Money – What Is It And Why Is It Important?
Money is the most important basic unit of value in the economy. Because of this, money has important economic, political, and social effects on societies and individuals. It determines how people will conduct their businesses, regulates the exchange of currencies, and helps to allocate resources. Thus, money plays a very important role in the operation of society.
The three main varieties of money are coins, banknotes, and metallic money. Coins are pieces of money that have been issued by governments. Their value may be backed up by government assets, including currency and stocks. Banknotes are issued by banks as substitutes for physical coins. Their legal tender, also, is convertible into coins so that their value can be assessed at any point.
As you can see, coins and banknotes play different roles in the economy. So, how much money should you keep in your pocket? Obviously, you should hold on to something that serves both monetary and social purposes. The amount you want to store in your wallet will depend on your goals. If you just want to survive from day to day, have just enough money in your pocket to survive, and you don’t care too much about changing the world through social activities, then having a few coins is more than enough.
However, if you want to change the world, and forgo your comfort zone, you will need to hold on to a large amount of active money in your pocket. This money supply will allow you to purchase commodities and invest in the stock and property, since the value of money is not tied to any particular commodity. However, as you accumulate wealth, you can use it to pay off debts, buy new cars and houses, and improve your lifestyle. Of course, with more wealth, comes a larger proportionate portion of society’s productive assets as well.
Active money, in contrast to money held in bank accounts, is usually stored in bullion or in coins. Gold, silver, and platinum are generally accepted as the base metals for all kinds of physical goods. In case of emergencies, you can always redeem them for hard cash. On the other hand, commodities such as food, fuel, and raw materials are normally held in warehouses where their intrinsic value is determined by the current cost of production. In these cases, gold, silver, and platinum coins may serve as sufficient backing for your commodities.
With that said, it can be said that the goods that are generally accepted as money are those that have a direct, real-life relationship with your purchasing power. For example, gold is a standard asset that serve as a hedge against inflation, and its value is subject to changes in the global market. On the other hand, a car loan is an intrinsically worthless good that serves no economic function other than to facilitate transactions between people. In both of these examples, the usefulness of the good is judged by the current price of the item on the commodity market. As a result, both fiat money and fiduciary money are not considered to be money at all.
