what is money | Explainer | Training (2023)

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Throughout history and around the world, money has taken various forms – from cowrie shells, copper bars, rum and gold coins in the past to brightly colored pieces of paper or polymer and digital bank records today (see images 1, 2, 3 and 4) . A variety of different barter tokens have been used as money throughout Australia's own history (seeBox: Early forms of money in Australia). What connects these different forms of money is not their physical properties, but their function: each money was considered in its time as a reliable means of payment or payment, a means of indicating price, and a means of long-term store of value. In other words, they were:

  • widely accepted means of payment
  • unit of account
  • store of value.

Indeed, these three attributes are the standard definition of what makes something "money."

The material or item used as money need not have intrinsic value. Some forms of money have this property (e.g. gold coins, copper bars), others do not (e.g. paper banknotes). Rather, money derives its value from the trust that people place in it. However, history shows that this trust can be lost if mismanaged. For example, if too much paper money is printed and spent, the value of the money goes down; that is, high inflation will result. In fact, hyperinflation may result. This has happened many times throughout history, including in Zimbabwe in the late 2000s, leading to the population abandoning the Zimbabwean dollar (see image 5) and switching to other, more stable currencies such as the US dollar.

Indeed, maintaining a stable currency and avoiding high inflation is one of the core tasks of central banks. In fact, theReservebankgesetz 1959, which founded the Reserve Bank, specifically named “currency stability” as one of the Reserve Bank Board's three objectives (the others being full employment and the economic prosperity and well-being of the people of Australia).

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In colonial times, when coins were scarce, bottles of rum were used as currency.
Bild: Sammlung Hyde Park Barracks Museum, Sydney Living Museums, HPB/UG269.

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An ancient Roman gold coin depicting the Emperor Augustus, minted between 4 B.C. and dated 2 AD.
Museen Victoria, Nr. 22518.

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Cowrie shells, like these from Zanzibar in East Africa, have traditionally been used as currency in countless parts of Asia, Africa and Oceania.
Image: British Museum, 2014, 2011.38.

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Bild: Reserve Bank of Australia

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Image: National Museum of American History, Smithsonian Institution. 2015.0071.1.

Box: Early forms of money in Australia

When the colony of New South Wales was founded in 1788, the colonists relied on barter and rum (spirits) as a makeshift currency. In 1792 a shipment of Spanish dollars was sent to Australia to be used as payment alongside the other international currencies then in use in the colony. In order to counteract the continuing scarcity of coins, new forms of money were developed in the following decades. These included Governor Macquarie's creation of the holey dollar and landfill (see images 6 and 7) (which made two coins out of one), the use of promissory notes (see image 8) or promissory notes and copper tokens (see image 9) used by companies were issued . Promissory Notes and Coppertokens proved an unreliable source of currency, partly because they had no official guarantee.

In 1825 the British government adopted a legal currency for the colony in sterling, which remained the basis of Australian currency until the decimal currency, the Australian dollar, was adopted in 1966. Australia's first gold coins were minted gold-backed banknotes in 1855, although these banknotes did not constitute national currency. Australia, like many other countries at the time, adhered to the gold standard and the total amount of banknotes that banks could issue was limited by their gold reserves. Under the gold standard, money was "backed" by gold - countries agreed to convert paper money into a fixed amount of gold. At the turn of the 20th century, Australia's currency remained a mix of British coins, Australian coins and the notes of private banks and the Queensland government.

In 1910 a national currency law was passed. The Australian government issued 'overwritten' banknotes, with words printed on banknotes purchased from the private banks (see Figure 10). These were the first banknotes to be accepted nationwide. The first genuine Australian banknote was produced in May 1913, with further denominations being produced from 1913 to 1915.

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A 5 shilling or "holey dollar" coin created in 1813.
Image: State Library of New South Wales, FL390234.

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A fifteen pence or "dump" coin made by piercing a "holey dollar" coin.
Image: State Library of New South Wales, FL398749.

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A promissory note issued in Hobart in 1826.
Bild: Note Printing Australia Limited.

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A sovereign gold coin minted at the Sydney Mint in 1855.

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10. A £10 note originally issued by the Bank of Adelaide in 1910 and endorsed by the Commonwealth Treasury.
Image: Reserve Bank of Australia Archives, NP-004014.

Learn more about how banknotes are madeNoticearticle onMoney in the Australian Economy.

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why do we need money

Money has value because people trust it has value today and will continue to have value in the future. But history shows that trust is sometimes broken, so why do people keep using money? The answer is that it's incredibly useful in facilitating trade, which in turn has led to a higher standard of living.

