In this explainer, we will learn how to identify different types, functions, and characteristics of money as well as the history of money.
Money plays such an important role in today’s economies that it is difficult to imagine an economy without money. We can walk into stores and purchase goods using cash, checks, or credit cards. However, let us take a minute to acknowledge that these objects do not carry any intrinsic value. In other words, cash, checks, and credit cards are worthless unless we are able to use them as payments for goods and services. This leads to the conundrum of money: why is money generally accepted as payment for goods and services?
Before we answer this question, it would be helpful to understand the history behind the emergence and development of money in civilizations. Money has not always existed in civilizations. Before money, people primarily used bartering to obtain essential goods and services. A barter is a process through which two parties agree on a trade of goods and services. For instance, a carpenter can barter a table he created with a box of fish from a fisherman. This process is represented in the following diagram.
In ancient civilizations, traded items mostly comprised of basic necessities such as agricultural goods or clothing. Bartering was sufficient and effective for such simple economies. The simplicity of bartering is one of its benefits. However, as human needs have increased and diversified over time, so has the size of economic activities within societies. Soon, economies in ancient civilizations grew to the extent that bartering was no longer sufficient. In particular, bartering has the following disadvantages, which led to its descent.
- Bartering requires two parties to have simultaneous needs for each other’s goods or services. This requirement is called double coincidence of wants, or simply, the coincidence of wants. For instance, a barter of a table and a box of fish may not be established if either party does not want the other’s goods at the same time. In order to obtain a table, a fisherman would have to search for a carpenter who wants a box of fish. Failure to find a carpenter with this want would mean that the fisherman’s need for a table would go unfulfilled. The requirement for a double coincidence of wants makes it more difficult to obtain goods and services through bartering.
- Indivisibility of bartered items poses a difficulty in establishing a fair trade. Certain goods, such as livestock, cannot be divided into smaller portions to establish a barter with goods of smaller value. For instance, a horse cannot be divided into smaller portions without destroying its value. Since a horse in most societies is considered highly valuable, it would be difficult to barter using a horse to obtain less valuable goods, such as a meal. A barter of a horse and a meal would result in a great disadvantage for the owner of the horse, but it may be necessary if the need for food is urgent. In this trade, indivisibility of a horse leads to an unfair barter.
- The lack of measurement standards, or a unit of account, in bartering makes it difficult to establish a fair trade when bartering. Since the society does not have standards on the values of particular goods, individuals must reach an agreement on the values of bartered goods on each occasion. For instance, if an individual wants to barter a desk for some fish, the parties must first agree on how much fish is equal in value with a desk. If the two parties have widely different opinions on the value of their goods, the bartering can fail to take place.
- Bartered items may perish over time or may require additional resources to store them, making it difficult to store values in a bartering economy. For instance, fish would spoil quickly, especially without salt or refrigeration, and horses would require a pasture and a stable to maintain. This means that an individual cannot effectively use these items to store values over a long period of time. Due to the difficulty in storing values with these goods, their owners are forced either to consume them at a more rapid pace than necessary or to barter them under their fair value.
In our first example, we will consider the advantages and disadvantages of bartering.
Example 1: Understanding Bartering
Which of the following describes an advantage of bartering in general?
- Bartering is simple.
- Bartered goods are divisible.
- Bartered goods can store values for a long time.
- Bartering requires double coincidence of wants.
A barter is a process through which two parties agree on a trade of goods and services. Bartering used to be the primary means of economic activities before money emerged. Let us consider the characteristic given in each option and determine whether it correctly describes the advantage of bartering in general.
- Bartering requires two parties to agree on the exchange of goods and services. Compared to transactions using money, which require societal agreements and financial systems to be in place, the bartering process is much simpler. The simplicity of bartering is one of its advantages in general.
