What Is Money and Why Are There Different Things That People Use To Work With It?
Money is a tricky concept to grasp for most people. It evokes images of hoarding riches in the hands of greedy bankers and grasping politicians, while it is an economic concept that we encounter daily. However, money as a concept has a lot of baggage attached to it. Let us take a brief look at this often misunderstood concept and try to shed some light on this issue.
In order to understand the true nature of money one should first understand the meaning of currency. Currency is a means of payment for goods and services that typically have a specific value in terms of money as they are normally measured in terms of gold, silver, etc. Money is any tangible object or verified account which is usually accepted as payment for various goods and services and repayment of various debts, including taxes, in a certain country or socio-cultural context. In other words, money is a means of exchange that is commonly used for social purposes such as buying and selling, investment, business transactions, etc.
So, what about money then? If you want something, you typically need a medium to exchange it for this thing. For example, if you want to buy a new television set, you may want to go and see a store that offers this commodity. Alternatively, you may want to use a bank to transfer funds from your bank account to your credit card so that you can purchase the television set.
The very core of money is its ability to exchange itself into other things through commerce. However, modern society relies on fiat money instead of physical commodity money. Fiat money is not backed up by any asset that can be taken to redeem it. This means that when you go to the bank to withdraw a check, you are actually just transferring funds from your checking account to your bank’s debit cards. Therefore, the question then becomes how the banks will be able to redeem their money back into fiat currency at the point of use.
Fortunately, this is no big issue in our modern society. Rather, the banking system uses the power of the federal reserve to do this conversion. The federal reserve uses the power of the credit market to make sure that the supply of circulating asset, like money, is in excess. If there is a deficit in the supply of this circulating asset, the price level rises. As long as the price level is in excess of the supply of money, the federal reserve will continually make adjustments in the amount of currency in its deposit accounts in order to “match” the demand for the money.
In fact, there are three different things that are used to “lock” the exchange process. First, there is a central bank that controls the supply. Central banks may want to take a precautionary step if they find that the price level of their chosen commodity money is rising too quickly. They may want to “level the playing field” by changing the rate of interest they charge. Lastly, there are market makers that have access to both the national and private exchange rates and may want to take advantage of any changes in the supply as it will drive up the price of their goods.