, on the other the price as currency with other currencies can also produce exchange effects of its worth.
Normally, when money is kept to preserve its value, it is not usually left under the mattress or behind a brick (although it sometimes happens), it is left in financial products that usually produce some type of return (interest) that will serve to offset the effect of inflation.
Allow deferred payments
In addition to being used, as we have seen before, to pay for things that are received (goods or services), it is also used to owe them and pay them later.
That is to say, thanks to the existence of money we can agree with who supplies us with that good or service to pay later and, thanks to money, we can set the amount and conditions of such payment without a problem.
The value of money, historical evolution
As we have seen, before money existed, economic exchanges were made through barter: one thing was given in exchange for another of equal or similar value.
Over time, goods appeared that had their own value and that could be used to pay, for example, salt was a means of payment in many ancient cultures and civilizations.
Later, and always within the ancient world, metals began to be used as an element of payment and value and, above all, precious metals such as gold and silver.
In the 5th century BC those precious metals (gold and silver) began to be minted into coins whose value was the value of the metal they were made of. This system continued in force until almost the 20th century of our era.
Starting in the 16th century, a new type of money appeared: fiduciary money, which consists of pieces of paper (bills) that have value because they are backed by a bank that has issued them and that undertakes to pay the bearer the equivalent in gold or silver (or in foreign currency).
Throughout the 20th century, fiat money (which is what we use today) finally appears, it is a variant of fiduciary money that is not backed by gold, silver or foreign exchange reserves but has value because the Law of the State establishes it as such. However, we say that it is a variant of fiduciary money because, although it is not backed by physical reserves, it is in some way backed by the economy of the country or territory.
In this current system, there are different currencies, the different currencies of each country or territory, which have a value relative to each other (the value is set by the foreign exchange market); There are two types of currencies:
- Convertible currencies are accepted in all parts of the planet and their value, one with respect to another, fluctuates according to the market.
- Non-convertible currencies can only be used in your own country, are not accepted elsewhere, and their value is usually linked, in one way or another, to a convertible currency, usually the US Dollar.
As we have just explained, in the current monetary system, money is issued by the public authority of a country or territory and has value by legal imperative.
However, the issuance of money in coins or bills accounts for only approximately 5% of the money in circulation.
The Law allows banking entities to create money through the so-called reserve coefficient.
It consists in the fact that the bank is obliged to maintain a reserve in bills and coins and, based on that reserve, it can create percentages of accounting entries for money that it does not physically have.
Thus, when the bank gives a loan to one of its clients, it does not give him the money in bills but rather provides him with a deposit in his checking account with that money, what he is doing is an accounting entry.
Since the one who has money in the bank is going to carry out an important part of his operations without using banknotes, paying for example with transfers or with cards, that accounting entry moves from one place to another, but in all this, it is not used physical money.
Finally, the money that is in our bank account can be withdrawn from there and stored in electronic devices (such as certain bank cards, our smartphones, the computer, PayPal-type payment platforms, etc.); With this system, we can make payments (especially online) and it has the advantage that, on the one hand, that money is set aside from the account and, on the other, it limits the amount that we can pay with it.