What is Money?

The article concerns the following question What is Money? People talk about money all the time, in fact most of us are obsessed with it. The odd thing is that most people don’t really understand what money is and what it isn’t. In theory the concept of money is simple it is something that we use to buy stuff. In practice it is quite complicated because it includes far more than the cash in your pocket. While it isn’t important to understand what exactly money is in order to use it an understanding will help you to make better financial decisions.

What is Money

Money is simply a medium of exchange like stocks that allows for the efficient trading of goods and services. In the days before money trade was done by barter but this is not an efficient way to trade because it requires both parties to want the same thing. For example if I have two hammers and I want to trade one of them for a screw driver I would need to find somebody who had a screw driver that he wanted to trade.

But this in itself wouldn’t be enough since if he didn’t want my hammer I couldn’t trade with him. Suppose instead that he wants a saw for his screwdriver I would then have to go and find somebody who had a saw that he was willing to trade for my hammer so I could trade it for the screw driver. This assumes of course that the guy with the saw wants my hammer which is highly unlikely. Obviously this is not a good way to do business.

Fortunately money solves this problem. In addition to helping make trade or efficient it also makes the economy more efficient since it makes it far easier for people to work as specialists. In a barter society it would be very difficult to work in a specialized job because of the difficulty involved in bartering your services. Money helps to address this issue since the specialist wouldn’t have to barter his service.

This makes the economy more efficient and has greatly improved our standard of living. There is more to money than just the bills in your wallet. Money can also include things like money in a bank account and in certain investments like bonds. There is actually no clear definition of what constitutes money. In fact when the government reports on the nation’s money supply they actually provide three different numbers.

Representing the narrowest and the broadest definitions of money as well as one definition that falls in the middle. As a general guideline money is made up of cash and any bank accounts and investments that can easily be turned into cash. One thing that is important to understand is that credit cards are not money. A credit card is a loan and it is not a part of the money supply and it shouldn’t be treated as such.

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