What is Money? How does it work?
People have been around for a very long time. They have only been a social unit or group for about 4,000 to 5,000 years. Money was made at the same time that people started living in communities. We've had coins or some kind of mark since the beginning of time. These things are still around today.
Money can do two things.
- It is a way for the value of things and services to move from the person who makes them to the person who buys them.
- It works as a place to store valuable things.
The second part was true until 1969, but it isn't true all the time anymore. Money is exchangeable. This means that a coin can be used in place of another coin or a bill can be used in place of another bill. No one cares to remember the number on the back of a bill. There is no question of a serial number for coins.
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Where did paper money come from?
People used to deal, which means they traded the things they made for other things or services they needed. But this made a problem because the person who made the goods might not always need the goods or services that were for sale. This caused a mismatch between how much people wanted things and services and how many were available.
So, there was a need for a way to send things and services from one place to another. You could take a form of payment for the goods or services you sold and then use that same form of payment to buy goods or services you needed. The medium was coins made of rare metals and copper. This made it easy to store wealth because large things that took up a lot of space could be traded for small amounts of gold and silver that were easy to store.
Goldsmiths were usually trusted to store large amounts of money safely, and the money could be taken out whenever it was needed. Fear of theft and bandits made it hard for traders and dealers to move large amounts of gold and silver coins from one trading centre to another. So, goldsmiths also served as bankers and gave out bills of exchange that traders could turn in for coins at the place they wanted to trade.
The Rothschild family took this idea even further by having each of their five brothers move to a different European city and write bills of exchange on each other. They became one of the wealthiest families in Europe, both in the Middle Ages and today. Soon, these bills of exchange were being signed by different traders, and the coins were being kept safe by the goldsmiths, who often also acted as bankers. Finally, the sovereign started making bills as well as coins to make it easier to move money. When the user of the notes felt unsafe, he or she could trade them for gold.
Who has the authority to make coins and print money?
The country's Sovereign has the right and power to print money. "Seigniorage" is the word for this. This comes from the French word seigniorage, which means that the lord has the right to make money. It is the difference between how much money is worth and how much it costs to make a bill or coin.
This is a sure way for the government to get money. When making a coin is no longer worth it, the seigniorage goes into the red, and the sovereign stops making those amounts.
People used to give gold or silver to the mint and get new coins in return. They had to pay a tax to the sovereign to turn the valuable metals into coins. It was called "seigniorage."
In the case of notes, seigniorage works even though there is no protection behind it. When the government needs money, it sells stocks. If the government can't pay back the bond when it comes due, it just prints money to do so. This gives the ruler the right to borrow money without having to pay it back.
Back in the day, seigniorage was very high. Seigniorage was the amount of copper or cheap metal that was mixed in with the gold or silver. Before 1933, 90% of a British pound was made of silver and 10% of a US dollar was made of gold.
In the case of the US dollar, seigniorage was very profitable because many countries were happy to hold their foreign assets in dollars in the form of treasury bonds for very little interest, even when it came time to pay them back, because the cost of printing new dollars is very low. People in Argentina and Venezuela, for example, prefer to hold dollars because they don't trust their own currency.
How can big company shares be used as money?
When a company gets big and keeps growing, its shares become very valuable. In general, the value of a stock is much higher than the value of the index. This is because the price of that stock has a bonus added to it by the market. New shares can be sold at higher prices to raise cheap money for operating capital or the launch of a new product or service.
You can also use this stock to buy other companies. To buy all of the existing shares of the target company, the company just gives new stock at current prices to the people who own shares in the target company at a ratio that was agreed upon ahead of time. (Like when Facebook bought Whatsapp)
