by At the heart of the world’s economic system is money. We use it to pay for services, play online casino slot games, or travel. Let’s break down what facts about money every adult needs to know.
Necessary Qualities of Money
In order for money to be recognized by the public and businesses, it must have the following qualities:
- Wide availability. Every person can get them for personal use.
- Inexpensive use. Money should lose minimal value in frequent use.
- Durability. Money shouldn’t be subject to deterioration during storage.
- Easy divisibility. Money should be easy to handle for the average citizen.
- Easy to transport.
- Reliability. Protection from counterfeit and wide trust of citizens.
Throughout history, these qualities were achieved first with metal coins, and then with banknotes. Nowadays the electronic money system dominates.
Why Money Is Needed
Money performs several key functions in the economy. It’s used as a medium for the following transactions:
- Exchange – money acts as a universal equivalent, through it different goods and services are equated to each other.
- Settlement – it simplifies mathematical operations in the economy.
- Credit – the moment of payment differs from the moment of receipt of a purchased good.
- Saving – money can be used to save and invest.
There are also other, narrower functions. For example, money serves as a measure of status for people (the value of wealth) or entire nations.
The Value of Money Changes Over Time
Over time money depreciates (inflation), but it’s also possible in much rarer cases that its value increases. This situation is called deflation. Other terms to keep in mind along with those mentioned are hyperinflation, when the value of money falls quickly and unpredictably, and stagflation, when inflation is accompanied by a shrinking economy.
Rule 72
How do you quickly find out over what period of time the capital will double if the profits are reinvested? To do this, divide the number 72 by the rate of money growth. If the interest on the investment is 10, then the amount will double in 7.2 years. If the percentage is 5%, then the doubling period is 14.4 years. The same principle is used to calculate the loss in value of money: 72 divided by the rate of inflation. Thus, at inflation of 4%, a unit of currency loses half its value over 18 years.
Lies About Risk-free Investments
There is no such thing as a risk-free investment. Even if you invest in government bonds which are considered to be highly reliable, there is the possibility that their value will go down. Similar is the case with investments in the most reliable banks.
Gresham’s Law
Bad money drives better money out of circulation. This law explains the gradual disappearance of silver and gold coins from circulation, as they have been replaced by money made of nickel alloys. All other things being equal, people prefer to save coins made of precious metals rather than exchange them for banknotes or other cash made of marketable materials.