- Some bartered goods, such as rice or flour, may be divisible into smaller portions. However, this is not true for all bartered goods. For instance, a horse cannot be divided into smaller portions without destroying its value. Indivisibility of such bartered items is a disadvantage of bartering because it leads to a difficulty in establishing a fair trade.
- Bartered items may perish over time or may require additional resources to store them, making it difficult to store values in a bartering economy. Due to the difficulty in storing values with these goods, their owners are forced either to consume them at a more rapid pace than necessary or to barter them under their fair value. Hence, difficulty in storing value is a disadvantage of bartering.
- Double coincidence of wants refers to the requirement for two parties involved in a barter to have the simultaneous needs for each other’s goods or services. For instance, a barter of a table and a box of fish may not be established if either party does not want the other’s goods at the same time. Hence, double coincidence of wants is a disadvantage of bartering because it makes establishing bartering more difficult.
Option A, which refers to the simplicity of bartering, is an advantage of bartering in general.
To satisfy any needs, participants of bartering economies have to seek out another party for a double coincidence of wants. Such a system would be quite frustrating, especially when needs become more abundant and complex. Double coincidence of wants is due to the fact that a barter combines the buying and selling processes into one. In a barter of a table and a box of fish, the sale of the table is tied to the purchase of fish. This difficulty can be resolved by splitting a barter into two independent buying and selling processes. For instance, if the carpenter can sell a table to one individual and then purchase a box of fish from another, such chain of transaction would not require a double coincidence of wants.
Money emerged in civilization to serve as a medium to accommodate such transactions, dividing the bartering process into buying and selling. We can observe this effect in monetary transactions today. We can walk into a store to buy a box of fish without having to worry about offering appropriate goods in exchange. While the money to purchase the fish may have originated from selling a table, the buying process is completely independent of the selling process. Money functions as a medium between the buying and selling transactions so that we are not burdened with a requirement for a double coincidence of wants. This process is represented in the following diagram.
When money first emerged in society, it looked quite different from its current form. Since money used in today’s society does not hold intrinsic value, it would not be readily accepted by merchants in a bartering economy. At the start, transactions using money looked very much like bartering. Each society decided on common goods that were perceived to be valuable and used these goods as a medium in bartering. Over many centuries, money has developed into the form that we now use and it is still continuing to evolve. Let us consider the history of money in civilizations.
At first, money emerged in the form of commodity money, which is any type of money with intrinsic value. Examples of commodity money used in early civilizations include salt, rice, and livestock. These common goods were used as a medium, which enabled the separation of the buying and selling processes in bartering. Types of commodity money varied widely between different civilizations. In some civilizations, an individual would be able to purchase a table from a carpenter in exchange for rice even if the carpenter did not have a need for rice. The carpenter can then use this rice to buy other goods and services from other merchants. In this way, commodity money separated bartering into buying and selling processes so that transactions did not require a double coincidence of wants.
Since commodity money requires the payment for goods and services with another type of goods, it still is a type of bartering, yet free of a double coincidence of wants. Due to its resemblance to the bartering process, emergence of commodity money independently occurred in many early civilizations. One of the earliest records of commodity money dates back to 3000 BC in the Sumerian civilization of the Mesopotamia region, where barley was used as commodity money. The Sumerian civilization was also among the first civilizations to develop a written language, and commodity money may have existed in other places well before this record.
A disadvantage that commodity money and bartering share is the difficulty with storage. For instance, rice and salt can spoil if not stored properly, and livestock requires additional resources to maintain. Even when stored properly, commodity money is susceptible to theft as well as damage in case of fire and flood. Additionally, it can be inconvenient to carry the bulk of commodity money for transactions.
Civilizations developed coins, which are metallic tokens that serve as money, to solve the storage problem. In ancient civilizations, coins were made of precious metals such as gold and silver. Gold and silver coins can be considered commodity money since precious metals are perceived valuable in many societies. Even if they are not accepted as money, these coins can be melted and used for other purposes.
