What Is Money?
At first sight the answer to this question seems obvious. The man or woman in the street would agree on coins and banknotes1, but would they accept them from any country? What about cheques2? They would probably be less willing to accept them than their own country's coins and notes but bank money （i.e. anything for which you can write a cheque） actually accounts for by far the greatest proportion by value of the total supply of money. What about I.O.U.s （I owe you）, credit cards and gold? The gold standard belongs to history but even today many rich people in different parts of the world would rather keep some of their wealth in the form of gold than in official, inflation-prone currencies. The attractiveness of gold, from an aesthetic point of view, and its resistance to corrosion are two of the properties which led to its use for monetary transactions for thousands of years. In complete contrast, a form of money with virtually no tangible properties whatsoever - electronic money - seems set to gain rapidly in popularity.
All sorts of things have been used as money at different times in different places. The alphabetical list below includes but a minute proportion of the enormous variety of primitive moneys, and none of the modern forms.
Amber, beads, cowries, drums, eggs, feathers, gongs, hoes, ivory, jade, kettles, leather, mats, nails, oxen, pigs, quartz, rice, salt, thimbles, vodka, wampum and yarns.
It is almost impossible to define money in terms of its physical form or properties since these are so diverse. Therefore any definition must be based on its functions. So the best definition is as follows: Money is anything that is widely used for making payments and accounting for debts and credits.
Functions of Money
Originally exchange took place without the use of money, by barter. Long before money had come into the commercial world people exchanged goods for goods. This system of barter made it possible to satisfy many wants that would otherwise have gone unsatisfied. Barter raised the standard of living, but under such a system the exchange of goods was greatly hampered. Barter requires that both buyer and seller need each other's goods. Again, indivisible quantities hindered the exchange, since half a canoe or half a cow could not enter into barter. Nor was there under the barter system any standard of value. A ratio was expressed between canoes and arrows if they were traded for each other, but such an exchange gave no hint as to the ratio of bread to meet, or even of canoes to meet. Because of these disadvantages money was introduced into the commercial system as an intermediary, for which all goods could be sold and with which all goods could be bought. Thus money serves its first function, as a medium of exchange.
Money is a medium of exchange universally acceptable for goods and services. Originally the medium was the commodity most common in the trade of the time and place. Cattle served in Greece in the days of Homer. Grain, furs, oil, salt, ivory, tea, wampum, tobacco, and many other commodities served in various parts of the world as media of exchange. For them all things were sold; with them all things can be purchased. They were the money of the time. But gradually a tendency developed to use the metals, such as iron, copper, silver, and gold.
When first used the metal was not in the form of coins, but consisted of a certain weight. To guarantee the weight （and later the fineness） it became customary to stamp the metal with a government seal. We still have as the British standard coin, the pound, originally a pound of silver. But this stamp piece did not prevent"sweaters" from clipping off bits, and making the money short in weight. To prevent this, the seal or stamp was then affixed to both top and bottom of the piece. Sweaters then clipped the sides. Now coins are milled; that is, the sides are marked with corrugations to prevent clipping. Today money has come to consist of coins and cash that perform a function as a medium of exchange.
Under barter there is no standard of value, no least common denominator of values. With money we have a medium in which all values may be expressed, and money enters into its second function, to serve as a standard of value. Under a money regime we express all values in the commercial world in terms of a standard coin, in the United States in terms of dollars. With all goods related to one common standard, we know it wants the relation to one another of all commodities whose value is stated in money. If one product has its value stated as one dollar and the second as five dollars, we know that the ratio value of one to the other is one to five.
Money performs a further service - store of wealth. By using money you can"store" the value of the goods and services you produce and spend those dollars on other items. This special function of money also means you can save the value of your work you do today, and convert that value to purchasing power at another time. For example, you may work all summer mowing lawns, and in the fall use the money you worked for to buy sports equipment or new school clothing.
The future for money in the global economy will enable quicker and more seamless transactions. Those with goods and services in countries worldwide will efficiently be able to process exchanges. As money continues to evolve so will its availability. The Internet is rapidly changing the face of money and with this change will come new opportunity to profit from it.
Types of Money
Money is a token that is widely accepted as a medium of exchange. The token can be tangible like a coin or a note, or intangible like a bank deposit. If the token is convertible on demand into a commodity like an ounce of gold, the token is known as commodity money. The exchange value of commodity money varies, but is never less than its value as a commodity. A precious metal coin is a token convertible into the bullion that comprises it, meaning the intrinsic value of the token coincides with its market value as a commodity.
Money that is inconvertible is known as fiat money. The government necessarily holds a monopoly on the issue of fiat money, and no longer issues convertible money. One must therefore avoid thinking in terms of commodity money to understand modern money.
In the era of commodity money, the issuer was constrained by the need to hold a sufficient supply of the underlying commodity. There is no such constraint in the case of fiat money3. The viability of a fiat money system depends on the policy and actions of the issuer, normally the central bank of a country.
The Invention of Banking
The invention of banking preceded that of coinage. Banking originated in Ancient Mesopotamia where the royal palaces and temples provided secure places for the safe-keeping of grain and other commodities. Receipts came to be used for transfers not only to the original depositors but also to third parties. Eventually private houses in Mesopotamia also got involved in these banking operations.
In Egypt too the centralization of harvests in state warehouses also led to the development of a system of banking. Written orders for the withdrawal of separate lots of grain by owners whose crops had been deposited there for safety and convenience, or which had been compulsorily deposited to the credit of the king, soon became used as a more general method of payment of debts to other persons including tax gatherers, priests and traders. Even after the introduction of coinage these Egyptian grain banks served to reduce the need for precious metals which tended to be reserved for foreign purchases, particularly in connection with military activities.
What Is a Modern Bank?
A modern bank is an institution that deals in money and its substitutes and provides other financial services. Banks accept deposits and make loans and derive a profit from the difference in the interest rates paid and charged, respectively.
Banks are critical to our economy. The primary function of banks is to put their account holders' money to use by lending it out to others who can then use it to buy homes, businesses, send kids to college ...
When you deposit your money in the bank, your money goes into a big pool of money along with everyone else's, and your account is credited with the amount of your deposit. When you write checks or make withdrawals, that amount is deducted from your account balance. Interest you earn on your balance is also added to your account.
Banks create money in the economy by making loans. The amount of money that banks can lend is directly affected by the reserve requirement set by the Federal Reserve. This amount can be held either in cash on hand or in the bank's reserve account with the Fed. To see how this affects the economy, think about it like this. When a bank gets a deposit of 100, assuming a reserve requirement of 10 percent, the bank can then lend out 90. That 90 goes back into the economy, purchasing goods or services, and usually ends up deposited in another bank. That bank can then lend out 81 of that 90 deposit, and that 81 goes into the economy to purchase goods or services and ultimately is deposited into another bank that proceeds to lend out a percentage of it.
In this way, money grows and flows throughout the community in a much greater amount than physically exists. That 100 makes a much larger ripple in the economy than you may realize！
Why Does Banking Work?
Banking is all about trust4. We trust that the bank will have our money for us when we go to get it. We trust that it will honor the checks we write to pay our bills. The thing that's hard to grasp is the fact that while people are putting money into the bank every day, the bank is lending that same money and more to other people every day. Banks consistently extend more credit than they have cash. That's a little scary; but if you go to the bank and demand your money, you'll get it. However, if everyone goes to the bank at the same time and demands their money （a run on the bank）, there might be a great problem.