Trade allows people to specialize in making those things where they have a comparative advantage. Even the ablest of humans would struggle to find food, build shelters, and make clothes all by themselves. However, if that person lived within a community and could trade with others, then each community member could specialize in one area—perhaps fishing, building houses, or making clothes—and be very knowledgeable about that task. By trading with each other, each member of the community would benefit from the expertise developed by the other community members.

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So what role does money play? It enables large-scale production and trade. If you live in a small village where you know and trust everyone, you might be willing to give up some of your fishing today, knowing that if you need (for example) clothes, the tailor will give you something to wear need. If you live in a larger city where you may not know or trust the people very well, you are unlikely to give your fish away to anyone who asks you for it, as you do not trust a tailor, for example gives you new clothes if you ask for them later. While you could try to solve this lack of trust problem with bartering, bartering doesn't usually work very well. For example, the tailor may not want your fish when you need new clothes - in fact, the tailor may never want fish, nor may they have the specific clothes you need. However, with money you can sell your fish to anyone who wants fish, save some of the money they pay you and take it to the tailor for when you need clothes (or whoever you want to buy something from and whenever you want) .

In short, money enables trading with people we may not know or trust, and trading makes society prosperous. Confidence is now placed on the value of money and not on every person you want to buy from or sell to.

What forms of money are used in a modern economy?

There are two main forms of money that exist in modern economies:

  • Coins and banknotes (i.e. currency)
  • Deposits in accounts with banks or other approved deposit-taking institutions.

currency is onephysicallyForm of money while deposits in accounts with a financial institution aDigitalForm of money and make up the largest part of money in a modern economy. (Learn more inNoticearticle onMoney in the Australian Economy.) There is also a subtle difference between currency and deposit account balances. The currency is backed by the central bank, which eliminates any risk of default. Deposit account balances, on the other hand, are liabilities of private financial institutions (because the depositor can claim them back), and these institutions are exposed to possible default risk. While this risk has materialized in some countries, it is extremely low in Australia. (Australia's banks are well capitalized and regulated, depositors are paid out first if a bank gets into trouble, and there is a financial claims scheme where the government offers a limited guarantee on household deposits from individuals under $250,000.)

What is legal tender?

Legal tender is a form of payment recognized by the legal system so that when it is offered ("offered") to pay a debt, the debt is legally settled (i.e. the creditor cannot refuse legal tender and later sue the debtor in court) . Debts). Banknotes are legal tenderReservebankgesetz 1959and coins are legal tender under theCurrency Act 1965. The monetary system in which a country's currency is backed not by a physical commodity (e.g. gold) but by a government directive making it legal is called the "fiat" system.

How is money created?

Australia's banknotes are manufactured by the ReserveBank of Australia while coins are manufactured by the Royal Australian Mint. Banknotes account for most of the value of physical money and we will focus on them in this guide. Under established arrangements, commercial banks purchase notes from the Reserve Bank on an as-needed basis to meet their customers' demand. Therefore, the increase in the value of banknotes in circulation means an increase in the public's demand for cash.

From a money creation perspective, deposits can also be created when financial intermediaries make loans.[1]While the process of lending is central to the process of money creation, this does not mean that financial intermediaries can lend and create money indefinitely. Deposit-taking institutions must meet certain regulatory requirements and satisfy themselves that borrowers can repay their debts.

Deposits can also be created by the Reserve Bank, for example when the Reserve Bank buys government bonds (seeHow the Reserve Bank implements monetary policy). Ultimately, when the Reserve Bank buys government bonds from unbanked private sectors, households and businesses deposit the proceeds of the sale in the banking system, which contributes to total deposits.

Is Bitcoin Money?

Bitcoin and other "cryptocurrencies" fulfill some of the properties of money, but not all. Most notably, they can be used as a medium of exchange – some businesses and individuals accept bitcoin as a form of payment, although the number of businesses willing to accept bitcoin is low (i.e., it is not a widely accepted form of payment). When it comes to the other two attributes of money – unit of account and store of value – Bitcoin fails. Stores do not quote prices in bitcoins; Rather, stores that accept bitcoin will typically quote prices in the local currency and then convert to bitcoin at the current exchange rate if someone chooses to pay that way. They do this in part because Bitcoin's price is highly volatile, with this volatility being one reason why Bitcoin is a poor store of value. (For more information seeExplainer: Cryptocurrencies.)

Why don't all countries use the same money?

While a single, stable form of money used by every country in the world would help people spend and save with confidence and plan for the future, it would make it harder for individual economies to respond to economic shocks.) countries have more flexibility in economic management. They are free to vary the value of their currency in response to economic events and conduct their own economic policies (especially monetary policies) independently of those of other countries. Consequently, individual countries (or groups of countries with similar economic characteristics, e.g. the euro area) usually have their own currency.