Many different kingdoms and authorities produced their own coins from precious metals, carrying emblems on their faces that indicated their authenticity as well as their value. The first written record for coins dates back to the seventh century, BC in the Lydian Kingdom of Asia Minor. Coins solved many problems experienced by commodity money. Coins are nonperishable, which means that they can store value for a long period of time. Also, coins are easier to carry and to hide compared to bulky goods used for more primitive forms of commodity money. Since coins allowed money’s function to store value, participants of the coin economy began to accumulate their wealth in coins. Hence, banks appeared to provide safe storage of coins.
Coins were widely used throughout many different civilizations due to their convenience as well as their practicality in regard to storing wealth. However, due to their heavy weight, it is difficult to transport a large amount of coins for transactions. Merchants traveling long distances required a solution to this problem since they had to carry large amounts in coins. To overcome this difficulty, merchants began trading paper money, or banknotes, which were promissory notes written on paper containing agreements on the transfer of ownership of coins. Recipients of these notes would obtain guarantees to receive coins from the other party’s bank rather than the physical delivery of coins. Unlike the earlier forms of money, these promissory notes did not have intrinsic value, and their value was derived from the goods guaranteed by the note.
The practice of trading promissory notes was first recorded during the Chinese Tang dynasty in the ninth century AD, where the notes were redeemable for coins in the Chinese capital. Rather than traveling to the capital for the exchange of notes for coins, the notes themselves were traded locally as payments since they were perceived to be trustworthy.
Since paper money did not hold intrinsic value, it was prone to counterfeit, which is still a societal issue today. Circulation of counterfeit paper money would reduce the society’s trust in its ability to serve as payments. Hence, the governments intervened to restrict the production of banknotes. Today, the national government is the sole issuer of paper money in each national economy, and merchants are legally required to accept banknotes published by the national government. Money backed by the legal authority of the issuing government is called legal tender.
Until the mid-twentieth century, banknotes published by the national government were backed by the value of coins, as stated on the notes, and commercial banks were obligated to provide the stated value in gold or silver in exchange for these notes when requested. Today, banknotes in most countries are not backed by precious metals but by the legal authority of the issuing government. This has led to a new type of paper money not supported by physical assets, which is known as fiat money. Fiat money was initially developed for small values, but later the issued values increased.
The most prevalent form of money in today’s society is credit money, which refers to the monetary value created through debts and obligations. Unlike the previous types of money, credit money is not physical money, but it is of intangible monetary value. When an individual deposits paper money at a bank, the bank becomes the owner of this money physically. In return, the bank is obligated to pay back the deposited amount plus interest when requested. This obligation, or liability, of the bank is known as credit money.
As the earliest form of paper money was supported by the guarantee of physical coins in exchange, credit money is supported by the guarantee of paper, or fiat, money from the bank upon request. An individual with bank deposits can use credit money directly as payment by transferring the bank’s liability toward the merchant by writing checks. During such transactions, no physical money is exchanged, but a part of the liability of the buyer’s bank is transferred to the merchant. Such credit money is only possible due to the consumer’s confidence that the banks will uphold their obligations.
In the diagram below, we can see the chronological order in the development of money.
In our next example, we will consider the history of money.
Example 2: History of Money
Put the following types of money in the chronological order of their development:
- Bank deposits
- Commodity money
Money emerged in society to overcome difficulties of the bartering process. Let us recall the history of money.
When money first emerged in civilization, it looked very much like bartering. Each society decided on what was generally perceived to hold value and bartered using these goods known as commodity money. Hence, commodity money is the first phase in the chronological order of the development of money.
While commodity money was an improvement over bartering, there were also a number of disadvantages. For instance, many of the goods used for commodity money in ancient civilizations were not durable as well as being difficult to transport in large quantities. To overcome these difficulties, civilizations developed coins, often made of precious metals such as gold and silver. Hence, coins are the next phase in the chronological order of the development of money.
