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What Is Money?

Money is the medium used for the exchange of goods and services. Money is used as a measuring device for the success or failure of a venture that may involve trading, manufacturing, servicing, or construction. Money is also considered fungible because it changes its nature upon using it. Money is fungible because we convert it into goods and services that we buy. The use of money resembles the use of a loaf of bread because the nature of that loaf of bread changes upon using (eating) it. In that sense, we cannot rent a loaf bread because the person who leases that loaf cannot return the same loaf back to its original owner. If we do that, it will be unfair because in that way one would be unfairly paying twice for the title of owning the loaf and for the using of it, while there is only one title of ownership, which is same as the title for using. That is conceptually why money is considered fungible, and that is why it cannot be rented at a price called interest rate. It only can be invested.

The success or failure of an investment is measured in terms of the return reaped at the end of a certain period of time, which is called the return on investment. Operators, traders, and investors evaluate the success of their venture by the return on investment. The level of return on investment differs from one locality to another; it is a function of many parameters. A return on investment of 5 percent may be considered a great return in a country with no inflation; however, a return on investment of 15 percent would be marginal and in fact negative in real terms in a country that suffers from 25 percent inflation. Riba banks lend (rent) money to entities at a rental rate called interest. If the interest rate charged on the money is higher than the income generated from the project, to the extent that the borrower cannot pay both the interest (the rental rate on that money) and the principal back, then the project is a failure, and it should not have borrowed money anyway. Conceptually, one can look at interest rate as a red line that defines which projects should be financed. If the projected real rate of return of a project (after allowing for inflation or reduction in purchasing power of money) is higher than the red line, then it makes sense to finance it; if it is lower, financing the project does not make prudent economic sense. The government sets the foundation of that interest rate by deciding on and adjusting the rate of printing of the money. If the government wants to allow only high-return projects to be financed, it will increase rates. As a result, there will be very few projects that make economic sense. Conversely, if the government wants to stimulate the economy, it will lower the rates so that less profitable projects can qualify.

The invention of paper (fiat) money was one of the important human developments in history. Money has helped develop markets in small villages that attracted many traders and merchants, eventually turning these small villages into small towns, cities, large metropolitan areas, states, and countries. The real value of the idea of paper (fiat) money is that it can be transported from one place to another. It can be divided into different denominations, and it can be recognized and accepted by others in the country and in other countries, depending on the country or locality that issued it.

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