Introduction
Money is any commodity or token that serves as a medium of exchange that is legally and socially acknowledged in payment for services and goods and in the disbursement of debts. Money serves as a store of value and as a standard of value for determining the comparative worth of different services and goods.
History of Money
Early trade involved the exchange of good and service in what was commonly known as barter trade. This kind of trade had many discrepancies as people couldn’t fully agree on the exchange value of the goods or services. To solve the problem associate with barter trade, commodity money was developed.
Functions of Money
Money has four major function; it act as medium of exchange, store of value, unit of account and a standard of deferred payment. As a medium of exchange, money is used to evade the inefficiencies associated with barter trade.
Money preserves value over time hence functioning as store of value. As a standard for deferred payment, money is generally accepted as a mean of clearing up future accounts. Lastly, as unit of account, prices are quoted and records kept in terms of money.
Types of Money
Different types of money have been in existence with different economic liabilities and strengths. There are three types of money namely: Commodity money, Representative money and Fiat money. Commodity money refers to any money used as a universal medium of exchange and as a commodity that can be traded in its own right.
The worth of commodity money as a medium of exchange largely depends on its supply compared to other services and good available in the market. Gold and silver have been used historically as commodity money. Commodity money is limited by its nature to act as store of value. Copper and tin, for example, rust and corrode; silver and copper easily lose weight when subjected to scratches and abrasion.
Commodity currencies limit the geographic trading market as the commodity has to be transported to the seller. Commodity money developed to representative money with the introduction of non-precious coins and paper currency. Representative money had the full backing of many government and banks as they promised to change representative money with a specific amount of gold or silver.
This was the kind of money used during the nineteenth and twentieth centuries. Fiat money refers to the currency declared as the legal tender for a country by the government despite the fact that it is not backed by reserves and has no inherent value.
Unlike commodity money, fiat money is based exclusively on faith. Fiat money risk becoming worthless incase inflation as it has no physical reserves or if people loose faith in it. Most countries in the world today use Fiat money.
Conclusion
Money is anything commonly accepted by a group of people for exchange of resources. Money has undergone major development from the early age when commodities like cowry shells were used as money in 1200 BC to the modern world when people are using digital or electronic money, to transact business over the internet.