One main disadvantage of coins is its heavy weight when a large amount is needed for transactions. For this reason, merchants began trading based on paper money, also known as banknotes, which were promissory notes containing agreements on the transfer of ownership of coins. Hence, banknotes are the third phase in the chronological order of the development of money.
Credit money, also known as bank deposits, refers to the monetary value created through debts and obligations. When an individual deposits money at a bank, the depositor acquires the bank’s obligation to pay back the amount plus interest when requested. As paper money started as a guarantee of the bank’s obligation to provide coins, credit money is a guarantee of the bank’s obligation to provide paper money. Hence, bank deposits are the final phase in the chronological order of the development of money.
The list in the chronological order is II, III, IV, and I.
We have observed different phases in the development of money. Originating from a bartering system, the development of money has been motivated in large part by convenience in its usage during transactions. Even today, money is continuing to evolve into new forms. Rapid technological developments have enabled the emergence of electronic money, which makes transactions even more convenient.
Definition: Electronic Money
Electronic money, or e-money, refers to the monetary value that is stored electronically.
We will only discuss electronic money that is supported by fiat money, that is, the national currency. More broadly, electronic money today also includes money that is not tied to any fiat currencies. However, this will not be discussed in this explainer.
Traditionally, banking institutions have been the main producers of e-money since they can electronically store the amount of their liabilities to their customers. However, banks are not the sole producers of electronic money, and a number of nonbanking financial institutions offer electronic money as their service.
Electronic money can be categorized depending on where the monetary value is stored. Hardware-based electronic money is the e-money whose value is stored in physical devices carried by the consumers. For instance, smart cards are cards with magnetic strips or small computer chips installed on them, and they carry within them the holder’s personal information or monetary value. Today, smartphones are also used as a physical storage of monetary value, which is communicated using a technology called near field communication (NFC). Both smart cards and smartphones store monetary value within the physical devices carried by the consumers, which makes them types of hardware-based electronic money.
Transactions using hardware-based e-money require specialized machines that can read the data physically stored within the devices. Since these machines can read the customer’s personal information from the devices, customers can verify their identities for transactions without carrying their identification. Instead, customers simply need to authenticate transactions using personal identification codes (PINs), signatures, or biometrics such as fingerprints.
Digital money is software-based electronic money that is not physically stored at the consumer’s location. Instead, digital money is stored at a secure location managed by financial institutions and can be accessed remotely through the Internet. Electronic transfer between bank accounts and online payments are examples of how digital money is used today.
In the next example, we will consider different types of electronic money.
Example 3: Types of Electronic Money
Which of the following is hardware-based electronic money?
- A gold coin
- A smart card
- A bank check
- An online money transfer
- A banknote
Recall that electronic money, or e-money, refers to the electronic storage of monetary value. Electronic money can be categorized based on where the monetary value is stored. In particular, hardware-based electronic money is the e-money where the value is stored in physical devices carried by the consumers.
Let us consider each type of money listed in the options to determine whether it is hardware-based electronic money.
- A gold coin is a physical type of money, which was used historically before paper money was invented. The value of a gold coin is physically stored within the object since gold is perceived valuable in most societies. Since its value is not stored electronically, a gold coin is not an example of electronic money.
- A smart card electronically stores the consumer’s personal information as well as monetary value needed for transactions on a magnetic strip or a small computer chip on the card. Since this data is electronically stored, it is a type of e-money. Also, since the data is stored at the consumer’s location, a smart card is a type of hardware-based electronic money.
- A bank check contains information about the consumer’s, which is physically written on paper. However, a bank check does not store monetary value electronically, so it is not an example of electronic money.
- An online money transfer uses the consumer’s financial information, which is electronically stored. This means that an online money transfer uses electronic money. However, data used in an online money transfer is stored at a secure location managed by the financial institution, which is generally not at the consumer’s location. Hence, an online money transfer is not a type of hardware-based electronic money. More specifically, an online money transfer is an example of software-based electronic money, which is called digital money.
