Money makes the world go around. Economies rely on the exchange of money for products and services. Economists define money, where it comes from, and what it’s worth. Here are the multifaceted characteristics of money. We’re going to take a look at the types of money and discuss related matters in this topic.
There are several kinds of money varying in liability and strength. Society has undergone changes in currency forms, leading to the introduction of diverse money types over time. During periods of abundant metal resources, metal money emerged. Later, Paper currency substituted this method . At different times, several commodities were used as the medium of exchange. So, the needs and available resources alter the type of money.
Top 10 – Types of Money
Some of the first things that were used as money were gold and silver. Due to their composition, they were highly sought after as a means of exchanging goods. Today, “money” encompasses a wide range of forms, including government-issued fiat currency, fiduciary media, and digital cryptocurrencies. Currency also mean alternatives to traditional paper money that are not issued by the government. We will go over the types of money in detail in this article. Read more about the quality of money subject to expand your perspectives.
Functions of Money
With monetary exchange, buyers and sellers don’t have to be in the same place at the same time. This is different from barter, which depends on a “double coincidence” of buyers and sellers.
In theory, credit could do this, but the seller would want to know if the buyer could pay back the loan before giving credit. Using cash as payment eliminates the requirement to verify the buyer’s identity or gather additional information, resulting in increased business costs.
The total amount of all currencies in circulation in the economy at any given time is the “money supply”. Economists keep an eye on the money supply because it could affect how the economy works. What services and goods should be part of the money system? We strive to include goods that can serve as a means of exchange in the monetary supply.
But over time, the things that do this job have taken many different shapes. Due to the difficulties of the barter system, people had to select a widely accepted item as a means of exchange in their region. This resulted in a multitude of items serving as currency, ultimately leading to widespread acceptance of the most valuable metals as money.
The Latin word “fiat” literally means “order of the sovereign.” Fiat money is a form of currency that lacks intrinsic value. The funds from a demand deposit are not convertible to assets with tangible value. Fiat money is something like paper money. Government set the value of fiat money .
Strict regulations are necessary to ensure responsible usage of fiat money and to prevent harm to the overall economy. Today, fiat currency is the foundation of the whole modern system of money. The forces of supply and demand in the market set the real value of fiat currency. One example is money, which comes in the form of bills and coins.
Unit of Account
Money is useful for more than just keeping track of accounts and setting prices for goods and services. It can also serve as a unit of measurement. It’s the same for everything, so you can easily compare the price of a Coke ($1) to the price of a chair ($50). If I had to pay for the drink with a pencil and the chair with an apple, it would be harder for me to understand what was going on.
The barter system, in which valuable goods are exchanged instead of currency, uses the most basic form of money. The cost of acquiring what is necessary for its function determines the value of this type of currency. Lack of resources can slow it .
The people who trade this kind of money are very important to figuring out how much it’s worth. This amount of money is worth more than anything else. A good becomes a form of currency when utilized in buying or selling another item.
This good is called “commodity money.” All kinds of goods can be used as a way to make a trade. This group includes gold, silver, copper, and a lot of other valuable metals.
In various regions of the world, seashells (commonly known as “cowrie shells”), tobacco, and numerous other items have served as currency and commodities for trade. Some of these things are gold coins, beads, shells, pearls, stones, sugar, and metal. Two more are sugar and tea.
Commercial Bank Money
“Demand deposits” or “commercial bank money” are the claims that consumers have against commercial banks that they can use to buy things from commercial banks.
You can get to the money in your demand deposit account at any time by writing a check or taking cash out of your account at the bank that holds your account. “Upon demand,” depositors’ funds must be promptly returned at the customer’s request. Money from a demand deposit can be accessed through the use of checks, bank drafts, ATMs, or online banking services.
Medium of Exchange
It concerns the level of popularity or favor-ability. If no one wants to trade with a certain form of currency, that currency is about as useful as barter.
Money is only legal in a society if most people trust its value and use it as a way to buy and sell things. Money, (a means of trade) is a standard way for different people to buy and sell goods and services. Because of this, it’s clear that both buyers and sellers can use the same channel.
Durability of Money
In most transactions in the future, money should still be worth what it is worth. If an item’s value deteriorates rapidly or becomes unusable after multiple sales, both buyers and sellers will exhibit decreased interest in it. Using an item that quickly becomes worthless as currency goes against the fundamental purpose and value of money, which is to maintain its value over time for future use.
Money’s main and maybe most important job is to be a way to trade goods and services for each other. Due to its widespread use as a payment method, it can also serve as a means of exchanging goods, facilitating its users in acquiring what they need.
The way the money system works today depends on trusting relationships. “Fiduciary money” means any time a financial institution promises to pay a client in more than one currency. The client has the option of selling or transferring the guarantee.
Gold, silver, and paper money are the most common ways to exchange fiduciary currency. Money orders and banknotes are both examples of fiduciary money. This is because they are interchangeable with cash and possess equivalent purchasing power. Banknotes and checks are both types of fiduciary money.
Portability of Money
Money should be small enough and light enough to move around easily. The use of a difficult or inconvenient to move good as a form of payment is a good example of how transaction costs can happen.
Frequently Asked Questions
Is Money a Store of Value?
Money is very valuable in economies that use monetary systems. Because it can help to make long-term investments. Money’s ability to keep its value makes it easier to move money from one time period to another.
What Makes a Good Money?
Stability. On top of everything else, good money is stable, which is probably the most important thing of all. Because of this, the buying power of money stays pretty constant over long periods of time. If the value of money fluctuates over time, it cannot serve as a reliable standard for deferred payment or as a unit of measurement for worth.
What is Money Made of?
According to the United States Department of the Treasury, 75% of American banknotes consists of cotton and 25% of linen. Additionally, the fronts of the bills feature a color-shifting metallic ink in addition to black ink. On the back side, you can only find green ink.
Virtual currency is still more of an exception than the norm. However, 80% of the world’s central banks are looking into the possibility of issuing digital currencies. The Central Bank of Nigeria just announced that it plans to launch its own digital currency. So, this will change soon. This article will go into types of money in detail and provide some examples for your convenience.