What is money?

Money, like the wheel, was one of mankind’s most important inventions. Before the development of money all exchanges were on a barter basis — the trading of one good directly for another. For example, if a hatmaker needed a pair of shoes, he had to find a shoemaker who needed a hat, an exceedingly inefficient method of exchanging goods.

Fortunately, society discovered that there were usually one commodity which would be accepted in exchange for all goods and services, and so this commodity became money.

Because of the development of money, which facilitated and accelerated the exchange of goods and services and made division of labor possible, productivity increased and and thus living standards rose. The sounder a nation’s money, the more efficient would be its economy and the faster would its standard of living grow.

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One of the main functions of money is to serve as a unit of account. It is the unit in which all other values are expressed. By all goods and services having a value in money, they can be related in value to each other, thus eliminating the near impossible task of evaluating goods and services directly to each other, as in barter. For example, how many heads of lettuce would equal a pair of shoes? Or, how many wooden bowls would equal a jacket, or how many hours of chopping woods would equal ten loaves of bread? By expressing the value of all these goods and services in money — their “price” — we can easily relate them to each other.

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By trial and error, civilizations discovered those commodities which best served as money. In most societies, the commodities that evolved were gold and silver.

Irwin Schiff

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