How Money Shapes Our World: A Graphic Introduction to Money and Its Impact
How Money Works: The Facts Visually Explained
Money is one of the most important inventions in human history. It enables us to exchange goods and services, store wealth, measure value, and coordinate economic activity. But how much do we really understand about money? How is it created, distributed, and controlled? How does it affect our lives and the world we live in? In this article, we will explore the facts and myths about money, using visual explanations to make complex concepts easy to grasp. Whether you want to improve your personal finances, learn more about the global economy, or just satisfy your curiosity, this article will help you discover how money works.
[PDF] How Money Works: The Facts Visually Explained
What is money?
Money is anything that is widely accepted as a medium of exchange, a unit of account, and a store of value. In other words, money is something that people use to buy and sell things, measure how much they are worth, and save for the future. Money can take different forms, such as coins, banknotes, checks, electronic transfers, or cryptocurrencies. However, not all forms of money are equally useful or reliable. Some may be more convenient, durable, divisible, scarce, or stable than others.
The history of money goes back thousands of years. Before money was invented, people used to barter goods and services directly with each other. However, this system was inefficient and impractical, as it required a double coincidence of wants (i.e., both parties had to want what the other had to offer) and a common measure of value (i.e., both parties had to agree on how much each good or service was worth). To overcome these problems, people started to use commodities that had intrinsic value (such as gold, silver, salt, or cattle) or symbolic value (such as shells, beads, or feathers) as a medium of exchange. These commodities became the first forms of money.
Over time, as trade expanded and societies became more complex, new forms of money emerged. These included metal coins (which were standardized in weight and purity), paper notes (which were backed by gold or silver reserves), fiat currency (which was issued by governments and not backed by anything), and digital currency (which was created and stored electronically). Today, we use a combination of these forms of money in our daily transactions.
How is money created?
Money is created by two main institutions: central banks and commercial banks. Central banks are the authorities that control the supply and circulation of money in a country or a region. They have the power to issue legal tender (i.e., the official currency that must be accepted as payment) and regulate the banking system. Commercial banks are the financial intermediaries that provide banking services to customers. They have the ability to create money by lending and depositing.
Central banks create money by printing banknotes and minting coins, or by creating electronic money in their accounts. They use this money to buy assets (such as government bonds or foreign currencies) from commercial banks or other institutions, or to lend it to them at a certain interest rate (called the policy rate). This way, they inject money into the economy and influence the availability and cost of credit. Central banks can also withdraw money from the economy by selling assets or raising the policy rate.
Commercial banks create money by lending and depositing. When a commercial bank lends money to a customer, it does not use existing money, but creates new money by crediting the customer's account. This money is then spent by the customer and deposited in another bank, which can lend it again to another customer, and so on. This process is called the money multiplier effect, as it increases the total amount of money in the economy. However, commercial banks cannot create unlimited money, as they are subject to reserve requirements (i.e., they must keep a certain percentage of their deposits as reserves) and capital requirements (i.e., they must have enough equity to absorb potential losses).
How is money measured?
Money is measured by two main concepts: money supply and velocity. Money supply is the total amount of money available in an economy at a given time. It can be classified into different categories, depending on how liquid (i.e., how easily convertible into cash) the money is. The most common categories are:
M0: The narrowest measure of money supply, which includes only the physical currency (coins and banknotes) in circulation.
M1: The measure of money supply that includes M0 plus the demand deposits (such as checking accounts) that can be accessed on demand.
M2: The measure of money supply that includes M1 plus the savings deposits, time deposits, and money market funds that can be converted into cash within a short period of time.
M3: The broadest measure of money supply, which includes M2 plus the large and long-term deposits, institutional money market funds, and other less liquid assets.
Velocity is the average number of times a unit of money is used for transactions in an economy during a given period of time. It can be calculated by dividing the nominal gross domestic product (GDP) by the money supply. For example, if the nominal GDP of an economy is $20 trillion and the money supply is $10 trillion, then the velocity of money is 2. This means that each dollar is used twice on average for transactions in a year. Velocity reflects how active and efficient the economy is in using its money.
How does money circulate?
Money circulates through two main channels: payment systems and financial markets. Payment systems are the mechanisms that enable the transfer of money between individuals, businesses, and institutions. They include cash transactions, bank transfers, card payments, mobile payments, and online payments. Payment systems facilitate trade and commerce, as well as remittances and transfers between countries. Financial markets are the platforms where financial assets (such as stocks, bonds, currencies, commodities, derivatives, etc.) are traded. They include stock markets, bond markets, foreign exchange markets, commodity markets, etc. Financial markets enable the allocation of capital, the diversification of risk, the determination of prices, and the transmission of information.
