[Introduction to Financial Management (6)] - What is money?

[Introduction to Financial Management (6)] What is money?

Did you know? Your "money" is an IOU guaranteed by the state!?

Why is money needed? What is the origin of money and the reason why it has developed to this day? In ancient times, when money was not available, individual outputs were bartered; if there was nothing to barter with, but urgently needed items were needed, credit was used. Credit accounts can be recorded on stones, walls, shells, wood, etc. These records of credit accounts are the most "original money (because the patterns engraved on the records are different, which can prove whose IOU is, and it becomes a valuable certificate, which is money)." So, money is an IOU.

Ancient money only records what someone owes on an IOU, such as "Mother Zhang owes a dou of rice". The person with this IOU can ask Mother Zhang or others (as long as they believe that Mother Zhang will fulfill the IOU in the end) to ask for a dou of rice or something or services equivalent to the value of a dou of rice. The circulation of such an IOU is a kind of money (currency).

So the money is an IOU (USD printed with THIS NOTE IS LEGAL TENDER FOR ALL DEBITS PUBLIC AND PRIVATE), which means that the U.S. central bank and the U.S. government have the responsibility to fulfill the value of this IOU. For details, please refer to the Federal Reserve Note.

Therefore, all money transfers (IOUs) have a person who is ultimately asked to repay them, that is, the person who issued the IOU. Usually we don't use money to find what the government wants from us. Instead, we trade with each other using guaranteed IOUs (money) issued by the government, and the value of the money is freely determined by the market. (In the United States, you can issue any currency on your own. It is not difficult to issue currency. The difficulty is to have someone believe in the IOU.)

Part of the money circulating in the market is money that has been spent by the government and is circulating outside and is the responsibility of the government (fiscal deficit). In addition, part of the money is money borrowed by businesses and individuals with the company or their own credit assets. Although these loan money are also government-guaranteed money, there is a corresponding loan record in the bank for individuals or companies. Therefore (in a narrow sense) the money circulating outside is the sum of the government's fiscal deficit plus all private borrowings. The total amount of money = government debt + private debt. Therefore, money is a kind of securities guaranteed by the government and used as a medium for mutual transactions. The value is determined by the market. Those who own money have the power to request goods or services. The ultimate recipients of the money are the government and all companies or individuals who borrow money.

In addition to being determined by the market, the basic value of money is also determined by the credit of the issuing national government and the credit of the companies and individuals that lend it (equivalent to the economic strength of the country). Therefore, when a country is strong and has rapid economic growth, and all those who own the country's currency can guarantee that they can obtain the goods and services they need from the country's government, businesses, and people, the country's currency will be more valuable. If the country is not rich in products and the output is not what everyone needs, and holding the country's currency can only exchange goods and services with the country's government or business people to a limited extent, the value of the country's currency will not be high. Therefore, the rise and fall of a currency depends on the country's political stability, financial soundness and economic development.

Understanding the origin of money, we can see that money is very important in a market economy. Without money, bartering is too inefficient. Rice growers have not yet harvested and cannot exchange for the items they need. There is excess output, and other people's immature output cannot be bartered with those with excess output, resulting in a sluggish flow of goods and limiting the development of the entire economy.

When you have money, you can sell your output and services first, collect currency, store the value of services and products in coins, and then exchange for needed items or services when needed. Therefore, money is a temporary store of the value of goods and services. It can improve transaction efficiency and delay consumption.

Therefore, money is the medium of exchange between goods and services that assists individuals and businesses. Without money, these outputs and services cannot circulate and exchange with each other. If there is too little money, it will hinder the circulation and exchange of these outputs and services. But what will happen if there is too much money? Of course, it will increase Speed the exchange of output and services. When there is too much money, the faster the exchange speed, the greater the demand for output and services, which will cause inflation. When there is too little money, it will cause deflation in an economic downturn. Therefore, how to control the issuance of money and maintain price stability is the central bank's greatest responsibility.

Date of writing: June 09, 2016