Money has three uses, one as a medium of exchange, two as a measure of value and three as a store of wealth. One of the differences between the wealthy and not is their knowledge that few monies can meet all of these requirements. Knowing this, they make a deliberate choice of the money they will use for each purpose.
As a medium of exchange money makes it easier to trade goods. Without money the farmer who wanted a wagon wheel repaired would have to barter with the blacksmith to exchange chickens for the work. If the blacksmith wanted apples instead and the farmer didn’t grow them he would have to find an apple farmer who was willing to take chickens in exchange and then take the apples over to the blacksmith to get his wheel repaired. This is known as the double coincidence of wants. While this worked in a small society with very few trade goods and little variety; as the variety increased it became slow and inefficient. It didn’t take long before people settled on a few goods that everyone used and needed as a standard medium of exchange and you had the birth of money.
These commodity economies have a few drawbacks. One of the biggest is the difficulty in carrying around enough gold or oil to do your shopping. So in comes the paper currency to make things easier. There is however, a problem with paper currency. They are not a good store of wealth, think inflation. When the issuing party, decides they want more money they just run the press and poof, there’s more money, but no value has been added to the economy. Even a low level of inflation, such as 2%, will cut the buying power of your money in half in just 35 years. That means YOUR retirement savings are affected, not just your children’s future buying power, but your own.
As a measure of value money provides a numerical representation of the relative value of items. How many hours work at Pizza Hut is a fillet mignon worth? We measure that in relative value in dollars or yen or what ever is the local currency. To fulfill this requirement money needs to be easily divisible into small units without destroying its value. This puts things like works of art out of the picture, but allows for the use of coffee such as was used for a period of time in WWII Germany, precious metals or digital bits in your banks computer. You could trade a pound of coffee or a single bean. There is also the need for every piece or unit to be equal in value. This is a problem for things like diamonds, but easily handled by currencies or bank ledger entries.
The third use for money is as a store of wealth. You want to be able to save it and when ready to trade at a later time, find it has the same value. If you’re saving for a down payment on a house, a kid’s education or your retirement, you want to know that when you’re ready to spend it, the money you have saved will actually cover the cost you expected it to. So for savings you will probably not want to use currency since it will most likely be eroded by inflation.
As a medium of exchange money makes it easier to trade goods. Without money the farmer who wanted a wagon wheel repaired would have to barter with the blacksmith to exchange chickens for the work. If the blacksmith wanted apples instead and the farmer didn’t grow them he would have to find an apple farmer who was willing to take chickens in exchange and then take the apples over to the blacksmith to get his wheel repaired. This is known as the double coincidence of wants. While this worked in a small society with very few trade goods and little variety; as the variety increased it became slow and inefficient. It didn’t take long before people settled on a few goods that everyone used and needed as a standard medium of exchange and you had the birth of money.
These commodity economies have a few drawbacks. One of the biggest is the difficulty in carrying around enough gold or oil to do your shopping. So in comes the paper currency to make things easier. There is however, a problem with paper currency. They are not a good store of wealth, think inflation. When the issuing party, decides they want more money they just run the press and poof, there’s more money, but no value has been added to the economy. Even a low level of inflation, such as 2%, will cut the buying power of your money in half in just 35 years. That means YOUR retirement savings are affected, not just your children’s future buying power, but your own.
As a measure of value money provides a numerical representation of the relative value of items. How many hours work at Pizza Hut is a fillet mignon worth? We measure that in relative value in dollars or yen or what ever is the local currency. To fulfill this requirement money needs to be easily divisible into small units without destroying its value. This puts things like works of art out of the picture, but allows for the use of coffee such as was used for a period of time in WWII Germany, precious metals or digital bits in your banks computer. You could trade a pound of coffee or a single bean. There is also the need for every piece or unit to be equal in value. This is a problem for things like diamonds, but easily handled by currencies or bank ledger entries.
The third use for money is as a store of wealth. You want to be able to save it and when ready to trade at a later time, find it has the same value. If you’re saving for a down payment on a house, a kid’s education or your retirement, you want to know that when you’re ready to spend it, the money you have saved will actually cover the cost you expected it to. So for savings you will probably not want to use currency since it will most likely be eroded by inflation.
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