Lesson 1. The essence of money. Money and their properties

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Financial literacy is impossible without understanding the essence of money and its properties. This topic is interesting and at the same time obligatory for every person who wants to learn how to handle them and understand what laws they live by. We encounter them every day and at the same time know absolutely nothing about them.
Money can be called the international language of the world market, in which people from all over the planet communicate. Understanding the functions of money is the first step to financial literacy. If you know the theory and understand the basics, you are armed with a tool that will help you learn how to properly manage them. Let's look at the history of the emergence of money, their functions and essence.

Content:

The essence of goods and money​

Money is impossible without goods. Therefore, first of all, you need to get a simple answer to the question: what is a product? A product is any product that meets three basic requirements:

1	Produced for sale.
2	Meets specific needs.
3	Has a cost.

In this regard, the essence of money lies in the fact that they serve as an element and an integral part of the economic activity of society, relations between the participants in the production process. Money is also a commodity (only universal) and therefore has the same properties as indicated above. However, they also have a number of unique properties. So what is money?

According to the Great Russian Encyclopedia:
Money is a specific commodity of maximum liquidity, which has several properties that are their essence.

Maximum liquidity is characterized by the fact that you can easily exchange your money for goods, while the opposite is a rather problematic process for you. The closest synonyms for the term liquidity are marketability and marketability. In addition, money:

• It is a tool for exchanging goods and services.
• This is the universal equivalent of the cost of other goods and services.
• This is a kind of certification of the social character of the private labor of a commodity producer.

Basic functions of money​

With each new century, money acquires new specific functions, but some of them are universal. We will consider them:

• Measure of value. Money can change and measure the value of a product, therefore it is a standard for them. The form of manifestation of the value of the goods is the price. Price is the value of a product expressed in money. Since at the very beginning of its existence money had an independent value (silver and gold contained in it), then initially the value of goods was correlated with the value of money through the ratio of social labor spent on their production. Nowadays, with the availability of loans, electronic money and advertising funds, a lot has changed.
• Exchange tool. This is the original function of money, it means that you can exchange your product for money and then use it to purchase the product you want. Over the millennia, dozens of others have been added to this main function, completely changing the economic picture of the world.
• Means of payment. This function arose in connection with the development of credit relations. In this case, there is no reciprocal movement of money and goods. If you took out a product on credit, you will need to pay back the amount of debt expressed in money, not in the product. Also, this function is embodied in wages or making payments to the budget.
• Means of circulation. In this case, money acts as an intermediary in the circulation of goods. And this is where the liquidity ratio plays a key role. You can sell your product today and buy raw materials whenever you want. A person can buy the goods he needs in one place, and sell in a completely different one - that is, money overcomes spatial and temporal restrictions.
• A means of accumulation. Not all money can and should be put into circulation immediately. A person can be engaged in accumulation for a sufficiently long period of time, after which he can make any expensive purchase or order a service. The downside is that inflation is possible, which means that the value of money will decrease.
• World money. Trade and loan relations are established between the countries of the world, which led to the emergence of the so-called world money. They function as a universal means of payment. Currently, five currencies are considered as such: the US dollar, the euro, the Japanese yen, the British pound and the Swiss franc. Since October 1, 2016, the Chinese yuan has also become such a currency. However, people have learned to convert electronic money into 17 currencies, which greatly simplifies the process of commodity-market relations between countries.

As it was said, the functions of money are constantly changing and supplemented, however, the above ones have been universal for a long time. In connection with the emergence of new electronic money, as well as cryptocurrencies, new functions may soon be invented and the essence of money itself will change along with them.

The history of the emergence of money​

Before the advent of money, the economy was vastly different from the modern economy and operated on the basis of debt and gift.
The gift economy is a social order in which goods and services are donated ("The Gift Economy" by David Cheal).
Some principles and elements of donation exist to this day, for example in the form of information. According to these principles, there is Wikipedia, torrent trackers, and with some exceptions, science. In this case, a reputation and social position are acquired, which in the information world sometimes mean even more than the amount of money that can be earned by selling this information. The desire to accumulate resources and information in the modern world is considered a sign of weakness and greed.
Then, in different regions of the world, people began to use various things as money:

✔	In many countries, these were furs and skins of animals, livestock.
✔	On the islands of Oceania, shells and pearls served as money.
✔	In New Zealand, stones with holes in the middle were used as money. The cost of such a stone was formed based on the size, material, and also on its history. Some stones were up to 3.6 meters in diameter.
✔	In Kievan Rus, despite the hryvnia monetary unit, honey, salt, livestock and animal furs were used.
✔	Later, in the form of money, people began to use ingots, bars and stumps of metals.

