Identify The Three Uses of Money


What is Money

All that money is considered active or that is generally accepted as a means of payment and payment for transactions.

On the contrary of what can be believed, money is not only the metals and papers we are accustomed to seeing as coins and bills respectively but all those kinds of assets that a community accepts as a means of payment. Of course, physical transactions were created to facilitate transactions.

Before the money existed, the transactions were made through barter. Imagine that I dedicate to raise chickens and you to plant wheat, we can reach an exchange agreement. Like for example, I give you a chicken in exchange for a kilo of wheat. The problem arises when you are not interested in hens. How could I get you the wheat? If I could sell the hens to another person and she would give me something that you would like to exchange, then I could buy you wheat. This is how money was born.

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But not only physical (cash) money is considered money. It is also money electronic money or any asset that can be used as a means of payment or collection. An invoice, for example, which is a collection document, is also money, since its holder or who is endorsed, has the right to collect the amount indicated. The same happens with checks, promissory note or bills of exchange, since being legal mechanisms and commonly accepted, give the holder the right to payment or its creditor-payment obligation. A credit card or guarantee are also for the same reasons as they are accounting entries supported by an economic amount.

3 Uses of Money

Money has become indispensable in the life of the human being. This is because the functions performed are virtually irreplaceable by any other known method. Its three main uses are:

  1. Unit of account: used to be able to determine the price of each thing.
  2. The medium of exchange: to be able to carry out commercial transactions through payments and collections.
  3. Value Deposit:  Having the coins and bills value themselves serve to provide savings so that families and businesses can use it for emergencies without deteriorating.

Originally, the money was created as a means of payment to avoid precisely the barter and effectively to assess all goods through the same channel, the currency. The coins were also initially created as intrinsic value, meaning that they were worth their composition in gold. The coins had value because they were composed of gold and silver, and their weight was worth in this precious metal; While today money is fiduciary( a relationship between a trustee and a beneficiary), that is, we give a generally accepted value that is marked by the currency itself. We know that a 2 euro coin is worth two euros because we accept it, however, its composition is only worth 20 cents.

The article how banks create money can help you better understand what money is today.