What Are The Three Conditions That Gold Meets To Be Used As Money?

Chapter 27. Money and Banking

27.1 Defining Money past Its Functions

Learning Objectives

By the end of this section, you will be able to:

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

Money for the sake of coin is not an end in itself. You cannot eat dollar bills or wear your depository financial institution account. Ultimately, the usefulness of coin rests in exchanging information technology for appurtenances or services. As the American writer and humorist Ambrose Bierce (1842–1914) wrote in 1911, money is a "blessing that is of no advantage to usa excepting when nosotros role with it." Coin is what people regularly use when purchasing or selling goods and services, and thus money must be widely accepted by both buyers and sellers. This concept of money is intentionally flexible, considering coin has taken a wide diverseness of forms in unlike cultures.

Castling and the Double Coincidence of Wants

To understand the usefulness of money, nosotros must consider what the earth would be like without money. How would people exchange goods and services? Economies without money typically engage in the castling organisation. Barter—literally trading one good or service for another—is highly inefficient for trying to coordinate the trades in a modern advanced economy. In an economic system without coin, an exchange between 2 people would involve a double coincidence of wants, a situation in which two people each want some skillful or service that the other person tin provide. For example, if an accountant wants a pair of shoes, this accountant must discover someone who has a pair of shoes in the correct size and who is willing to exchange the shoes for some hours of accounting services. Such a trade is likely to be hard to conform. Think about the complexity of such trades in a modern economy, with its extensive segmentation of labor that involves thousands upon thousands of unlike jobs and goods.

Another trouble with the barter organization is that it does non allow united states to easily enter into future contracts for the purchase of many goods and services. For example, if the goods are perishable information technology may be difficult to commutation them for other goods in the hereafter. Imagine a farmer wanting to buy a tractor in 6 months using a fresh crop of strawberries. Additionally, while the castling organisation might work adequately in pocket-sized economies, it will keep these economies from growing. The time that individuals would otherwise spend producing appurtenances and services and enjoying leisure fourth dimension is spent bartering.

Functions for Coin

Money solves the issues created by the castling system. (We will get to its definition presently.) Showtime, money serves equally a medium of substitution, 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 so used to buy shoes. To serve as a medium of exchange, money must be very widely accustomed equally a method of payment in the markets for appurtenances, labor, and financial capital.

Second, money must serve every bit a store of value. In a barter system, we saw the instance of the shoemaker trading shoes for accounting services. But she risks having her shoes go out of fashion, particularly if she keeps them in a warehouse for future use—their value volition decrease with each flavor. Shoes are not a good store of value. Belongings money is a much easier way of storing value. You know that you lot do not need to spend it immediately because it will still hold its value the next day, or the adjacent year. This function of money does non require that money is a perfect store of value. In an economic system with inflation, coin loses some buying ability each year, but it remains money.

Third, money serves as a unit of account, which means that it is the ruler by which other values are measured. For example, an accountant may accuse $100 to file your tax return. That $100 tin can buy 2 pair of shoes at $l a pair. Money acts every bit a common denominator, an accounting method that simplifies thinking virtually trade-offs.

Finally, some other function of money is that coin must serve as a standard of deferred payment. This means that if money is usable today to make purchases, it must also be adequate to make purchases today that volition be paid in the future. Loans and future agreements are stated in monetary terms and the standard of deferred payment is what allows united states of america to purchase appurtenances and services today and pay in the time to come. And so coin serves all of these functions— it is a medium of exchange, store of value, unit of account, and standard of deferred payment.

Commodity versus Fiat Money

Money has taken a wide variety of forms in different cultures. Gold, silver, cowrie shells, cigarettes, and even cocoa beans have been used equally coin. Although these items are used every bit commodity money, they also take a value from utilize as something other than money. Gold, for example, has been used throughout the ages as money although today it is non used every bit money only rather is valued for its other attributes. Gold is a good conductor of electricity and is used in the electronics and aerospace industry. Gold is also used in the manufacturing of energy efficient cogitating glass for skyscrapers and is used in the medical industry likewise. Of course, gold also has value considering of its beauty and malleability in the cosmos of jewelry.

