Why Do We Need Money?

Everyone alive today knows that we need money to buy things like clothes & food or to enjoy things like a night at the movies or a trip to Disneyland. But before the world agreed on using money as something to be exchanged for the thing that we want, the world used a Barter System.

What is a Barter System?

In simple terms, a Barter System is when you exchange one item for another item you want. For example, if you wanted a bag of corn, you might offer to give the corn farmer a bunch of your bananas from your banana farm. Both parties have to agree with the item to be swapped and the amount to be swapped.

It sounds complicated doesn’t it?

What if I have a bunch of bananas but you do not want bananas and instead, you want pineapples? I will never be able to buy the corn from you because I do not have pineapples.

Now do you see why a Barter System is not the most ideal?

It is hard for buyers and sellers to agree on the items of exchange.

Bartering can also be done for the exchange of services. I will tutor your sister math in exchange for you creating a poster for me for my project. This is because you can’t help your sister in math because you’re not good in math. I can’t design a poster for my project because I’m no good at designing. So we pay each other with a service.

Again, not everyone can agree on the favour to be exchanged.

When did we start using money?

No one knows for sure when humans started using money to buy things. But historians believe that metal objects had been used as money as early as 5000 B.C.

Who invented paper money?

Paper bills were first used by the Chinese, who started carrying folding money during the Tang Dynasty (A.D. 618-907) — mostly in the form of privately issued bills of credit or exchange notes — and used it for more than 500 years before the practice began to catch on in Europe in the 17th century.

Why is money the preferred medium of exchange?

  • It is accepted worldwide
  • Its value is not eroded. A $1 coin is always $1 and will not drop to 80 cents in value.

Digital money

The money that your parents have in the bank now are only numbers on the computer. They do not have real coins and notes stored in a room in the bank for every customer. Today, 92% of the world’s money is digital money.

Today, the total sum of money in the world is $60 trillion.

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