As a result, the role of money shifted to metals. The function of money was performed by bronze, copper, iron and silver. Over time, whole ingots of metal began to be used, which brought significant inconvenience, because they had to be constantly weighed and also determined the sample. Therefore, in order to avoid counterfeiting and bodywork, the metal began to be marked with a public stamp, which led to the creation of a minted coin and a mint.
Minted coins became popular around the 7th century BC. It was convenient to store them, their weight was quite small, and besides, it became more convenient to calculate due to their exact cost.
The first paper money appeared in China in 910. And already in 1661 the first issues of banknotes appeared in Stockholm. Around the same time, banks began to issue their certificates, which confirmed that the banker's money was in custody. Over time, these certificates themselves became money and there was no need to go to the bank in order to receive a certain amount of money.
As we can see, the very creation and development of monetary units was a revolution in market relations and was simply necessary. People could create their goods faster and buy raw materials for production. We also note the evolution of the physical weight of money - from three-meter stones to paper ones. In our time, electronic currency has appeared and now money has come where it came from - from the minds of people.

The value of money over time​

During the existence of money, people have formed many concepts and theories about them. One of the concepts was proposed back in 1202 by the famous mathematician Fibonacci. He formulated the golden rule of business: "The amount received today is greater than the same amount received tomorrow."
All this is known to us even now. The value of today's money is higher than the value of the same amount received in the future and even tomorrow. That is why (although not only) banks require interest on their loans.

From all of the above, there are two extremely important consequences that need to be realized by any person seeking to become more financially literate:

1. It is always worth considering the time factor when conducting financial transactions.
2. The summation of monetary values related to different periods of time is incorrect.

In order to understand what is the value of money in time, you need to calculate the value of money. For this, discounting was invented.
Discounting is an estimate of the value of the future stream of payments based on the different value of money received at different points in time ("Fundamentals of Stochastic Financial Mathematics", Shiryaev A.N.)
That is, in simpler terms, discounting will help you find out what is the difference between your profit of 100 currency units in a year and today. Note also that it is not only about inflation, but also about the fact that having received 100 monetary units today, you can invest them and receive additional income, even taking into account the loss of the value of the amount over time. Calculating the discounted value is important, for example, for investors who want to understand whether their profits will depreciate so much that it is easier to invest in something more profitable and not so long in time. You become poorer if you receive the same salary for months or years and spend it on your everyday needs.

What does the discount rate depend on? There are five main factors:

1	Return on alternative investments.
2	The cost of credit funds.
3	Inflation.
4	The term through which you expect to receive future income.
5	The risk associated with this future income.

For this reason, investments are a good way to save and increase your own capital. Investing money in a bank essentially only allows you to save your money. It is also possible to increase your capital by putting money in the bank, but this becomes possible only in the case of a long term and compound interest. However, remember that in this case, there is a serious risk that the bank will burn out and you will lose the entire amount. And in the best case, you will return only part of it.
Compound interest is a good way to generate income because interest is also charged on interest. There are cases when relatives became millionaires only because their ancestor invested a small amount of money in the account, and a century later a contract was discovered. Of course, the bank had to pay a huge amount, but it received advertising for its longevity and attitude towards customers.
We will not give complex discounting formulas here, but we will give a simple example. Let's say in one year you expect a profit of 121 currency units at a discount rate of 10%. Then the cost of your future 121 units will actually be 110 —121 / (1 + 0.1). If after two years, then 100 - 121 / (1 + 0.1) 2 . This is the time value of your money.
As we wrote above, inflation also affects the value of money. Let's consider it in more detail.

Inflation​

There are many different definitions of this term, so we tried to give the most simple, accurate and understandable one.
Inflation is the depreciation of money, as a result of which the prices of goods and services, if they remain at the same level, become less affordable.
Inflation should not be confused with a rise in prices, because in the second case, prices for certain groups of goods rise, but in the event of inflation, money depreciates and all goods become more expensive. When people say that the purchasing power of the population has decreased, they usually mean inflation. The depreciation of money and a general increase in prices are its main signs.

There are two exceptional cases of price spikes and inflation in world history. The uniqueness is that, in theory, the financial security of citizens should have increased:

• After the discovery of America, a lot of gold and silver began to flow to European countries from Peru and Mexico. This led to an increase in prices by 2.5-4 times.
• In the 1840s, development began in California gold mines, as well as mines in Australia. Gold production has increased sixfold, but prices around the world have increased by 25-50%.