How does money affect the economy?
Money affects the economy in various ways. One of the most important ways is through monetary policy. Monetary policy is the set of actions and decisions taken by central banks to influence the availability and cost of credit in an economy. By changing the policy rate, buying or selling assets, or adjusting reserve requirements or capital requirements, central banks can affect the interest rates, exchange rates, inflation rates, growth rates, and trade balances of an economy.
For example, if a central bank wants to stimulate a sluggish economy, it can lower the policy rate or buy assets from commercial banks or other institutions. This will increase the money supply and lower the interest rates in the economy. Lower interest rates will encourage more borrowing and spending by consumers and businesses, as well as more investment and exports by making domestic goods cheaper relative to foreign goods. This will boost aggregate demand and output in the economy. Conversely, if a central bank wants to cool down an overheated economy, it can raise the policy rate or sell assets to commercial banks or other institutions. This will decrease the money supply and raise the interest rates in the economy. Higher interest rates will discourage borrowing and spending by consumers and businesses, as well as investment and exports by making domestic goods more expensive relative to foreign goods. This will reduce aggregate demand and output in the economy.
How does money influence society?
Money influences society in various ways. One of the most important ways is through income and wealth distribution. Income is the flow of money that a person or a group receives from working, investing, or transferring. Wealth is the stock of money and assets that a person or a group owns or controls. Income and wealth distribution refers to how income and wealth are shared among different segments of society, such as individuals, households, classes, genders, races, regions, etc.
Income and wealth distribution affects the well-being, opportunities, and power of different groups in society. For example, a more equal distribution of income and wealth may lead to higher levels of social cohesion, human development, and economic stability. A more unequal distribution of income and wealth may lead to lower levels of social mobility, political participation, and environmental sustainability. Therefore, income and wealth distribution is a key indicator of social justice and economic efficiency.
Income and wealth distribution is influenced by various factors, such as the structure of the economy, the policies of the government, the institutions of the society, and the behavior of the agents. For example, the structure of the economy determines how income and wealth are generated and allocated among different sectors and activities. The policies of the government affect how income and wealth are redistributed through taxation, spending, regulation, and intervention. The institutions of the society shape how income and wealth are governed and protected through laws, norms, values, and customs. The behavior of the agents influences how income and wealth are created and used through work, saving, investing, spending, donating, etc.
How does money shape the world?
Money shapes the world in various ways. One of the most important ways is through globalization. Globalization is the process of increasing interdependence and integration among countries and regions in terms of trade, finance, culture, communication, etc. Globalization is driven by various factors, such as technological innovation, political cooperation, market competition, consumer demand, etc. However, money plays a crucial role in facilitating and accelerating globalization.
Money enables globalization by allowing the exchange of goods and services across borders and regions. Money also enables globalization by creating a global financial system that connects markets and institutions around the world. Money also enables globalization by influencing the global governance that regulates and coordinates international affairs. Money also enables globalization by affecting the global culture that shapes values and identities around the world.
Globalization affects money in various ways as well. Globalization affects money by creating new forms and functions of money that transcend national boundaries and jurisdictions. For example, cryptocurrencies are digital currencies that operate on decentralized networks without intermediaries or authorities. Globalization also affects money by creating new opportunities and challenges for monetary policy and financial stability that require international coordination and cooperation. For example, currency crises are situations where a sudden loss of confidence in a currency leads to its sharp depreciation or collapse. Globalization also affects money by creating new issues and debates for monetary justice and ethics that involve global actors and interests. For example, tax havens are jurisdictions that offer low or no taxes for foreign investors or entities.
How can you manage your money?
such as losing your job, facing an emergency, or dealing with inflation. Money management can also help you improve your financial literacy and confidence.
Money management involves four main steps: budgeting, saving, investing, and protecting. Budgeting is the process of estimating your income and expenses and allocating your money accordingly. Budgeting can help you live within your means, avoid overspending, and plan for the future. Saving is the process of setting aside a portion of your income for future use. Saving can help you build an emergency fund, accumulate wealth, and achieve your financial goals. Investing is the process of using your money to generate more money. Investing can help you grow your money, diversify your income, and beat inflation. Protecting is the process of securing your money and assets from potential losses or damages. Protecting can help you reduce your financial risks, cover your liabilities, and preserve your legacy.
How can you make more money?
Making more money is the process of increasing your income and wealth through various sources and strategies. Making more money can help you improve your living standards, fulfill your aspirations, and support your causes. Making more money can also help you overcome financial difficulties, such as debt, poverty, or inequality.
