Money is anything that is generally acceptable as a means of payment in the settlement of all transactions, including debt. General acceptability as a means of payment or as a medium of exchange is the unique feature of money. What makes money is the belief held by everyone that it will be accepted as such by all others in the economy. General acceptability as the common means of payment is the sine qua non or the differentia of money.
Money, commonly defined, comprises coins
and paper currency and demand deposits of banks.
Functions
of
Money:
The functions of money have been
well summed up in
a couplet:
Money is a
matter of functions
four,
A medium, a measure,
a standard, a
store.
1. Money as a Medium
of
Exchange: The primary
and unique function of money is that of acting as a medium of exchange. A characteristic that will help separate money from
other (near-money or non- money) assets. It is this function alone which can help identify money as
money. All other attributes or
functions of money are derived from this primary function. But
they do not help distinguish money uniquely from other assets.
The use of money as a common medium of exchange has facilitated exchange greatly. Without money,
exchange will involve a direct barter of goods and services for goods and services. There
must
occur a double coincidence
of
wants. This would
involve
tremendous waste
of time
and resources in
search effort and in
making bargains. The use
of money
as
medium of exchange avoids much of this
waste by economizing on the use of scarce real resources in carrying out exchanges. This is said to promote
Transactions efficiency
in exchange. In addition, the use of money also promotes allocation efficiency by
making
it
possible to exploit potential gains
from
specialization in trade and
production and emergence of
specialized markets (dealers) in every type of goods and services.
Without money, in certain spheres of
economic activity, it will be difficult to organize exchange
at all, and
hence production.
2. Money as a Unit of Account: Money customarily serves as a common unit of account or measure of value in terms of which
the
values of all goods
and services are
expressed. This makespossible meaningful
accounting systems. It has been truly
said that it has
beenpossible for economics to grow as a science, because it analyses social behavior concerned with theproduction, exchange,
distribution and
consumption of goods and services whose values can be measured in acommon unit, money. Prices are only
values per
unit
of goods and servicesexpressed in terms of money. These prices, being expressed in a common
unit
can be directly
compared with each other and the ratio of exchange betweenany
pair
of goods easily
computed. In the absence of money as a commondenominator, the number of exchange ratios among goods
will
be several timeslarger than the
number of money prices.
3. Money as a Standard of Deferred Payment: Money also serves as a standard or unit in terms of
which deferred or futurepayments are stated.
This applies to
payments of interest, rents, salaries, pensions, insurance premium
etc.
In a money-using system, the bulk of deferredpayments are stipulated in money
terms.
Large fluctuations in
the value of money (i.e.,
inflation
or deflation of prices) make money
not only a poor measure of value, but also
a poor standard ofdeferred payment. This makes monetary
management for the stable
value ofmoney socially very important.
4. Money as a Store
of
Value: Money also serves as a store
of
value, i.e.,
members
of
the public can
hold
theirwealth in the form
of money. This function is derived from the use of money asmedium of exchange
in
a two-fold manner. First, the use of money as amedium of exchange decomposed a single barter
transaction
into two separatetransactions of purchase and sale. Under barter,
purchase and sale
arenecessarily simultaneous operations.
The
use of money necessarily
separatesthe two transactions in time. This
will require that the medium of exchange
alsoserve
as a store of value. There are other assets
of all kinds which also serve asstore of value and compete with money in this capacity. But money
is uniqueas a store of value in that it alone is perfectly liquid. That is, it alone serves as agenerally acceptable means of payment.
The fluctuations in the value of moneythat affect its functions as a measure
of value and
as a
standard of deferredpayment also influence its
role as a store of value.