We all know that we need money and we use it every day in some form or fashion. However, have you ever stopped to think about what is money exactly? Money as we know it has not always existed. It has evolved from the barter system to the sophisticated forms that we use today.
Here we will discuss the topic of money in detail. So, as you embark on your financial journey, you will have the knowledge that is required for success.
As you know a definition is always important to offer some perspective. Simply put, money is a unit that functions as an exchange medium for transactions within an economy.
Money can also be considered a commodity.
You may have wondered how much money is in the world. Money is divided into 3 categories to help measure it. The categories are elaborated on below:
M1– The first category of money comprises of all physical types of money like:
Demand deposits (NOW accounts, travelers’ cheque, and chequing accounts)
M1 money is used for making payments.
M2– This class of money can be turned into cash like time-related deposits, non-institutional money market funds, and saving accounts deposits. It also included the M1 money.
M3 – This class of money includes all the money found in the M2 category and institutional money market funds, large-time deposits short-term repurchase agreements, and any other larger liquid assets.
You may also have heard the term active money used. Active money is another name for the M1 category of money. It is essentially all the paper currency and coins that are circulating in the county. The amount of active money is always fluctuating.
It fluctuates daily, weekly, monthly, and even seasonally. The money that the bank lends to its clientele, becomes active money.
Here are some examples of active money fluctuation trends:
Weekends– (more active money in circulation)
Seasonal– (more money in circulation during and before the Christmas and Thanksgiving season. Less active money after the holiday season)
Types Of Money
There are different types of money and here we will look at each one in-depth.
Representative currencies are backed by physical commodities such as precious metals like gold, silver, etc. Cheques and credit cards are representative currencies since they are used instead of traditional money.
Representative currencies have been around for a long time. Commodities like furs and corn were used as currencies in the 17th-18th centuries. Then gold and silver were used as representative currencies.
The world followed the goal standard until 1970. This meant that a person could exchange their money for gold. Gold had a fixed price for buying and selling. The major advantage of a representative currency is that it is unaffected by inflation.
When we ponder the question “what is money?”, fiat currencies are usually what comes to mind. Fiat currencies are declared legal tender by the government of a country. It can be both paper money and coins. Fiat currencies are not determined by a commodity.
The value of fiat currencies is not determined by the material that they are made from. As such the value of the paper and the metal used to make the coins are irrelevant. The government decides on the value of fiat currencies and that value depends on the country’s economy and stability.
Examples Of Fiat Currencies Are As Follows:
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The question of “what is money?”, also comes up when discussing cryptocurrencies. A cryptocurrency is a virtual or digital currency i.e. there is no physical form of this currency. Bonus, this means that this type of money has almost zero chances of being duplicated.
Cryptocurrencies are relatively new, and the market is relatively volatile. It stands to reason that trading cryptocurrencies may bring high returns but also high risk.
Once you are exploring cryptocurrencies who will encounter the term blockchains. A blockchain is a tool that cryptocurrencies use to organize the transactional data.
Here is a list of more popular cryptocurrencies:
The value of all the cryptocurrencies in the market comes in at a grand total of 214 billion. So, you can see for yourself that the cryptocurrency market has great earning potential.
You may be wondering what is money when referring to a corporate currency? However, the term refers to the transactions that businesses engage in where domestic companies buy goods or raw materials in another country with a foreign currency.
Corporate currencies present several challenges. The first challenge is that there is often a transactional risk with corporate currencies. You see a payment in a foreign currency may be delayed let say 90 -120 days. That delay between the sale and receipt of funds gives room for the value of the foreign currency to fluctuate on the exchange market. This could result in a loss for the company.
Corporate currencies may also face translation risk.
You see if a company is operating overseas, the value of assets and liabilities must be translated from the foreign currency to the home currency. This is done before the company submits its financial reports. Sometimes, unfavorable equivalents might be revealed. What is money is very different when the translation does not reflect the values in a positive light.
The cashflow of corporate currencies may also be reduced. When the foreign currency is changed in the home currency it may very well be less.
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