- A banknote is a physical piece of paper that contains legally binding monetary value or an agreement for a transfer of ownership of coins. The value of a banknote is backed by physical assets, such as coins, or by the issuing nation’s legal authority. Since its value is not stored electronically, a banknote is not an example of electronic money.
Option B, a smart card, is an example of hardware-based electronic money.
Electronic money has largely overtaken the marketplace today. While cash, that is, banknotes, is still used for transactions, many consumers prefer electronic means of payment over cash so that they do not have to carry around large amounts in cash. As participants of today’s economy, we would find it beneficial to understand the characteristics of different types of electronic payments.
Credit cards are issued by banks as well as nonbanking financial institutions, and they allow cardholders to borrow monetary value from the issuers. Transactions using credit cards are initially paid by the issuing institutions and become the credit card holder’s debt. When using a credit card, the consumer is not obligated to pay for the purchase at the transaction, but its payment can be deferred to a later date. The following diagram represents how credit card transactions are processed.
Generally, credit card transactions are summarized into a bill on a monthly basis, the length of which is called the billing cycle. At the end of a billing cycle, the credit card holder is notified of the debt amount. The issuer then grants a grace period, which is usually one month, before which the debt can be paid without incurring additional costs to the holders. This means that a consumer can have up to months between the date of the transaction and the date at which the payment is required. If the full debt balance is not repaid before the end of the grace period, the credit card issuer, banks or other financial institutions, may impose a fine or interest on top of the debt. Interest rates for credit cards are generally much higher than interest rates for other loans such as mortgage loans.
Some credit cards may also be used abroad where the merchants require payments in their own currencies. In such transactions, credit card issuers pay the merchants in foreign currencies, while the cardholder’s debt is converted to the home currency, that is, the currency of the nation where the card was issued. While additional fees may apply for international transactions occurring in foreign currencies, cardholders can repay the debt using the home currency.
Payments using debit cards are paid directly from the consumer’s bank account at the time of the transaction. This is different from credit card payments, which are paid by generating debts. Financially, debit card payments are processed the same way as payments using personal checks, which use the consumer’s credit money, that is, the bank’s liability toward the consumer. Credit money is a part of the consumer’s wealth, so debit cards simply serve as a medium of payment using credit money. The following diagram represents how debit card transactions are processed.
ATM cards allow consumers to access their bank accounts to convert their credit money to banknotes by using automated teller machines (ATMs). Unlike credit or debit cards, ATM cards are not directly used to pay for transactions. Instead, holders can obtain banknotes using ATM cards, which are deducted from their bank accounts. These banknotes are then used to pay for goods and services. ATM cards can be useful because some merchants do not accept electronic payments. The following diagram represents how transactions involving ATM cards work.
It is worth noting here that most debit cards can also function as ATM cards, while the converse is not true. Debit cards can be used directly at vendors to pay for transactions and can also be used at ATM machines to withdraw or deposit money from or to the consumers’ bank accounts.
Stored-value cards (SVCs), also known as prepaid cards, are preloaded with monetary value that can be used to pay for transactions. Gift cards are types of SVCs that are associated with specific merchants or organizations. SVC transactions are similar to debit card transactions since the value of the transaction is immediately subtracted from the preloaded value. However, unlike debit cards, SVCs are not tied to the consumer’s bank account. SVCs are useful for individuals who do not hold bank accounts. The following diagram represents how SVC transactions are processed.
In our next example, we will compare different electronic payment methods.
Example 4: Understanding Electronic Payments
Which of the following is not an accurate description of electronic payment methods?
- Stored-value cards do not require the holders to have bank accounts.
- ATM cards cannot be used directly to pay for transactions.
- Holders of credit cards must pay interest in addition to the transaction value.
- The value of debit card transactions is immediately deducted from the customer’s bank account.
