Text a: money and its role in the economy
What is money? Why do we use money at all? In order to better understand the concept of money and get an answer to these questions, let us turn to the origins of money and examine its principal functions.
To begin with, money is the result of a long evolutionary process. Before there was money, people living in primitive societies used barter as a means of exchanging goods and services, and it worked quite well. However, as time went by and society advanced, the volume and range of goods and services expanded. Eventually, bartering became very complicated and cumbersome.
It was money that solved the basic problems created by barter - ‘indivisibility’ and ‘coincidence of wants’. The emergence of money was spontaneous. No king, government or person created money. It came into being through barter, and evolved independently in different parts of the world. The oldest recorded use of money dates back to ancient Mesopotamia (now southern Iraq) about 4,500 years ago.
Originally, money took the form of commodity money or money with its own value as a good. It means that the commodity itself constitutes the money, and the money is the commodity. In fact, any commodity used as a medium of exchange is commodity money. At different times different commodities were used as money: iron and bronze, cattle and fish, furs and skins, cowries and precious metals, specifically gold and silver. Gold coins are examples of commodity money because gold is worth something as a commodity, not just as a monetary unit.
Over time other types of money came into use: representative, fiat money, credit money, etc. The system of commodity money in many instances evolved into a system of representative money which refers to paper currency backed by a government or bank’s promise to redeem it for a given weight of precious metal (gold or silver). During the late 19th and early 20th century, most currencies were examples of representative money. Money of this type was based on the gold standard, and, in theory, could be exchanged for a fixed amount of gold. For example, the US dollar was convertible to gold until 1934.
Currency that is found today in most countries is fiat money. Unlike representative money, fiat money is not backed by any commodity, and is absolutely irredeemable. It serves as legal tender by a government decree, or fiat which means in Latin ‘let it be done’. “Legal tender for all debts, public and private” is written on the US dollar. The value of fiat currency is based merely on trust that people will accept it in payment for goods and services and that its value will remain relatively stable. A prime example of fiat money is the new international currency - the euro. The introduction of the euro changed the face of money, superseding many of the world's oldest currencies.
Whatever the type of money, it should be judged on how well it performs its major functions: (1) a medium of exchange, (2) a measure of value, and (3) a store of value. As a matter of fact, money is what money does.