Making more money involves two main strategies: earning and saving. Earning is the process of obtaining money from working, investing, or transferring. Earning can help you increase your income and wealth by providing value to others, generating returns from your assets, or receiving support from others. Saving is the process of reducing your expenses and retaining your money. Saving can help you increase your income and wealth by cutting costs, avoiding fees, or benefiting from incentives.
Making more money requires some skills and habits that can enhance your financial performance and potential. Some of these skills and habits are:
Financial literacy: The ability to understand and use financial information and concepts.
Financial planning: The ability to set and pursue financial goals and plans.
Financial discipline: The ability to stick to your budget and follow your rules.
Financial creativity: The ability to find and exploit new opportunities and solutions.
Financial resilience: The ability to cope with and recover from financial shocks and setbacks.
How can you protect your money?
Protecting your money is the process of safeguarding your money and assets from potential threats and losses. Protecting your money can help you maintain your financial security, stability, and peace of mind. Protecting your money can also help you prevent or minimize financial damages, such as fraud, theft, or bankruptcy.
, locks, encryption, etc.) that prevent unauthorized access or use of your money or assets. Securing can help you protect your money by avoiding or deterring fraud, theft, or hacking that may compromise your money or assets.
How can you spend your money wisely?
Spending your money wisely is the process of using your money for the best possible outcomes and impacts. Spending your money wisely can help you enhance your well-being, happiness, and satisfaction. Spending your money wisely can also help you contribute to the well-being, happiness, and satisfaction of others.
Spending your money wisely involves four main principles: prioritizing, optimizing, aligning, and evaluating. Prioritizing is the process of ranking your needs and wants according to their importance and urgency. Prioritizing can help you spend your money wisely by focusing on what matters most and avoiding unnecessary or wasteful expenses. Optimizing is the process of finding the best value for your money in terms of quality, quantity, and price. Optimizing can help you spend your money wisely by getting more for less and avoiding overpaying or underpaying. Aligning is the process of matching your spending with your values and goals. Aligning can help you spend your money wisely by supporting what you believe in and pursuing what you aspire to. Evaluating is the process of assessing the outcomes and impacts of your spending on yourself and others. Evaluating can help you spend your money wisely by learning from your experiences and improving your decisions.
How can you learn more about money?
Learning more about money is the process of acquiring and updating knowledge and skills related to money and finance. Learning more about money can help you improve your financial literacy, performance, and potential. Learning more about money can also help you cope with the changing and complex financial environment.
Learning more about money involves three main sources: education, information, and advice. Education is the process of receiving formal or informal instruction or training on financial topics and concepts. Education can help you learn more about money by providing you with a foundation and framework for understanding and using money. Information is the process of accessing and analyzing data and facts on financial issues and events. Information can help you learn more about money by providing you with insights and updates on the current and future state of money. Advice is the process of seeking and following recommendations or guidance from experts or peers on financial matters and problems. Advice can help you learn more about money by providing you with solutions and support for your specific financial needs and goals.
Conclusion
Money is a fascinating and powerful phenomenon that affects every aspect of our lives and the world we live in. In this article, we have explored how money works, using visual explanations to make complex concepts easy to grasp. We have covered topics such as what is money, how is it created, measured, circulated, and affected by the economy, society, and globalization. We have also covered topics such as how to manage, make, protect, spend, and learn more about money.
We hope that this article has helped you discover how money works and inspired you to improve your relationship with money. Whether you want to achieve financial freedom, make a positive difference in the world, or simply enjoy life more, knowing how money works can help you reach your goals.
If you want to learn more about money, we recommend that you check out these resources:
How Money Works: The Facts Visually Explained: A comprehensive and accessible guide to everything you need to know about money.
Khan Academy: Economics and Finance: A free online platform that offers courses and videos on various topics related to economics and finance.
Reddit: Personal Finance: A popular online community that offers advice and tips on personal finance issues.
FAQs
What are the advantages and disadvantages of using cash?
Cash is one of the oldest and most widely used forms of money. Some of the advantages of using cash are:
It is accepted almost everywhere as a medium of exchange.
It does not require any intermediaries or fees to transfer or use.
It is anonymous and does not leave any trace or record of transactions.
It is tangible and easy to handle and count.
Some of the disadvantages of using cash are:
It is vulnerable to theft, loss, or damage.
It is inconvenient and costly to store, transport, or withdraw large amounts.
It is difficult to track and control its circulation and supply.
It is inflationary and loses its value over time.
What are the advantages and disadvantages of using digital currency?
Digital currency is one of the newest and most innovative forms of money. Some of the advantages of using digital currency are:
It is fast and efficient to transfer or u