Money is a medium of exchange that is accepted by people for the payment of goods and services, as well as the repayment of loans. It is the medium in which prices and values are expressed and it circulates anonymously from person to person and country to country, thus facilitating trade. It is also the principal measure of wealth.
Before the development of money, people would barter to obtain the goods and services they needed. Two individuals, each possessing some goods the other wanted, would enter into an agreement to trade. However, bartering does not provide the transferability and divisibility that makes trading efficient. For instance, if someone has cows but needs bananas, they must find someone who not only has bananas but also the desire for meat. This lack of transferability of bartering for goods is tiring, confusing, and inefficient.
Commodity money solved these problems. Commodity money is a type of good that functions as currency. In the 17th and early 18th centuries, for example, American colonists used beaver pelts and dried corn in transactions. Possessing generally accepted values, these commodities were used to buy and sell other things. The commodities used for trade had certain characteristics: they were widely desired and, therefore, valuable, but they were also durable, portable, and easily stored.
Another more advanced example of commodity money is a precious metal such as gold. For centuries, gold was used to back paper currency up until the 1970s. In the case of the U.S. dollar, for example, this meant that foreign governments were able to take their dollars and exchange them at a specified rate for gold with the U.S. Federal Reserve.
Most of the money in the economy is created not by printing presses at the central bank but by banks when they provide loans. Money is more than banknotes and coins. If you have a bank account, you can use what’s in it to buy things, typically with a debit card.
Money is a social contrivance that has evolved over time to facilitate trade and economic growth. It has taken many forms throughout history from bartering to commodity money to paper currency backed by precious metals to modern-day fiat money issued by governments