The reason is that a large increase in money in the economy causes prices to rise. The more money in the economy, the more the commodity depreciates. Accordingly, an increase in production could help to curb inflation in these two cases, but in the first case, in the absence of industrialization and industry, this could not be done, while the second became not so catastrophic precisely because of the increase in production.
A slight increase in inflation around the world is considered the norm. Its level usually increases slightly at the end of the year, when the number of consumed goods and at the same time the level of corporate spending increases.

What are the causes of inflation? There are six main reasons , but in addition to them there are dozens and even hundreds of others, which economists still argue about.

✔	Money issue. Government spending is on the rise, resulting in a decision to print more money. Issue is the issue of new money.
✔	Mass lending. In this case, finances are not even taken from savings, but from the issue of currency unsecured by goods. That is, the second reason is often adjacent to the first.
✔	Excessive taxation. Not only are there fewer goods produced in this case, but also the tax itself falls on the shoulders of an ordinary consumer.
✔	Monopolization of markets and monopoly pricing. Large firms determine the price and their own production costs.
✔	Decrease in the volume of national production. This means that fewer goods correspond to the previous volume of money supply.
✔	Trade union monopoly. In this case, workers' salaries are raised regardless of economic reasons.

As we can see, with competent government management, high inflation can be avoided. Now there is only one country in the world in which the value of money is periodically observed. This is the so-called deflation and it has been characteristic of Japan in recent years.

Types of inflation​

There is an overt and hidden nature of inflation. With an open one, everything is simple - it is a rise in prices and a decrease in purchasing power. You can see it and you don't need to be an economist to recognize it. Latent inflation is much more complicated and interesting. For example, in the USSR for some time there was an increase in wages and a decrease in food prices. However, the natural consequence of this suppressed inflation was a shortage of goods and huge queues.

There are also such types of inflation as:

• Demand inflation - in this case there are fewer goods than people need.
• Inflation of costs - prices increase due to the growth of production costs in conditions of unused resources. Thus, raw materials and resources are held up in warehouses, which increases the unit price.
• Predicted inflation - It can be predicted because many economic agents often behave in the same way. As mentioned above, by the end of the year, the level of consumption usually increases, companies increase production, and therefore it is at this time that the rate of inflation rises.
• Unpredictable inflation - in this case, the growth of inflation becomes a surprise for the population and the government due to the complexity of the economic system.
• Balanced inflation - the prices of all goods rise in almost the same way. If inflation is inevitable, then it is more suitable for the country's economy; the economy is not shocked by surprises.
• Unbalanced inflation - in this case, prices for some goods rise more than others. This leads to many sad consequences.
• Adapted consumer expectations - information about future inflation is spreading in society, this changes consumer psychology, the demand for goods increases, which leads to higher prices.

Government intervention to suppress inflation does not always help. When the state prohibits raising prices for a specific product, this leads to a decrease in the production of this product with all the ensuing consequences - for example, to cheaper production costs and the appearance of counterfeits.

There are types of inflation depending on the growth rate:

• Creeping inflation is characterized by price increases of less than 10% per year. Some Western economists consider this to be a perfectly normal process. For example, if such inflation is caused by an increase in the money supply, then, as a result, this money will be used and the rate of production will also increase. But of course this is in theory, in practice everything depends entirely on the adequacy of the country's leaders. In this case, such inflation gets out of control and turns into two other types, described below.
• Galloping inflation is characterized by price increases from 10 to 50%. The economy is out of control and requires urgent, maybe even unpopular, measures. State intervention is permissible.
• Hyperinflation is characterized by a rise in prices by 60% or more, and can reach astronomical numbers. We all know the example of Zimbabwe and the fact that they have a one hundred trillion Zimbabwean dollar bill. To cover the budget deficit, this government began to issue an incredible amount of money, which led to hyperinflation. As a result, Zimbabwe returned to barter exchange. Similar experiences also exist during the war.

The main conclusion that everyone should make for themselves is that low inflation is a normal process, and in some cases even means economic growth. If a new money supply is poured into the country's economy, then at first it leads to inflation, and then this money begins to move the economy forward, production growth is observed. All this is possible only with proper management, otherwise, as a result, the process will get out of control.