Recall the following types of electronic payment methods: credit cards, debit cards, ATM cards, and stored-value cards. Let us consider whether the options give accurate descriptions about these payment methods.
- Stored-value cards, also known as prepaid cards, are preloaded with monetary value that can be used to pay for transactions. Holders of stored-value cards do not have to own bank accounts, since the monetary value is stored within the card itself without going through bank accounts. Hence, this option gives an accurate description of stored-value cards.
- ATM cards allow consumers to access their bank accounts, which is their credit money, using automated teller machines (ATMs). Consumers can use ATM cards to obtain banknotes from credit money, which are then used for transactions. In this sense, ATM cards are not used directly to pay for transactions. Hence, this option gives an accurate description of ATM cards.
- Credit cards allow the holders to borrow from the issuers. Issuers of credit cards often grant periods of up to months after the transaction before penalizing credit card holders with fines or interest. While the issuing company may impose interest if the debt is not repaid within the due date, the consumers can avoid paying interest by fulfilling their debt obligations in time. Hence, this option does not give an accurate description of credit cards.
- Payments using debit cards are paid directly from the consumer’s bank account at the transaction. Hence, this option gives an accurate description of debit cards.
Option C, which states that credit card holders must pay interest, is not an accurate description of the electronic payment method.
So far, we have learned about the development of money in civilization as well as the wide variety of forms that money can take. We have seen that money can take the forms of barley, gold coins, banknotes, credit, and electronic bits. If the form of money can vary so greatly, what exactly characterizes money?
Money is anything that is generally accepted as payment for goods and services by other participants of the economy.
The key characteristic of money is its general acceptability. A nation’s government may decide to print a new type of legal tender, but it would not be considered money until it is generally accepted in the marketplace. On the other hand, if everyone in a society agrees to accept shoes as payment, shoes will be considered money in that society. This brings us back to the conundrum of money, which we stated at the start of this explainer: why is money generally accepted as payment for goods and services?
Merchants accept money as payment in exchange for goods and services because they believe that they can also use the money to purchase other goods and services. One merchant accepts money because they believe that other merchants will also accept it. This belief that other individuals in the economy will accept money as payment essentially leads to its general acceptability. Hence, money is generally accepted because each individual in the economy believes that other parties will accept it as payment.
General acceptability of money enables it to perform several essential functions in the economy. Let us consider the functions of money.
- Money represents a general purchasing power. In other words, money gives its owner the ability to purchase any types of goods and services afforded by it. This function of money is purely a reflection of its general acceptability, which is money’s defining characteristic.
- Money acts as a medium of exchange. Rather than exchanging goods and services with other goods and services with equal value as in bartering, a buyer can pay the seller with money without having to worry about an exchange. This is the function of money that divides the bartering process into buying and selling. Merchants who receive money as payment can then use it to acquire other goods and services. This is possible due to the function of money as a medium of exchange.
- Money serves as a unit of account, that is, a measure of value. Individuals involved in bartering have to determine for themselves the value of each type of goods or service. This measurement is not reliable since different individuals can consider the same goods to be of different value. This function of money makes it easier to measure values by assigning prices of goods and services, which remain consistent across the society.
- Money is used as a store of value. This function of money allows the owner to defer the usage of money’s general purchasing power. The owner can choose when to exercise the purchasing power any time in the future. This function also enables individuals to accumulate wealth in the form of money. However, money as a store of value is dependent on economic stability. For instance, if the prices of everyday goods and services increase, then the purchasing power of money, that is, the amount of goods and services that can be bought with money, decreases. Note that the purchasing power of money is negatively related to the level of prices. When money’s purchasing power decreases (inflation), it loses its function as a store of value. During inflation, alternative ways to store values, such as real estate and physical assets, are often preferred over money.
In the final example, we will consider the functions of money.
Example 5: Functions of Money
Which of the essential functions of money directly serves to divide the bartering process into buying and selling?
