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What Is Money? Functions, Types, and History

Most people consider money the most important aspect of their life. Without a clear understanding of what money is, the risk of economical struggles in your life increases.

The solve this problem, we answer to this question: What is Money?


What’s Money?

Money is a medium of exchange that has been globally accepted. It’s the item we use to give value to our time, and to all other assets in our lives (source)

With no doubt money plays an essential role in our lives. Since society has accepted money as the exchange item, it is money what gives value to everything; even our time.


Money has worth because for most people it has value. In fact, money has the value we want to give it, as in reality money only represents a piece of paper.

The value of money was once directly attached to how much a country was worth. In this system, the amount of circulating money represented the wealth of such country.

Thus, each country adapted its own currency to represent their money.

History of Money

In ancient times, when no money existed, the mode of selling and buying goods and services relied in bartering and the trust on each other’s perception of value.

The creation of money established a constant and universal perception of the value each goods and service had. The Lydians were the first people to introduce the use of gold and silver coins, approximately 8,000 years ago (source).

It wasn’t until the Chinese Son Dynasty when paper money was first used. In Europe, the Stockholm Bank in 1661 was the first entity to use it.

lydian coins

Throughout history, money represented the wealth of a country. Its value was directly attached to the amount of gold and/or silver collected in the reign.

As private banks rose, the relation between gold and money began to weaken. Nowadays, most of the circulating money doesn’t represent the amount of gold of a country, but the value the entire society perceives.

Functions of Money

Money plays different roles in society. Overall, money is the medium of exchange everyone uses to buy/sell goods and services.

Functions of Money

  • Medium of exchange: money is used to intermediate the exchange of goods and services
  • Measure: money acts as a standard measure and a common denomination of trade
  • Standard: A standard of deferred payment is an accepted way to settle a debt
  • Store: money is able to be reliably saved, stored, and retrieved.

More than a medium of exchange, money is also a measure of value, a standard reference, and a way to store your value over time.

As time moves on and phenomena like inflation takes place, the storage function of money loses importance. Money is constantly revaluating itself, and storing money will make one’s value decay over time.


Types of Money

Depending on the source of money, it can be defined as commodity or fiat.

Commodity money relies on gold. This metal is something everyone has wished for, and could be traded universally.

Fiat money is a government-issued currency with no relation to the amount of gold of each country. Thus, fiat money is not backed by any commodity nor physical token.

Depending on the mode of creation, money can be defined as narrow or broad

Narrow money is made by the central bank. The creation procedure is by minting coins and printing banknotes.

Broad money is created by private banks. This is done by recording loans as deposits of their clients.

Types of Money

Depending on the source:

  • Commodity money
  • Fiat money

Depending on the mode of creation:

  • Narrow money
  • Broad money

Depending on the state:

  • Paper money
  • Coins

Depending on the state of money, it can be defined as paper money or coins.

Paper money is represented as a piece of an special registered paper. It usually has more value than coins.

Coins is the original form of money, made by mixing different metals and shaping them into a round flat shape.


Money is a universal exchange item that gives value to all the goods and services around us. Depending on the source, mode of creation, and physical state we can have different variations of money.

It was originated approx 8000 years ago in Lydia, but it wasn’t until 1661 when the first paper money was printed in Europe. Since money and gold lost their relation, money is worth the value we perceive.

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