Then, I can take the money I earn and pay for a variety of goods and services.Įconomists say that the invention of money belongs in the same category as the great inventions of ancient times, such as the wheel and the inclined plane, but how did money develop? Early forms of money were often commodity money-money that had value because it was made of a substance that had value. In a money-based economy, I can sell my services as a bassoon player in an orchestra to those who are willing to pay for orchestra concerts with money. In fact, without money, every transaction would require me to find producers who would exchange their goods and services for bassoon performances. Money reduces the cost of this transaction because, while it might be very difficult to find a mechanic who would exchange car repairs for bassoon concerts, it is not hard to find one who would exchange car repairs for money. In an economy where people have very specialized skills, this kind of exchange would take an incredible amount of time and effort in fact, it might be nearly impossible. In other words, I would need to find a mechanic who would be willing to exchange car repairs for a private bassoon concert by 9 AM tomorrow so I can drive to my next orchestra rehearsal. In fact, I would need to find a coincidence of wants-the unlikely case that two people each have something that the other wants at the right time and place to make an exchange. In a world without money, I would need to barter for car repair. Imagine I am a musician-a bassoonist in an orchestra-who has a car that needs to be repaired. In order to appreciate the conveniences that money brings to an economy, think about life without it. government protects my right to pay with U.S. paper money carries this statement: "This note is legal tender for all debts, public and private." This means that the U.S. When I go to the grocery store, I am confident that the cashier will accept my payment of money. This means that money is widely accepted as a method of payment. So, for instance, your new computer might cost you 100 to 150 bushels of corn at today's prices, but you would find it most helpful if the price were set in terms of money because it is a common measure of value across the economy. If you are shopping for a new computer, the price could be quoted in terms of t-shirts, bicycles, or corn. You can think of money as a yardstick-the device we use to measure value in economic transactions. Inflation slowly erodes the purchasing power of money over time. Although it is an efficient store of value, money is not a perfect store of value. In fact, holding money is a more effective way of storing value than holding other items of value such as corn, which might rot. If I work today and earn 25 dollars, I can hold on to the money before I spend it because it will hold its value until tomorrow, next week, or even next year. What do these forms of money have in common? They share the three functions of money: Money has taken different forms through the ages examples include cowry shells in Africa, large stone wheels on the Pacific island of Yap, and strings of beads called wampum used by Native Americans and early American settlers. Economists define money as any good that is widely accepted as final payment for goods and services.
We earn it and spend it but don't often think much about it. Money is something that people use every day.
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