- Unit of account
- Satisfaction of needs
- General purchasing power
- Store of value
- Medium of exchange
Recall the following functions of money: general purchasing power, medium of exchange, unit of account, and store of value. Let us consider the characteristics of these functions and determine which one directly serves to divide the bartering process into buying and selling.
- A unit of account is a function of money that serves to measure values of goods and services by assigning prices in terms of monetary units. This function of money would make it easier to compare values of traded goods in bartering, but it does not serve to split the bartering process into buying and selling.
- Satisfaction of needs is not one of the four functions of money. Individuals may have needs, which can be satisfied directly with money, but such needs are not related to the bartering process.
- General purchasing power is a function of money that gives its owner the ability to purchase any types of goods and services afforded by it. This function exclusively concerns the buying portion of the bartering process and is not directly involved in splitting the bartering process into buying and selling.
- Store of value is a function of money that allows the owner to defer the usage of money’s general purchasing power. The owner can choose when to exercise the purchasing power any time in the future. This function of money would make the bartering schedule more flexible, but it does not serve to split the bartering process into buying and selling.
- Medium of exchange is a function of money that enables money to be used as payment instead of bartered goods and services. Rather than trading goods or services of equivalent value, a buyer can pay the seller with money. The seller can then find another merchant to purchase other goods and services with this money. In these two exchanges, the buying and selling processes are independent of each other because money served as a medium of exchange. Hence, this function of money splits the bartering process into buying and selling.
Option E, medium of exchange, is the function of money that directly serves to divide the bartering process into buying and selling.
Let us finish by recapping a few important concepts from this explainer.
- Money is anything that is generally accepted as payment for goods and services by other participants of the economy.
- A barter is a process through which two parties agree on a trade of goods
and services. Bartering has the following disadvantages:
- Bartering requires a double coincidence of wants.
- Bartered items are often not divisible.
- Bartered items are often difficult to store and to carry.
- Money emerged in civilization to overcome the requirement for a double
coincidence of wants by dividing the bartering process into buying and selling. The development of money followed four main stages:
- Commodity money is any type of money that carries intrinsic value such as salt, rice, and livestock.
- Coins are metallic tokens that serve as money. In ancient civilizations, coins were made of precious metals such as gold and silver, which could be considered as commodity money.
- Paper money, also known as banknotes, is money in paper forms. Paper money used to contain agreements between parties that guaranteed a transfer of ownership of coins. Today, paper money is not backed by coins but by the issuing nation’s legal authority. Paper money that is not backed by physical assets is called fiat money.
- Credit money is the monetary value created through debts and obligations. Bank deposits are the most common forms of credit money, where the bank has an obligation to provide money to the depositors upon request.
- Electronic money, or e-money, refers to all types of digital storage of
monetary value. Electronic money can be split depending on where the monetary value
- Hardware-based electronic money, like a smart card, is the e-money where the value is stored in physical devices carried by the consumers.
- Digital money refers to software-based e-money that is not physically stored in consumers’ devices but can be accessed through the Internet.
- The four main electronic payment methods are as follows:
- Credit cards allow the holders to borrow from the issuers. Issuers of credit cards often grant periods of up to months after the transaction before penalizing the credit card holders with fines or interest.
- Payments using debit cards are paid directly from the customer’s bank account at the transaction.
- ATM cards allow customers to access their bank deposits, or credit money, using automated teller machines (ATMs). ATM cards are used to obtain banknotes from the customer’s bank account, rather than to directly pay for transactions.
- Stored-value cards, also known as prepaid cards, are loaded with monetary value that can be used to pay for transactions. Unlike debit cards, stored-value cards are not tied to bank accounts.
- The general acceptability of money is attributed to everyone’s belief
that other parties will also accept it as payment. General acceptability allows
money to serve the following functions:
- Money represents a general purchasing power.
- Money acts as a medium of exchange.
- Money serves as a unit of account, that is, a measure of value.
- Money is used as a store of value.