The Basic Properties of Money

Date: 2015-10-07; view: 482.

Money as Credit

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Money does not exist in a pure barter system. Trades are negotiated by the participants as a fair exchange of goods and services. If someone agrees to receive equivalent value later in exchange for his goods, he has accepted an IOU. An IOU is a credit for the seller and a debt for the buyer. If the IOU becomes negotiable, meaning others will accept it in exchange for goods and services, the IOU is money. In essence, money is credit that is widely accepted as a medium of exchange.

An IOU will be accepted in exchange for goods and services only if it is seen as a store of value. However it does not have to store value indefinitely to qualify as money. It is money if it retains value long enough to be generally accepted as a medium of exchange. Money is always a store of value, but a store of value is not always money. For example, a bond is a store of value, but bonds are seldom accepted as a medium of exchange, and therefore are not money.

Most of the money we use is denominated in the unit of account established by the government.That enables us to measure the value of a good or service against another, based on what each sells for in the market.How many quarts of milk are equivalent in value to a barber shop haircut can only be determined in the market place.