Types of money​

During its long history, mankind has used a large number of different types of money. Initially, the material from which the money was made was very important. They were supposed to have the following properties:

• Divisibility and integrability. They must have the property of exchange, and also not change their value when combined.
• High quality uniformity. Individual copies of the same denomination should not be of greater value.
• Portability. Small weight and volume and at the same time their high cost. That is, they should not be three-meter stones with a hole in the middle. The world is striving for credit cards and electronic money with all their advantages and disadvantages.
• Persistence. When stored for a long time, money should not physically deteriorate or change its chemical properties.
• Recognition. Money could be easily identified and its denomination could be understood.
• Security. There must be protection against counterfeiting and theft.

In connection with all of the above, the type of money changed and improved significantly, because ideally money should have all these properties.

Commodity money​

It is a commodity with recognized value and utility. The main feature of such money is that it can be used not only as payment for goods. For example, a gold coin is valuable in itself, it can be melted down and made into a piece of jewelry.
Therefore, at the dawn of economic development, the role of money was played by independent goods that would be useful to any person in any case - furs, pearls, livestock, grain, cowrie shells, as well as bronze, copper, platinum, gold and silver coins. In Scotland, at one time, workers were paid with nails, and in Sudan with spearheads and shovels. In prisons, cigarettes are money.
Commodity money did not take root because it did not meet the very properties of ideal money - it was not portable, deteriorated during storage, it was difficult to divide and create it. Therefore, over time, people began to come up with money that is easy, quick and cheap to make.

Secured money​

In essence, they are representatives of commodity money. You could receive marks or certificates and, with their help, exchange for a certain amount of goods or trade money. For example, in Ancient Sumer you could show figurines of sheep and goats made of baked clay and get live goats and sheep for them. Initially, even banknotes were considered secured money, but then this function disappeared from them.

Fiat money​

This is the same money that we use at the present time. They do not have an independent value, but they act as money, because the state spelled out laws to consider them as such. Today, there are three forms of such money - banknotes, non-cash money in the bank and electronic money. Cashless ones should not be confused with electronic ones, although they can eventually be deposited into a bank account. And banknotes are gradually being forced out of circulation.

Electronic money​

They are used to pay for goods and services on the Internet and at the same time have the same value as real money. The development of this type of money became possible for many reasons, but the two main ones are an individual's earnings on the Internet and financial transactions between companies.
Electronic money has all the properties listed above. In addition, they have additional ones - they can be quickly calculated, translated and divided. You can also pay bills automatically and you don't even need to spend extra time for that. And since they do not exist in physical form, they cannot deteriorate and do not lose their qualities over time. The disadvantage is that almost all monetary transactions can be traced, moreover, many cases of theft are known. There is a joke that claims to be true: if before, to steal money, ten armed people were needed, now one nerd with a laptop is enough.

Cryptocurrency​

The most controversial currency, which is still controversial. Also, few understand how it works and whether such money has a future. Let's talk specifically about Bitcoin, which is the most popular cryptocurrency.
For the transfer of bitcoin, a person does not pay a commission, that is, there are no intermediaries in principle. Almost complete anonymity is guaranteed, which of course can become (and has already become) a field of activity for various criminal transactions. In the Bitcoin system, there is no person who leads it; all participants in the process are equal.
Apart from the fact that cryptocurrency can become a weapon in the hands of different organizations, the disadvantage is that it is planned to release a limited number of bitcoins. At least because this is no longer a market principle and it can lead to many problems.
Bitcoin is inherently an indicator of the level of confidence in conspiracy theories. Cryptocurrencies in their advertising focus on Big Brother, who is constantly watching us and if we do not get out of his control, then humanity will face financial slavery. Simply put, with the massive introduction of bitcoin, the world's banking system is likely to collapse, or at least it will accept the rules of the game and change dramatically. Nobody can say what will happen to the world economy if the cryptocurrency wins. That is why cryptocurrency is so controversial and controversy on this topic is still ongoing.
In this lesson, we examined in detail the concept of money, its properties and depreciation. We examined the history of the emergence of money and found out why money looks the way it is now. Any financially literate person should understand these fundamentals, because any history of a subject matters a lot in understanding the present and the future.
In the next lesson we will proceed directly to the topic, which will allow you to learn how to consciously relate to their finances, namely to their planning and accounting. This is the foundation and foundation on which any financial well-being rests.

Test your knowledge​

If you want to test your knowledge of the topic of this lesson, you can take a short test consisting of several questions. In each question, there can be only one correct answer. After you have selected one of the options, the system automatically proceeds to the next question. The points you receive are influenced by the correctness of your answers and the time spent on passing. Please note that the questions are different each time, and the options are mixed.

Having dealt with the essence of money, you can proceed to planning and accounting for funds.