Money makes the world go round, it really does. Look everywhere around you, and you will find money changing hands. Everybody has certain goods and services that they want to buy, and everybody around the world does this with money, making it so important. What is it about the concept of money that gives it this omnipresent rule in the global economy?
First, imagine you went back to primitive times when money was not yet a concept. Say, for example, you were a farmer and produced potatoes. You could not survive off potatoes alone and you don’t have the skills to make all the other items that you need or want. If you wanted to eat something other than potatoes, say fish; you would have to go out yourself and find a fisherman who was willing to trade your potatoes for his fish. This is great if your only exchange was potatoes and fish, but let’s make it more realistic.
There is no guarantee that two given people will have goods that the other needs. Say you wanted to eat chicken and the butcher has no need for potatoes, you would need to trade your potatoes for another item that the butcher wants, say for example new knives to get your chicken. When you go to the blacksmith to trade your potatoes for knives, he may not want the potatoes either, he may want a new shirt. To get your chicken you are now in a situation where you have to find someone to trade your potatoes for a shirt, then the shirt for knives and then the knives for chicken. In today’s economy with millions of goods and services on offer, the ideas of trading goods and services until you get what you want are ridiculous, it would take far too long and would be unbelievably inefficient.
This is where money comes on, acting as a placeholder or a medium of exchange. When you go to the butcher for your chicken, you can pay in money, which the butcher can then just use to buy the knives himself, without further need of bartering. The placeholder makes transactions so much easier and gives a universal means of exchange for all parties.
Now another issue that money solves is the issue of value.
Some goods are very difficult to barter with. It is difficult to know how many potatoes are worth the value of a table (I apologise for the poor example) as the two products are unrelated and are difficult to compare. However money acts as a measure of value, both potatoes and tables can have value in monetary terms, giving a suitable means to compare the two products allowing easier transactions.
With money acting as a means of value, it can also act as a store of it. Going back to the situation of the primitive potato farmer, he is in a situation where his crop will eventually rot. If he wanted to store money for a large payment, for example, if he wanted to buy a new horse, he would be unable to save in potatoes. The ability to trade potatoes for money allows individuals to have a store of value and to retain their purchasing power in the future if you chose to not spend today.
Another benefit of using money is that it can act as a standard of deferred payment. In today’s world credit is synonymous with transactions. This function of money allows people to delay payment and settle debt in a much easier way than bartering with goods and services that could potentially rot and are sometimes not equivocal. Money makes the financial transaction far easier as its value is guaranteed.
However, having said this, it is worth mentioning that money cannot carry out these purposes without people’s confidence in the system, or else there is a risk that it will lose its acceptability. When this happens people will not have faith in money to be able to hold value for goods and services. A real-world example of this was in Zimbabwe, where hyperinflation occurred and the value of money dropped rapidly, making the money worthless, destroying people’s savings and their confidence to trade with it as they did not know if they could make purchases.
Overall, money in whatever form cash or bank deposits is an underlying factor that glues the global economy. By reducing the need for bartering, money has been able to allow economic trade for centuries through its means of exchange, measure of value, store of exchange and its standard for deferred payment. So be thankful for those pieces of paper in your pocket and the numbers on your statement. Without them, the world really would not go round.