As commodity money, golden has historically served its purpose every bit a medium of exchange, a store of value, and as a unit of account. Article-backed currencies are dollar bills or other currencies with values backed up by gold or other article held at a bank. During much of its history, the money supply in the United States was backed by gold and silver. Interestingly, antique dollars dated every bit late every bit 1957, take "Argent Certificate" printed over the portrait of George Washington, as shown in Figure ane. This meant that the holder could have the bill to the appropriate bank and commutation it for a dollar's worth of silver.

Figure 1. A Silver Certificate and a Modern U.S. Bill. Until 1958, silver certificates were article-backed coin—backed by argent, every bit indicated past the words "Silver Certificate" printed on the bill. Today, U.Southward. bills are backed by the Federal Reserve, but as fiat money. (Credit: "The.Comedian"/Flickr Creative Eatables)

Equally economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved towards the utilize of fiat money. Fiat money has no intrinsic value, but is declared past a authorities to be the legal tender of a state. The United States' paper money, for example, carries the argument: "THIS Annotation IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE." In other words, by government decree, if you owe a debt, so legally speaking, you lot tin pay that debt with the U.S. currency, even though it is not backed by a commodity. The merely bankroll of our coin is universal faith and trust that the currency has value, and nothing more.

Lookout this video on the "History of Coin."

Primal Concepts and Summary

Money is what people in a social club regularly use when purchasing or selling goods and services. If money were not available, people would demand to barter with each other, pregnant that each person would need to identify others with whom they accept a double coincidence of wants—that is, each political party has a specific proficient or service that the other desires. Money serves several functions: a medium of exchange, a unit of account, a shop of value, and a standard of deferred payment. There are 2 types of money: commodity coin, which is an item used as money, just which also has value from its employ equally something other than money; and fiat coin, which has no intrinsic value, only is declared by a government to be the legal tender of a country.

Cocky-Cheque Questions

1. In many casinos, a person buys chips to use for gambling. Within the walls of the casino, these fries can oftentimes be used to buy food and drink or even a hotel room. Practice chips in a gambling casino serve all three functions of money?
2. Can you name some detail that is a store of value, merely does non serve the other functions of money?

Review Questions

1. What are the four functions served by money?
2. How does the being of money simplify the process of buying and selling?
3. What is the double-coincidence of wants?

Disquisitional Thinking Questions

1. The Bring it Home Feature discusses the use of cowrie shells as money. Although cowrie shells are no longer used as money, practise y'all think other forms of article monies are possible? What role might technology play in our definition of money?
2. Imagine that y'all are a barber in a world without money. Explain why information technology would exist tricky to obtain groceries, habiliment, and a place to live.

References

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

Glossary

barter

literally, trading one practiced or service for another, without using money

commodity coin

an detail that is used every bit money, but which as well has value from its use as something other than money

commodity-backed currencies

are dollar bills or other currencies with values backed up by gold or another article

double coincidence of wants

a situation in which two people each want some good or service that the other person tin provide

fiat coin

has no intrinsic value, but is declared by a authorities to exist the legal tender of a land

medium of commutation

whatever is widely accepted as a method of payment

money

whatsoever serves order in 4 functions: as a medium of commutation, a store of value, a unit of account, and a standard of deferred payment.

standard of deferred payment

money must also be acceptable to make purchases today that will be paid in the future

store of value

something that serves as a manner of preserving economic value that tin can be spent or consumed in the future

unit of business relationship

the common mode in which market place values are measured in an economy

Solutions

Answers to Self-Check Questions

1. As long as you lot remain inside the walls of the casino, chips fit the definition of money; that is, they serve as a medium of exchange, a unit of account, and a store of value. Chips do not work very well as money once yous exit the casino, but many kinds of money practise non piece of work well in other areas. For example, it is hard to spend coin from Turkey or Brazil at your local supermarket or at the movie theatre.
2. Many physical items that a person buys at one time but may sell at another fourth dimension can serve as an answer to this question. Examples include a house, land, fine art, rare coins or stamps, and then on.

Source: https://opentextbc.ca/principlesofeconomics/chapter/27-1-defining-money-by-its-functions/

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