C H A P T E R O N E
The Importance and the Value of Saving
Money
Before you understand and learn to appreciate the value of money, you
must first understand what money exactly is. To most of us, it is just a
means of exchange, right? Well, money is much more than that.
What exactly is Money?
Money is what makes the world go round. The exchange of money for
goods and services is the foundation of economies.
People used to barter to get the goods and services, they wanted before the
invention of a medium of trade, aka. Money. When there was no money,
two people who would have something that both parties are interested in
would look at the products, come to an agreement and make an exchange.
However, early forms of bartering lack the transferability and divisibility
that makes trading effective. For example, if someone has cows but needs
bananas, they must find someone who has both bananas and a desire for
meat. What if that person comes across someone in need of meat but lacks
bananas and can only give potatoes? To obtain meat, the person must first
locate someone who has bananas and desires potatoes, and so on.
Situations like these often made the process of bartering a rather
complicated one. Bartering for products is exhausting, confusing, and
wasteful due to the lack of transferability. But that is not the end of the
problems; even if the individual meets someone to exchange meat for
bananas, many bananas might not be worth a whole cow. Such a trade
necessitates reaching an agreement and devising a method to decide how
many bananas are worth which sections of the cow.
These issues were resolved through the use of commodity money.
Commodity money is a type of a good that serves as a form of currency.
American colonists, for example, used beaver pelts and dried corn in
transactions in the 17th and early 18th centuries. These goods, which had
widely agreed values, were used to buy and sell other items. Commodities
used in trade possessed certain characteristics: they were highly desired and
expensive, but they were also robust, compact, and easily stored.
A precious metal, such as gold, is another advanced example of commodity
currency. Until the 1970s, gold was used to back paper money for decades.
In the case of the US dollar, for example, this meant that the foreign
governments might take their dollars and exchange them for gold at a
predetermined rate with the US Federal Reserve. What's fascinating is that,
unlike beaver pelts and dried corn, which can be used for clothes and food,
gold is valuable solely because people want it. It isn't inherently useful—
you can't eat gold, and it won't keep you warm at night—but the majority of
people think it's amazing, and they know others do, too. As a result, gold
has monetary value. As a result, gold acts as a tangible symbol of wealth
based on its expectations.
This relationship between money and gold reveals, how money acquires its
value—as a reflection of something precious.
The second form of money is fiat money, which does not require physical
backing. Instead, the value of fiat currencies is determined by supply and
demand, as well as people's belief in their worth. Since gold was a scarce
resource and rapidly expanding economies couldn't always mine enough to
back their currency supply requirements, fiat money formed. The need for
gold to offer money value in a thriving economy is extremely inefficient,
particularly when its value generated by people's perceptions.
Fiat money becomes a symbol of people's perceptions of value, serving as
the foundation for why money is made. An increasing economy appears to
be effective in generating other goods, beneficial to itself and other
economies.
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