What is the future of money?

Money has changed form many times over the years, but for as long as there have been complex societies, there has been money. The only reliable prediction one can make about money is that as long as people want to trade with each other, money in some form will continue to exist because the functions it performs are central to sustaining economic activity.

While government payments increase deposits in household or corporate accounts with banks or other deposit-taking institutions, they do not create money because they must be funded by an offsetting transaction that reduces deposits. A government transfer that increases household deposits must be financed by issuing bonds or taxes, both of which reduce deposits.[1]

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What is money in simple words? ›

What is money? Money is a commodity accepted by general consent as a medium of economic exchange. It is the medium in which prices and values are expressed. It circulates from person to person and country to country, facilitating trade, and it is the principal measure of wealth.

What is money your answer? ›

Money is any item or medium of exchange that is accepted by people for the payment of goods and services, as well as the repayment of loans. Money makes the world go 'round. Economies rely on money to facilitate transactions and to power financial growth.

How much money is enough in life? ›

The answer for most people, according to new research by university psychologists, is $10m (£8.6m) – but not Americans, who say they need at least $100m, and frequently insist on $100bn.

What is money and why is it important? ›

Money is a liquid asset used to facilitate transactions of value. It is used as a medium of exchange between individuals and entities. It's also a store of value and a unit of account that can measure the value of other goods.

What are words that describe money? ›

Synonyms of money
  • cash.
  • currency.
  • bucks.
  • coin.
  • funds.
  • dough.
  • gold.
  • dollar.

What are the 3 types of money? ›

Economists differentiate among three different types of money: commodity money, fiat money, and bank money.

Why is money so good? ›

Why Do We Need Money? Money can't buy happiness, but it can buy security and safety for you and your loved ones. Human beings need money to pay for all the things that make your life possible, such as shelter, food, healthcare bills, and a good education.

How is the value of money? ›

So, what is value for money? Value for money has been defined as a utility derived from every purchase or every sum of money spent. Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchase.

What are 4 types of money? ›

The 4 different types of money as classified by the economists are commercial money, fiduciary money, fiat money, commodity money. Money whose value comes from a commodity of which it is made is known as commodity money.

How much money is enough for happiness? ›

While a previous study by Daniel Kahneman and Angus Deaton found that people's sense of wellbeing plateaued when they made at least $75,000, new research challenged this notion, finding that there was no leveling off effect at $75,000.

How much money is OK spending? ›

The rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must-have or must-do. The remaining half should be split up between 20% savings and debt repayment and 30% to everything else that you might want.

How much money is enough to live in USA? ›

The average monthly living expenses for a single person in the USA are $3,189, which is $38,266 per year. The average cost for a family of four is $7,095 per month, which is $85,139 per year.

Is money the most important thing in life? ›

The reason money is so important is that it provides options for you to live a better life that you choose and puts you in control. Having money and being comfortable with finances also gives you freedom and options to decide how you want to live and support the things you care most about in your life.

Why money is the key to happiness? ›

When we wonder whether money can buy happiness, we may consider the luxuries it provides, like expensive dinners and lavish vacations. But cash is key in another important way: It helps people avoid many of the day-to-day hassles that cause stress, new research shows.

Does money matter in our life? ›

More Money Matters

In Maslow's hierarchy of needs, the only factors more important than financial security per se and physical safety are our physiological needs for air, water, warmth, and rest — all of which are increasingly dependent on money as well.

What are 3 characteristics of money? ›

To summarize, money has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange.

What are the 5 characteristics of money? ›

The following are the key characteristics of money: 1. Durability 2. Portability 3. Divisibility 4. Uniformity and Fungibility 5. Limited supply 6. Acceptability
  • Durability.
  • Portability.
  • Divisibility.
  • Uniformity and Fungibility.
  • Limited supply.
  • Acceptability.

What are the 4 characteristics of money? ›

in fact, a variety of items have been used as money over the centuries. The items that worked the best tended to have four basic characteristics: portability, divisibility, durability, and acceptability.

What is money made of? ›

Federal Reserve notes are a blend of 25 percent linen and 75 percent cotton. Currency paper has tiny red and blue synthetic fibers of various lengths evenly distributed throughout the paper. It would take 4,000 double folds, forwards and backwards, to tear a banknote.

