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How Money has Developed over Time

How Money has Developed over Time

Author: Jeff Carroll

Determine the functions of money.

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Source: Image of coins, double arrow, cow, handshake, images by Video Scribe, License held by Jeff Carroll; Image of wood chair, Public Domain,; Image of flour sack, Public Domain,; Image of M1 and M2 Money Supply, Public Domain,

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Hi, I'm Jeff. And in this lesson, we'll learn about the history and the functions of money. So let's get started.

Money has not always existed in its present form. And prior to the use of money, people traded or bartered for goods or services. For example, if a carpenter wanted milk, then the carpenter needed to find a dairy farm who would give him milk for the construction of a chair.

However, as civilization progressed, people began using common items or commodities as mediums of exchange, which is an item that allows a simplified sale or purchase process. It was also important that these items could be stored for longer periods of time without losing value or without spoiling.

A good example was flour, which was a durable good. Going back to our carpenter example, the carpenter might give a chair to the miller in exchange for a bag of flour. The carpenter could then trade cups of flour to the dairy farmer in exchange for milk.

The flour was the medium of exchange. And it is portable and divisible. So it served a purpose similar to the modern version of money.

Eventually, as groups began forming into governments and trading with each other, there was the need to create their own money with stamped metals, and eventually printed paper.

For something to be considered money, it must have four functions. It must be portable, which can simply mean it must be easy to carry. It's hard to lug around 40 pounds of precious metal.

It must be divisible. If you wanted a loaf of bread or 20 loaves of bread, there must be a way to divide up your money to pay less for the loaf of bread.

It must be durable. It would do people no good if money fell apart or spoiled in some way before it could be reused. So perishable goods, such as milk will not work.

And it must be stable. Money needs to retain its value. You cannot use something that loses value with each use.

Also, in order for money to function, there must be an agreement between a buyer and a seller that what they are exchanging is indeed money. And there needs to be an agreement on what it is worth.

This is handled by the supply and demand of the money supply. When the supply of money is high, the value is lower. And when the money supply is low, the value of money goes up.

In a large economy, it can be a challenge to measure the supply of money, but there are two values that economists use to do this-- the M1 and M2 money supply values.

The M1 money supply is money that is either physically money or immediately accessible through an account, such as a checking account. The M2 money supply is all of the money that is in the M1, plus funds or investments that are easily converted into cash, such as a savings account or money market fund.

Here is a graph of the M1 and M2 money supply from 1981 through 2012. You can see how there has been steady growth in both of these values. As the money supply increases, the economy is considered to be more healthy, since it means that individual people have access to usable money for spending.

All right, nicely done. In this lesson, we learned about the history and definition of money. We talked about the four functions necessary for anything to be called money. And we talked about how the value of money changes and is measured.

Thanks for your time, and have a great day.

Terms to Know
M1 Money Supply

Money that is either physical money or immediately accessible through an account such as a checking account.

M2 Money Supply

All of the money that is in the M1, plus funds or investments that are easily converted into cash such as a a saving account or money market fund.

Medium of Exchange

An item that allows a simplified sale or purchase process.