Money is defined in its most basic sense as everything that is generally accepted in the exchange of goods and services and the payment of debts. However, this definition does not fully meet the functions of money in the modern economic system. Because today, in addition to being a means of shopping, money also has functions such as changing economic activities, redistributing income and gaining influence. In order to understand these functions of money in the modern era, it is of great importance to first know the basic functions of money, the need for which it emerged, the characteristics of the material that is considered money and accepted, and the types of money. In this article, I will examine the adventure of money over 3000 years.
At the beginning of economic relations, people used the direct barter method. However, the biggest problem in the barter system was the principle of two-way need. For example, if you have wheat and need shoes, you had to find a shoemaker who wanted your wheat. This problem caused economic transactions to become inefficient.
Therefore, over time, people began to determine a single fixed unit and use them as a means of exchange. In the early periods, this unit was an object that we now call commodity money. Various objects such as gold, silver, salt, and even seashells served as money in different societies. Of course, the objects that were decided to be used as money had certain characteristics.
Characteristics of commodity money:
Durability: Money should not physically deteriorate, tear, or rot.
Portability: Individuals should be able to carry money easily.
Divisibility: Money should be able to be divided into smaller units in order to adapt to the various prices of goods and services.
Standardity: Each unit should be equivalent to other units.
Restricted Supply: Money should not be easily obtained, its supply should be controlled. Otherwise, its value will decrease rapidly.
General Acceptance: It should be widely and voluntarily accepted by society.
In short, the needs of the period made the invention of money necessary and assigned certain functions to money. The first of these is that it is a medium of exchange. In other words, money acts as an intermediary in the exchange of goods and services, thus eliminating the inefficiencies of the barter system. The second function is that it is a unit of account. It is the standard unit used to measure and compare economic values. Prices, debts, income and expenses are expressed in money. Its third function is that it is a store of value. In other words, it allows savings by preserving purchasing power over time. However, this function can be negatively affected by factors such as inflation.
So can only the commodity-money system meet all the functions of money? Of course not. With the strengthening of states, paper money (representative money) came into circulation as a representation of precious metals. In this system, each banknote in circulation was kept at the Central Bank in exchange for a certain amount of precious metal. For example, a fixed exchange rate such as 1 dollar = 1/20 ounce of gold was applied. In other words, paper money was actually like a gold certificate. People could go to the central bank and pay the equivalent amount and buy gold whenever they wanted.
The money used today is not representative, but fiat money (reputation money). In other words, no state is obliged to keep gold or any other precious metal in its treasury in exchange for the money it prints. What makes money valuable is that the state declares this value. The state says, "This money is worth $100 and is legally valid." In the end, money has value with the state's coercive power (legal tender) and social acceptance. The purpose of social acceptance is that people believe that they can shop with this money and that it will be valid when given to someone else. Because money is a kind of contract, a collective agreement where everyone says, "this is valid." Although many lives have ended in the pursuit of money, the adventure of money is not over. Digital currencies and cryptocurrencies are still very young. It is likely that these currencies will be the medium of exchange that humanity will mostly benefit from in the future.
