Financial literacy

Why Money Is Important: Demystifying The Economics Of Money And Banking

Why does money have value? Why do different countries have different money systems valued at different rates? Also, what determines the exchange rate of a particular system, and why is cash scarce?

Read on to get answers to these questions and more!

Why does money have value? — How Money Came to Be

No one can say for sure, but one thing is certain; money has been around for as long as 40,000 years. The need for legal tender was born out of the practice of trading. The bartering system was the first system to be generally accepted for the exchange of goods and services. This system soon phased out with civilization and transitioned to currencies.

The Bartering, Livestock, and Cowrie Systems:

Barter is the exchange of goods and services for mutual advantage. Despite being marked as an important human activity, some schools of thought believe that it is not purely human-related. Bartering exists as a symbiotic relationship between plants and animals in nature.

With the advent of agriculture, the bartering system took a different turn. People started placing more value on livestock and other farm produce which soon became the acceptable money standard. Farm produce was soon replaced by cowrie shells which were widely accepted in different continents. History has it that the legitimacy of cowries lasted more than any other form of legal tender.

The Metal and Paper Money System:

The Chinese have been credited as the first to use valuable money in the forms of bronze and copper cowries miniatures and metal tools at the end of the stone age. The metal miniatures and tools later transitioned into the primitive versions of round coins made out of base metals.

The westerners made their own metal money, but instead of using base metals like the Chinese, they used valuable materials like bronze, silver, and gold. The coins were also stamped with remarkable figures to authenticate them.

Moving metal coins around, especially in large quantities, was inconvenient, thus the introduction of banknotes which was first used in China.

Why do different countries have different money systems?

To understand what makes money valuable, you need to understand why different countries have different currencies. Cash is intangible in itself while currency (or money system) is a tangible form used by a particular nationality to represent cash. For instance, the US currency is the dollar, the Chinese currency is the Yuan, the Russian currency is rubble, and so on. All of these currencies are valued based on the economy of the country it is associated with.

If the economy of nation A is booming and valued more than that of nation B, then the national currency of nation A would be more valuable than that of nation B. Inflation and deflation also plays a notable role in determining the value of a currency. This is why some currencies are more valuable than others.

Characteristics of Money: What Gives Money Its Value

The major characteristics of money include scarcity, acceptability, durability, sustainability, divisibility, and portability. These characteristics further explain the value of money.

– Scarcity:

The amount of cash in circulation cannot be more than its need or demand, stemmed by economic activities. Because of this limitation, cash tends to be scarce, thereby making it valuable by nature.

– Acceptability:

Currency is part of the identity and value of a nation. This means it can be accepted in exchange for goods in any part of that country. In some cases, currencies of countries that are high performers in the global economy are accepted in multiple countries. So, it is safe to say that economic strength is a major reason why money is valuable. The US dollar is a good example of such a currency.

– Durability:

You can buy goods valued at $20 so long as you have enough dollar currency with you. It does not matter if the dollar currency was printed 100 years ago or 2 weeks ago, it remains valuable. The only difference between the two is that a 100-year-old $20 bill may be worth a lot more than a 2-week-old $20 bill because of the time difference and how much inflation/deflation that has taken place within that time.

– Stability:

Why is money so valuable? Because it is stable. For a banknote to serve its purpose, it must consistently retain its function as a store of value. This means that a $1 bill must remain a $1 bill as long as the dollar is perceived as money. It cannot change to $10 or $5 overnight. Note that financial stability in this sense is different from price stability.

– Divisibility:

Currency divisibility makes it possible to break down a monetary denomination to facilitate exchange. This means you can pay for a cup of coffee worth $2.50 using a $10 bill and get a balance of $7.50. This is one of the traits categorized as what gives money its value; every denomination is acceptable because they are all divisible.

– Portability

Finance has high inevitable value, and so is the need to move it around without unnecessary attention or stress. There is more cash in circulation than coins because cash is more portable than coins. As the world continues to dig deeper into civilization, finance is becoming more portable than it used to be. This can be seen in the gradual global acceptance of the concept of a cashless economy.

Why Paper Money Is More Valuable Than Coins

Talking about physical cash, banknotes are seen as more valuable than coins. With the right amount of cash or coin, one can purchase any commodity that is for sale, so why is paper money valuable?

– Higher face value:

Paper money represented a certain amount of coin, usually too large to move around. In the early stage of finance evolution, authorized papers were issued for large values of coins that were impractical to carry around. So, banknotes naturally have a higher value than coins, even to this day.

– Convenience:

Aside from having higher face value than coins, banknotes are easier to work with. It does not occupy a lot of space, is not as heavy, and is not as noisy when compared to coins. For these reasons, people tend to gravitate towards banknotes rather than coins.

– Cost-effectiveness:

In 2012, the Canadian government ceased the production of 1 cent coin because it cost about 3 to 5 cents to make one. Since the production cost of 1 cent is higher than its actual value, it could only accumulate losses if production was not discontinued.

The Future of Money — the concept of a cashless economy

Money has value and will continue that way so long as there is a need for trade. However, the forms and means of financial transactions have changed over the decades. From the trade by barter concept, it moved on to a selection of equipment, then a miniature of the selected equipment, and then coins and banknotes.

Currently, the concept of a cashless economy is gradually taking over. This means transactions can be carried out without using cash or coins. The concept of a cashless economy seeks to replace the use of cash and coins with more convenient digital means like debit cards, internet banking, mobile payment, electronic fund transfer, and mobile wallets.

As more people accept the idea of going cashless with the help of technology, the more likely it is that cryptocurrency would be the future of finance. According to experts, bitcoin provides an incorruptible language of value that is globally acceptable and preferable to gold.


Dmitry Savransky
Dmitry Savransky

Chief Editor

Dmitry graduated from National Technical University of Ukraine ‘Kyiv Polytechnic Institute’. He joined PocketGuard at the end of 2021 as a Head of Product with strong background in fintech. Dmitry i...

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