Money, any medium of exchange that is widely accepted in payment for

goods and services and in settlement of debts. Money also serves as a

standard of value for measuring the relative worth of different goods

and services. The number of units of money required to buy a commodity

is the price of the commodity. The monetary unit chosen as a measure

of value need not, however, be used widely, or even at all, as a

medium of exchange. During the colonial period in America, for

example, Spanish currency was an important medium of exchange, while

the British pound served as the standard of value.

Money of the World Most nations have their own system of money and

print their own currency. Made of paper, these pieces of currency have

very little intrinsic value. As fiat money, however, the paper bills

represent a specific monetary value decreed by the government and

accepted by the people. The bills pictured here are examples of fiat

money from all over the world. George Chan/Photo Researchers, Inc.

II MONEY AND THE ECONOMY

Circular Flow of the Economy This illustration presents a simplified

version of how money circulates in the U.S. economy. Although it does

not take into account several major factors, such as the role of

government in the economy, the diagram shows the basic money

transactions that make the economy work.© Microsoft Corporation. All

Rights Reserved.

The functions of money as a medium of exchange and a measure of value

greatly facilitate the exchange of goods and services and the

specialization of production. Without the use of money, trade would be

reduced to barter, or the direct exchange of one commodity for

another; this was the means used by primitive peoples, and barter is

still practiced in some parts of the world. In a barter economy, a

person having something to trade must find another who wants it and

has something acceptable to offer in exchange. In a money economy, the

owner of a commodity may sell it for money, which is acceptable in

payment for goods, thus avoiding the time and effort that would be

required to find someone who could make an acceptable trade. Money may

thus be regarded as a keystone of modern economic life.

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SIDEBAR

The Origin of Money

The earliest known use of money occurred in Mesopotamia around 2500

bc. Replacing the barter system, in which one good was exchanged for

another, the use of money brought about an explosion in the variety of

goods available. In a barter economy a barley farmer, for example,

could only acquire those goods that people were willing to trade for

barley. With money, people could easily purchase exactly what they

wanted or needed. This Discover Magazine article by author Heather

Pringle explores the early history of money.

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A Types of Money

Early Forms of Money Before paper and coins were introduced as

permanent forms of money, people used a variety of other objects to

serve as money for trading goods. Examples of early forms of money, as

shown here, include rice (China), dogs' teeth (Papua New Guinea),

small tools (China), quartz pebbles (Ghana), gambling counters (Hong

Kong), cowrie shells (India), metal disks (Tibet), and limestone disks

(Yap Island).Dorling Kindersley

The most important types of money are commodity money, credit money,

and fiat money. The value of commodity money is about equal to the

value of the material contained in it. The principal materials used

for this type of money have been gold, silver, and copper. In ancient

time, various articles made of these metals, as well as of iron and

bronze, were used as money, while among primitive peoples such

commodities as shells, beads, elephant tusks, furs, skins, and

livestock served as mediums of exchange. The gold coins that

circulated in the United States before 1933 were examples of commodity

money. Credit money is paper backed by promises by the issuer, whether

a government or a bank, to pay an equivalent value in the standard

monetary metal. Paper money that is not redeemable in any other type

of money and the value of which is fixed merely by government edict is

known as fiat money. In the past, fiat money generally consisted of

repudiated credit money, such as the U.S. note known as the greenback,

which was issued during the American Civil War. Most minor coins in

circulation are also a form of fiat money, because the value of the

material of which they are made is usually less than their value as

money.

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Compound Interest

Both the fiat and credit forms of money are generally made acceptable

through a government decree that all creditors must take the money in
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settlement of debts; the money is then referred to as legal tender. If

the supply of paper money is not excessive in relation to the needs of

trade and industry and the people feel confident that this situation

will continue, the currency is likely to be generally acceptable and

to be relatively stable in value. If, however, such currency is issued

in excessively large volume in order to finance government needs,

confidence is destroyed and it rapidly loses value. Such depreciation

of the currency is often followed by formal devaluation, or ...

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