According to the
money notes of Adam Smith,
money is a commodity or token that everyone will accept in exchange for the things they have to sell”. Down the ages different societies have had different forms of money but globalization has resulted in a concerted effort to bring about a certain level of uniformity in form and scope of money. One of the first definite moves in this direction was the European Monetary Union that launched the combined European currency ‘Euro’ in the global money market.
History of money
The
history of money is almost as old as the beginning of private property itself. Between 9000 BC and 6000 BC the domestication of cattle and cultivation of crops resulted in the earliest form of money as these two commodities have all the attributes required to function as a valuable mode of exchange. It is understood that cattle preceded crops as the earliest form of money and was in existence in many primitive societies as late as the 20th century.
Types of money
Commodity Money
Any commodity used as a medium of exchange is commodity money. The best known examples of commodity money are gold, copper and silver, although tobacco and cowrie shells are said to have been used as money at different points of time.
Fiat money
Fiat money is money by "fiat", or command of the law of the land. It is a monetary standard that people of that particular area are required by law to accept as a medium of exchange.
Fiduciary money
Fiduciary money is based on the promise by a participant of the transaction to pay in commodity money or in fiat money. The contemporary monetary systems are mainly fiduciary, e.g. bank money, which is also called fiduciary money as it is based on the trust that the bank enjoys with respect to its practice of ‘pay as promised’. In today’s globalized monetary system the most pertinent form of fiduciary money is the credit card, a breakthrough system of monetary transaction that has elevated the status of the consumer like never before.
Functions of money
Functions of money can be traditionally divided into four heads:
Medium of exchange
This is the function that defines money, which means that whatever is given in exchange for the things that are bought is the medium of exchange.
Unit of account
The unit in which values are stated, recorded and settled is the unit of account and despite the similarities with medium of exchange the differences are pronounced.
Standard of deferred payment
The unit in which debt contracts are affirmed is standard of deferred payment and it means a payment made in the future. The standard of deferred payment also has similarities with the medium of exchange but it is subtle.
Store of value
This is money or medium of exchange set aside for the future to maintain the value of wealth.