26th November 2020

What is Money?

The first mass-produced coins were made in Turkey over 2,600 years ago.

In the UK, bank notes have been around for over 300 years, credit cards for over 60 and contactless payment cards were first introduced in 2008.

Cryptocurrency, such as Bitcoin, and mobile payments, such as Apple Pay are more recent innovations in money. So, why do we need money and is there a downside to the move towards a ‘cashless society’?

What did we do before money?

Before money was invented, people would barter to get what they needed. For example, if a farmer had a leaky barn roof, they might have been prepared to exchange a prize plough horse for a builder’s time, especially if it meant their harvest would then be protected. However, bartering had a number of limitations:

  • It wasn’t easy to find someone who needed what you had and had what you needed.
  • There was no common measure of value. This meant there was no way of knowing, for example, whether a horse was worth the equivalent of builder’s time.
  • A horse is not something that can be divided into smaller units, so if a builder’s time was only worth half a horse, then the farmer would lose out; and finally,
  • A horse would not maintain its value for long, over time it would grow old and no one would want to barter for it.

Why was money invented?

Money was invented to overcome the limitations of bartering. It fulfils three key roles by acting as:

  • A means of paying someone else for something you need
  • A way for you to understand how much something is worth
  • A way to store value – unlike a horse, you can keep money for a length of time and it will generally hold its worth.

What are the key features of money?

To be effective in fulfilling its key roles money must be:

  • Acceptable and consistent in value – in the UK, we know that the money produced by the Bank of England will be accepted, we also know – broadly speaking – what we can buy for £1, £5, £10 and so on
  • Portable – coins and notes need to be a manageable size and weight so we can carry them around
  • Limited in supply – if we could just print our own money then it would have no value, there needs to be a limit for it to be worth something
  • Divisible – notes, for example, need to be divisible into coins so we can receive change
  • Durable – both coins and notes need to last so they are tangible, therefore we feel we can trust them

Money in other countries

While the £ is perfectly acceptable in the UK, if we were to pop across the Channel to France we would find our £s to be of little use. TO spend overseas, we first need to exchange our money into the currency of the country we’re visiting.

Where to next?

Cashless payments – which include traditional debit and credit cards as well as electronic devices such as smartphones and wristbands are accepted worldwide. In fact, in 2015 cashless payments overtook cash payments for the first time.

While advances in technology are usually viewed as a positive thing, the move to a cashless society may not be good for our bank balances. Studies have shown that when we spend physical cash our brains register a small amount of pain as we hand the money over a watch it disappear into the till. This pain acts as a brake on our spending. The brain does not react in the same way to cashless or, indeed, online spending, suggesting that it is much easier for us to spend – and spend more – this way.

Only time will tell the impact cashless payments will have on our finances long-term, but already experts are recommending that anyone needing to cut back on their spending switches back to cash for greater control over their money.

With thanks to our partners over at the NMBA for content.

Up next week – budgeting!