Money and their role in our lives

Money plays an important role in every person’s life. Many people would say that money is not the most important thing in life. I would agree with that but would mention that money does have a lot of importance and influence on person’s life. Not having enough money would represent a serious problem for any person. There are several important functions that money performs. This article will mention some of the functions of money and the characteristics that will make money important.

Let’s look at the functions of money first. The main and the most important function of money is being the medium of exchange. Once the barter systems (exchange of one good for another) became obsolete, money performed the function that allowed people to trade with one another. In short, one person will sell some good or service in exchange for a certain sum of money and the other person would use money to pay for some good or service. This is the most basic way of exchange.

Being the medium of exchange requires certain characteristics. First of all, money needs to have value for people who use it. One way to do that is to secure the money with something valuable. For example, the money could be secured by gold in the government’s treasury. There are many examples of this type of system. Many times the security wouldn’t be some type of valuable material like gold. The stability of the country’s economy and the citizen’s trust in government can be a backup for the issued money.

To continue on the above topic, it is important to provide some examples. For example, many countries in their past history had money in form of coins that are made of gold or silver. Each of these coins had a direct value – the value of the material it was made of. However, there were many problems with this type of system. For example, any person could try to remove a tiny portion from each coin so the value of each coin diminished as the time passed by.

Another example of the money system is the system where paper money is used. There are multiple examples of this type of system. United States, Russian Federation, countries of European Union and almost every other country in the world would use some sort of paper money. The coins are still in use but are not made of any valuable material like gold or silver. This type of currency is usually backed up by a countries reserve or country’s government.

Most of the money transactions nowadays are not in the form of paper money or coins. The majority of transactions are processed electronically. In other words money is transferred between people and banks in form of simple electronic transactions without any physical transfer of currency. It is important to mention that this type of system requires a lot of security to make sure that any fraudulent activity is prevented.

Government’s central banks usually have a control over the country’s fiscal policy. They can influence money supply and demand by doing such things as issuing government securities.

An important way how governments can influence the fiscal and monetary policy is by changing interest rates for short term securities. For example, in United States of America the Federal Reserve (US central bank) has the ability to set short term interest rates.

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