Different Kinds of Money

In prisoner-of-war camps, cigarettes served as money. In the nineteenth century money was mainly gold and silver coins. These are examples of commodity money, ordinary goods with industrial uses (gold) and consumption uses (cigarettes) which also serve as a medium of exchange. To use a commodity money, society must either cut back on other uses of that commodity or devote scarce resources to producing additional quantities of the commodity. But there are less expensive ways for society to produce money.

A token money is a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money.

A £ 10 note is worth far more as money than as a 3 ´ 6 inch piece of high- quality paper. Similarly, the monetary value of most coins exceeds the amount you would get by melting them down and selling off the metals they contain. By collectively agreeing to use token money, society economizes on the scarce resources required to produce money as a medium of exchange. Since the manufacturing costs are tiny, why doesn’t everyone make £10 notes?

The essential condition for the survival of token money is the restriction of the right to supply it. Private production is illegal.

Society enforces the use of token money by making it legal tender. The law says it must be accepted as a means of payment.

In modern economies, token money is supplemented by IOU money.

An IOU money is a medium of exchange based on the debt of a private firm or individual.

A bank deposit is IOU money because it is a debt of the bank. When you have a bank deposit the bank owes you money. You can write a cheque to yourself or a third party and the bank is obliged to pay whenever the cheque is presented. Bank deposits are a medium of exchange because they are generally accepted as payment.

1. Money is a medium of exchange.

2. People accept money not to consume it directly, but because it can be used to buy things they want to consume.

3. In a barter economy goods are swapped directly for other goods.

4. In a barter economy there is no double coincidence of wants.

5. The use of money makes the trading process simpler and more efficient.

6. In Britain prices are quoted in dollars.

7. During the rapid inflation in Germany it was convenient to use dollars as the unit of account and not marks.

8. To be accepted in exchange, money has to be a store of value.

9. Trading without money is cheaper than using money as a medium of exchange.

10.Since money’s real purchasing power in Britain is eroded by inflation, there is no better way to store value.

11.During the rapid inflation when prices in the country’s own currency are changing very quickly it is more convenient to use some other stable currency, dollars for example, as the unit of account.

12.There are examples of commodity money, originally goods with industrial uses and consumption uses, which also serve as a medium of exchange.

13.Bank deposits are not a medium of exchange because they are not accepted as payment.

14.Bank deposits are IOU money as they are debts of the bank.

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