How Do We Use Money To Obtain Goods And Services

Affiliate 27. Coin and Cyberbanking

27.1 Defining Coin by Its Functions

Learning Objectives

By the finish of this department, you volition be able to:

Explain the various functions of coin
Contrast commodity money and fiat coin

Money for the sake of money is not an stop in itself. You lot cannot eat dollar bills or wear your bank business relationship. Ultimately, the usefulness of money rests in exchanging it for goods or services. As the American writer and humorist Ambrose Bierce (1842–1914) wrote in 1911, money is a "approval that is of no advantage to united states of america excepting when we role with it." Money is what people regularly use when purchasing or selling goods and services, and thus coin must be widely accepted past both buyers and sellers. This concept of money is intentionally flexible, because money has taken a wide variety of forms in unlike cultures.

Barter and the Double Coincidence of Wants

To sympathize the usefulness of money, we must consider what the world would be like without money. How would people exchange goods and services? Economies without money typically appoint in the castling system. Barter—literally trading one good or service for some other—is highly inefficient for trying to coordinate the trades in a mod advanced economic system. In an economy without money, an exchange between two people would involve a double coincidence of wants, a state of affairs in which two people each want some good or service that the other person tin can provide. For example, if an accountant wants a pair of shoes, this accountant must discover someone who has a pair of shoes in the right size and who is willing to exchange the shoes for some hours of accounting services. Such a merchandise is likely to be difficult to conform. Call back near the complexity of such trades in a modern economy, with its extensive division of labor that involves thousands upon thousands of unlike jobs and appurtenances.

Another trouble with the castling system is that information technology does not allow the states to easily enter into futurity contracts for the purchase of many appurtenances and services. For case, if the goods are perishable it may be hard to exchange them for other goods in the future. Imagine a farmer wanting to purchase a tractor in half dozen months using a fresh crop of strawberries. Additionally, while the barter system might piece of work adequately in pocket-sized economies, it will keep these economies from growing. The time that individuals would otherwise spend producing goods and services and enjoying leisure time is spent bartering.

Functions for Money

Money solves the problems created by the barter system. (We volition get to its definition presently.) First, money serves every bit a medium of exchange, which means that money acts as an intermediary between the buyer and the seller. Instead of exchanging accounting services for shoes, the auditor now exchanges accounting services for money. This money is then used to purchase shoes. To serve as a medium of exchange, money must be very widely accepted as a method of payment in the markets for goods, labor, and fiscal capital.

Second, money must serve as a store of value. In a barter system, we saw the case of the shoemaker trading shoes for accounting services. Merely she risks having her shoes go out of style, especially if she keeps them in a warehouse for time to come apply—their value will decrease with each flavor. Shoes are not a practiced store of value. Holding money is a much easier way of storing value. You know that yous practise not need to spend it immediately because it volition all the same hold its value the next day, or the next year. This part of money does not require that money is a perfect shop of value. In an economic system with inflation, money loses some buying power each year, but it remains money.

Third, money serves as a unit of business relationship, which means that it is the ruler by which other values are measured. For example, an accountant may charge $100 to file your tax return. That $100 can purchase two pair of shoes at $50 a pair. Money acts as a mutual denominator, an bookkeeping method that simplifies thinking about trade-offs.

Finally, another function of money is that money must serve as a standard of deferred payment. This means that if money is usable today to make purchases, it must also be acceptable to brand purchases today that will be paid in the hereafter. Loans and future agreements are stated in monetary terms and the standard of deferred payment is what allows us to purchase goods and services today and pay in the future. Then money serves all of these functions— it is a medium of substitution, shop of value, unit of measurement of account, and standard of deferred payment.

Commodity versus Fiat Money

Money has taken a broad variety of forms in dissimilar cultures. Golden, silver, cowrie shells, cigarettes, and fifty-fifty cocoa beans have been used as money. Although these items are used equally commodity money, they besides have a value from use as something other than money. Gold, for case, has been used throughout the ages as coin although today it is not used as money but rather is valued for its other attributes. Gold is a good conductor of electricity and is used in the electronics and aerospace industry. Golden is too used in the manufacturing of energy efficient reflective glass for skyscrapers and is used in the medical manufacture too. Of course, aureate as well has value because of its dazzler and malleability in the cosmos of jewelry.