How to save more money? ›

23 Practical Ways to Save Money
  1. Say goodbye to debt. ...
  2. Cut down on your grocery budget. ...
  3. Cancel automatic subscriptions and memberships you don't use. ...
  4. Buy generic. ...
  5. Cut ties with cable. ...
  6. Save money automatically. ...
  7. Spend extra or unexpected income wisely. ...
  8. Adjust your tax withholdings.
Jan 10, 2023

What is money quotes? ›

20 inspirational money quotes to set you on the path to wealth
  • “If you want to be rich, simply serve more people” – Robert Kiyosaki. ...
  • “Fortune sides with him who dares.” – ...
  • “Never spend your money before you have it.” – ...
  • “Money is a reward for solving problems.” – ...
  • “Money is usually attracted, not pursued.” –
Jan 25, 2016

Why money is the most powerful? ›

The reason that money holds such a power over people is that it provides them with power – to do what they want to do, whatever that may be. Some people feel money gives them a sense of personal worth.

Can we live without money? ›

If you're a single person, living without money will be much easier to manage than if you have a family. Because living cash-free is a huge commitment, you will want to make sure that your essential needs can still be met without money.

Does money make people happy? ›

In a six-month experiment, people who received cash transfers of $10,000 generally reported feeling happier than people who did not receive the payment. A recent experiment suggests that money can indeed buy happiness — at least for six months, among households making up to $123,000 a year.

Why is money important quotes? ›

Money is an important tool for modern life. Money will not make you happy, but you can use money wisely to enhance your happiness.

Is money always value? ›

People, and embarrassingly economists, often conflate money with economic value. They are two different concepts, and should be treated as such when analyzing economic problems. The relationship between money and value is very similar to the relationship between law and morality.

Is money an important value? ›

In conclusion: Money is important to live the life you want

Money can't buy you happiness, but it can help you acquire things and experiences that create much joy and satisfaction for you. It can help you pursue your passions and purpose in life. And, it allows you to be generous and supportive of others in need.

What are the two main forms of money? ›

Although money can take an extraordinary variety of forms, there are really only two types of money: money that has intrinsic value and money that does not have intrinsic value. Commodity money is money that has value apart from its use as money. Mackerel in federal prisons is an example of commodity money.

What type of money is used the most? ›

The most popular are the U.S. dollar, the euro, and the yen. Another name for a global currency is the reserve currency. According to the International Monetary Fund, the U.S. dollar is the most popular. As of the fourth quarter of 2019, it makes up over 60% of all known central bank foreign exchange reserves.

What are the five stages of money? ›

Different stages of money are Commodity Money, Metallic Money, Paper Money, Credit Money, and Plastic Money.

What is the perfect amount of money? ›

Globally, the study found that the ideal income point for an individual is $95,000 for life satisfaction and between $60,000 to $75,000 for emotional well-being.

How much money do I need a year to live? ›

The median annual living wage — defined as the minimum amount you need to cover expenses while saving for retirement — is $61,617 per household in the U.S., according to calculations by personal finance website GOBankingRates.

How much money do you need to feel rich? ›

How much money do you need to be considered rich? According to Schwab's 2022 Modern Wealth Survey (opens in new tab), Americans believe it takes an average net worth of $2.2 million to qualify a person as being wealthy. (Net worth is the sum of your assets minus your liabilities.)

How much money should a person spend a day? ›

So, how much does the average American spend on a daily basis in different categories? Overall, Americans spend the most on housing, followed by groceries, utilities, and health insurance.
Average American Spending per Day: All Ages.
Average Daily Spending by Americans of All Ages
13 more rows

How much money should you really have saved? ›

Standard financial advice says you should aim for three to six months' worth of essential expenses, kept in some combination of high-yield savings accounts and shorter-term CDs.

How much should you save a month? ›

At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.

What is money in simple words for kids? ›

Money is a medium of exchange – it is something everyone is willing to accept in exchange for goods and services. Although money has taken many forms over time, currently it's most commonly seen as bills and coins.

How do you explain money to a child? ›

How to Teach Pre-Schoolers and Kindergartners About Money
  1. Use a clear jar to save. ...
  2. Set an example. ...
  3. Show them that stuff costs money. ...
  4. Show opportunity cost. ...
  5. Give commissions, not allowances. ...
  6. Avoid impulse buys. ...
  7. Stress the importance of giving. ...
  8. Teach them contentment.
Nov 28, 2022

What is money according to kids? ›

Thus, money is what we give for buying food, toys, clothes, candy, cars, houses, etc. Money can be explained as something which everyone accepts in exchange for goods and services.

What is money definition for students? ›

Money can be defined as the medium of exchange, such as notes, coins, and demand deposits, used to pay for commodities and services. The value or price of an item or service is paid for using money. The US dollar is the official currency of the United States of America.


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