January 26, 2022

SB-Accounting

Accounting + Finance Blog

Meaning of Money and Explanations and a Shift in paradigm

Money: Meaning, Explanations and a Shift in paradigm
2Shares

The word money is widely known. Even a kid can differentiate between money and other things. And may prefer money. Money has a long history. But the thing is, people have always wanted to weigh the value of one thing for another. However, in recent times there has been a paradigm shift to the understanding of the term. This article is the beginning of the series of cryptocurrencies.

Definition of Money

Money is simply defined as anything people all over the world place value on as a medium of exchange and may or may not be backed by legal laws.

In a more formal definition, money is what is legally acceptable as a medium of exchange by people in a country.

Key Explanations

It must be legal. It is believed that before anything can be accepted as money, the government of the country must have legally agreed to make that currency or commodity their money. In Nigeria, for example, the Naira is the official currency. This is what is legally used. If you bring in Cedis, a Ghanaian currency to buy something of value it won’t be accepted because it isn’t legally used in this country.

Generally accepted. Yes, citizens in that country must accept it as a medium of exchange. Unless, it will be useless in your hands. In the olden days, cowry was generally acceptable as a medium of exchange. Later on, people begin accepting certain types of notes as provided by Goldsmiths as value which can be used for exchanges. The notes become what we know as cheques. However, paper and coins become widely used later on because they can be easily carried from one place to another. Recently, people are shifting paradigm to cryptocurrency.

Money: Meaning, Explanations and a Shift in paradigm

Medium of Exchange. For anything to be used as money it must be used to exchange one thing for another. For example, if Mr. A wants to buy a basket of Rice, he should be able to present something of value to the seller as an exchange for the Rice. In those days of trade by barter, Mr. A will offer other goods he has, say, Yam and the seller must need Yam before the exchange can take place. However, the use of Money makes it easier. If the seller needs Plantain, he can use the money earned from the sale of Rice to buy it.

READ ON  Seven (7) Reasons why cryptocurrencies are better than Fiat Money

A country. The item used as money must be accepted in the country. Naira is accepted in Nigeria. The United Kingdom uses the British pounds. While, Ghana uses Cedis. However, there is a shift in paradigm to this regard. Many people all over the world are relying on borderless money. The cryptocurrency will change the way people see money in the future.

Three Uses of Money

Money can be used in several ways. Here are three ways money is used and this is why money is important to the human race.

Unit of Measurement. Money makes it easy to measure things. If Mr. A needs a basket of Rice and the seller needs the Yam. At what units of Yam can Mr. A get the basket of Rice? This is one of the biggest issues with trade by barter. But with the use of money, this becomes easier. A price in money term is placed on the basket of Rice. The seller can then use the money earned from the proceeds to buy Yam.

Store of Value. This is another powerful aspect of a currency. If commodities like salt, Yam, and so on are used as the means of exchange, it will be difficult to store them. Therefore, it won’t be possible to have a community of savers. And any country where its citizens cannot save will face crises. Because, savings leads to investments. But, the use of paper and coins has aid storage or savings by individuals, firms and government. The money saved can as well be invested.

READ ON  Meaning of Fiat Money and Key Explanations

Another way to look at store of value is this. Assuming the seller sells a basket of Rice for a bag of salt. Now let’s say he sold 574 baskets of Rice in a day. Where will he keep all the bags of salt exchanged for he Rice? He will need to have a huge storehouse for this. This is why currencies are important. Now digitising currencies have made this more simpler.

Measure of Deferred Payment. Money serves as a means to buy certain items and pay for it on another day. Since the buyer and seller know the price attached to the item, they can decide on credit terms and the seller can allow him to pay later. This is difficult during the barter period and more easier in today’s technology world.

A Paradigm Shift

At first people started exchanging goods for goods. This led to double coincidence of wants. Mr. A needs Rice but has Yam. He will have to look for a person that needs Yam and has Rice. What if he sees someone who needs Yam but doesn’t have Rice. Exchange will not be possible! The use of money from paper, coins to cheque and other notes solve this problem. It also makes money easier to carry about and to store it.

But using money requires one thing, that is, trust. It is because people trust that the currency will be stable with the help of the government and banks will accept all forms of money that’s what makes it unique. However, there is a likely shift of trust in recent times and also in the future. This is a paradigm shift. People have started trusting technology and relying on digitized forms of money. Such as the use of stripe cards like your debit and credit cards.

READ ON  eNaira (CBDC) Wallet Meaning and Key Explanations

Next shift in paradigm is the introduction of cryptocurrencies. The most popular of them is Bitcoin. Bitcoin which is more than 10 years in existence is receiving more acceptance among the human race. This is true as people start trusting and accepting it as a medium of exchange and store of value. Although it is yet to be fully backed by the government. Early in January, 2021, the United State Federal Reserves allowed the use of stable coins. So, banks in that country can now transact businesses with this special form of cryptocurrency. Note that stable coins are those coins that are less volatile to changes in market conditions.

Another aspect of the paradigm shift is border less money. Instead of identifying a single currency to a country. Everyone everywhere in the world can use any of these cryptocurrencies as long as the parties involved agreed to use it as the means of exchange.

Conclusion

Money is the only way transactions can take place in recent times. Invented by John Money, this item has become generally accepted by people all over the world. Current trend shows that there may likely be a shift from the use of paper, coins and promissory notes as a type of money to more digitised form.

2Shares