Equally commodity money, gold has historically served its purpose as a medium of exchange, a shop of value, and every bit a unit of account. Article-backed currencies are dollar bills or other currencies with values backed up by gilt or other commodity held at a bank. During much of its history, the coin supply in the United States was backed by gold and silvery. Interestingly, antiquarian dollars dated as tardily as 1957, accept "Silverish Certificate" printed over the portrait of George Washington, as shown in Figure 1. This meant that the holder could take the neb to the advisable banking company and substitution it for a dollar'due south worth of silver.

Two images are shown. The bottom image is a silver certificate—U.S. paper currency from 1957 or earlier. The top image is of a modern U.S. currency which no longer indicates that it is commodity-backed, but which is still legal tender for all debts.

As economies grew and became more global in nature, the utilise of article monies became more cumbersome. Countries moved towards the use of fiat money. Fiat money has no intrinsic value, just is declared past a government to be the legal tender of a country. The United States' newspaper coin, for example, carries the statement: "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND Individual." In other words, by regime decree, if you owe a debt, then legally speaking, you can pay that debt with the U.S. currency, even though information technology is not backed past a commodity. The only bankroll of our money is universal faith and trust that the currency has value, and nothing more.

Watch this video on the "History of Money."

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Key Concepts and Summary

Coin is what people in a guild regularly utilize when purchasing or selling goods and services. If money were non available, people would demand to castling with each other, meaning that each person would need to identify others with whom they have a double coincidence of wants—that is, each party has a specific good or service that the other desires. Money serves several functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. There are two types of money: commodity coin, which is an item used equally money, but which as well has value from its use as something other than coin; and fiat money, which has no intrinsic value, simply is declared by a regime to be the legal tender of a country.

Self-Cheque Questions

In many casinos, a person buys fries to use for gambling. Within the walls of the casino, these chips can ofttimes be used to buy food and drink or even a hotel room. Do chips in a gambling casino serve all three functions of money?
Tin you proper name some item that is a store of value, but does not serve the other functions of money?

Review Questions

What are the four functions served by coin?
How does the existence of coin simplify the process of buying and selling?
What is the double-coincidence of wants?

Critical Thinking Questions

The Bring information technology Habitation Characteristic discusses the use of cowrie shells every bit money. Although cowrie shells are no longer used equally coin, do yous think other forms of commodity monies are possible? What role might technology play in our definition of money?
Imagine that you are a hairdresser in a world without money. Explain why it would be tricky to obtain groceries, clothing, and a place to live.

References

Hogendorn, Jan and Marion Johnson. The Shell Money of the Slave Merchandise. Cambridge University Press, 2003. 6.

Glossary

barter: literally, trading 1 good or service for some other, without using money

article money: an item that is used as money, but which also has value from its use as something other than coin

article-backed currencies: are dollar bills or other currencies with values backed up by aureate or another article

double coincidence of wants: a state of affairs in which two people each want some practiced or service that the other person tin can provide

fiat money: has no intrinsic value, merely is alleged by a government to be the legal tender of a land

medium of exchange: whatever is widely accustomed as a method of payment

money: any serves lodge in four functions: as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment.

standard of deferred payment: money must too be adequate to make purchases today that will exist paid in the future

store of value: something that serves as a mode of preserving economical value that tin can be spent or consumed in the futurity

unit of measurement of account: the mutual fashion in which marketplace values are measured in an economy

Solutions

Answers to Self-Bank check Questions

Every bit long as you remain inside the walls of the casino, chips fit the definition of coin; that is, they serve as a medium of exchange, a unit of account, and a store of value. Chips practice non work very well every bit coin once y'all go out the casino, but many kinds of coin exercise not work well in other areas. For example, it is hard to spend money from Turkey or Brazil at your local supermarket or at the movie theater.
Many physical items that a person buys at one time simply may sell at some other time tin serve as an answer to this question. Examples include a house, land, art, rare coins or stamps, and then on.