money has been shaped by a combination of the three factors stated above. Why is understanding this important? Because our particular view of money greatly influences our financial decisions. Often, the influences upon our own view of money become so powerful that they can create false ideas and ultimately destructive mindsets, as in the case of Margaret.
The fact that you are holding this book is proof that you have a desire to improve your own understanding of money. It is also likely that you are deeply concerned about America’s uncertain economy and how you can protect your family and yourself. If so, then this book is exactly what you have been looking for.
In order to understand the true impact of the global financial crisis, and how you can prepare yourself and even profit from it, we will now confront several foundational questions that deserve to be answered. These questions include:
• What is money?
• How is money measured?
• What gives money its value?
• And finally, if money can be printed to prevent a financial crisis, why not just print more?
In this chapter, I will answer each of these important questions. My goal, however, is not to bore you with tedious details and lots of financial jargon. Instead, my desire is to inspire you over the next few chapters by helping you gain a basic understanding of the current monetary and banking systems and why this knowledge is vital to your financial security. While these questions may seem completely irrelevant to you right now, I hope to demonstrate in the chapters ahead how understanding the answers will empower you with the financial knowledge you will need to profit in the uncertain days ahead. Believe it or not, your ability to protect yourself and your family financially is greatly connected to your understanding of the four basic questions above. I believe that the answers will surprise you.
Now that I have your attention, let us proceed.
So . . . What Is Money?
That is a great question — what exactly is money?
If asked to give a definition of money to someone, how would you define it?
If you answered that money is the paycheck that you receive at the end of every week from your employer, you would be only partially correct. Economists have grappled with this question and have come up with three basic answers. The three definitions of money are as follows:
• Money is . . . a medium of exchange
• Money is . . . a store of value
• Money is . . . a unit of account
Let’s briefly define each of these.
Money is a . . . Medium of Exchange
One way to define money is to say that it is something universally accepted as payment for goods and services or for the repayment of debts. In America, for example, a U.S. dollar is recognized by everyone as money. Therefore, it is acceptable as payment for any and all goods and services within the nation’s borders. U.S. businesses who sell a good or a service do not accept U.S. dollars because they like the way the dollar looks or how they smell. That would be ridiculous! Instead, the reason that a merchant is willing to accept payment in U.S. dollars is because they know that the dollar is an acceptable means of payment for their needs. Put simply, they will accept dollars for payment because they know they can immediately turn around and use those same dollars to purchase something for themselves. However, if you walked into a store and attempted to pay with a handful of bananas instead of dollars, then you would be out of luck. Why? It is nothing personal against bananas. It is only because bananas are not currently a recognizable and universal means of payment for goods and services. So for something to be considered money, it must serve as a medium of exchange.
Money Is a . . . Store of Value
Economists also define money as a store of value. By this, they mean that money must be able to be stored away and used later. For example, if the U.S. dollar was perishable, or had an expiration date, then it could not serve as an effective store of value. This can be applied to our earlier example of bananas. Within a week or less, a banana can rot. Bananas would not make a very stable form of money as they would lose their value very quickly. Money should be nonperishable and must hold its value for future needs and wants over time.
Money is a . . . Unit of Account
Finally, money must be a unit of account. What does that mean? It means that the prices within an economy should be expressed in a universally accepted monetary unit. For example, without a single universally accepted form of money, how could storeowners price their items? The prices of goods and services would be very difficult to determine without a unit of account. What if you wanted to pay for your goods with your bananas and another customer wanted to pay with pineapples? How could the store owner possibly know how to price his goods under such a complex system? Today’s economic environment has become far too complex and interdependent to rely upon such an antiquated system of barter. People no longer have to produce everything they consume. Instead, they can simply trade money for the goods or services that they do not, or cannot, produce. Our modern economy requires a cohesive and universal monetary system that can serve as a unit of account.
The Brief Evolution of Money
The history and evolution of money is a story that spans thousands of years. And while money and trade have become more sophisticated over time, we have evidence that several early civilizations had forms of advanced monetary systems. One of the first civilizations to develop a system of trade with a form of money was ancient Sumer. The Sumerians were highly advanced in many areas, including their system of economy and trade.
From the days of ancient Sumer to our present day, money and trade have taken many different forms. The most primitive type, and earliest form, of money is commodity money. Commodity money is a unique form of money that serves a dual purpose. It can be used for trade or it can be consumed by the owner. Early civilizations, for example, used common items as commodity money, including spearheads, shells, feathers, and salt. In ancient times, for example, salt could be used for trading purposes. But the owner always had the option of consuming the salt himself. Salt could also be used for antiseptic purposes and for preserving food, among other uses. This is unlike our current paper money system that serves only one purpose, that is, trade. Paper money has no other use if it is not backed by a commodity. Because commodity money has a dual purpose, it is said to have an intrinsic value.
Over time, the portability and durability of money became important to merchants and traders as societies became more interconnected. As the old saying goes, “Necessity is the mother of invention.” This need for more versatility in financial transactions led to the rise of gold and silver as money. Unlike crops, gold and silver were scarce, durable, and non-perishable. In addition, gold and silver were far superior to livestock in that they 1) were much easier to transport, 2) required little maintenance costs, and 3) had the unique capability of being divided for exact payment. Soon, gold and silver were made into the form of coins with their values stamped on them. This simple but revolutionary act made financial transactions more convenient and represented man’s first real attempts at coined currency.
It did not take long, however, for those in search of dishonest gain to exploit the gold and silver monetary system. How? Those who wanted to cheat the system did so by placing gold or silver plating over cheaper metal discs to imitate the appearance of solid gold and silver coins. Local governments would often step into the “money-making business” to prevent such counterfeiting efforts. Despite these efforts, counterfeiting remained a constant challenge to most forms of money. This is true even to this day.
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