Functions of Money:
Medium
of exchange: Money is generally accepted medium of
exchange that is used to make all the transactions. Ex-payments of goods,
payment of tax, etc.
A
Measure of Value: Money expresses the value of every
service as well as goods. Therefore, it is a common denomination.
Standard
of deferred payments: Money is considered the standard for
future payments. Ex-The payment of the electricity bill on the upcoming due
date.
Store
of Value: It means that money is capable of being stored and
transferring the purchasing power from today to the future. Ex: Using the money
in a savings account to buy new furniture.
Distribution
of social income: Income can be easily be distributed
with the help of money. Ex: Distribution of total money earned by a school in
the form of salaries, wages, utility bills, etc.
Basis
of Credit Creation: The “store of value” function of the
money helps in credit creation by the banks. Ex: Using the money of demand
deposits as a tool for credit creation.
Liquidity:
Money is the most liquid asset of the economy. Ex: Credit cards, debit cards,
cash.
Types
of Money:
Money serves as a
medium of exchange, a unit of account, a store of value, and a standard of
deferred payment. The types of money can be classified based on different
criteria, including their intrinsic value, backing, and form. Let’s discuss
these types more elaborately:
1. Commodity Money: Commodity money has intrinsic value because it is made of a valuable commodity, such as gold, silver, or precious metals.
Characteristics: The value is derived from the commodity itself.
Historically, gold and silver coins have been examples of commodity money.
It has inherent value beyond its use as a medium of exchange.
2. Representative Money: Representative money is backed by a commodity but it is not the commodity itself. It represents a claim on a commodity like gold or silver.
Characteristics: Paper currency that can be exchanged for a specific amount of a commodity.
The value is based on the backing commodity, and it can be redeemed for that commodity.
3. Fiat Money: Fiat money has no intrinsic value and is not backed by a physical commodity. Its value is based on the trust and confidence people have in the government that issues it.
Characteristics: Its value is established by government decree and is not tied to any physical asset.
Most of the world’s currencies, like the US Dollar and Euro, are fiat currencies.
4. Fiduciary Money: Fiduciary money is a currency without intrinsic value and not backed by a commodity. Its value is based on the trust and confidence people have in the issuing authority.
Characteristics: Relies on the trust in the stability of the government or institution issuing it.
It includes most of the paper currency in circulation today.
5. Cryptocurrency: Digital or virtual currencies that use cryptography for security. cryptocurrencies are an electronic medium of exchange that exists virtually. Crypto is a peer-to-peer system that runs on the blockchain. In simple terms, it is an intangible form of currency with opportunities for international exchange.
6. Local Currencies: Money issued and accepted in a particular locality or region.
Characteristics: Used alongside or instead of national currencies in local communities.
May serve to promote local economic development.
7. Digital Currency: Money in digital form, including both physical and purely electronic representations.
Characteristics: Digital wallets, online banking, and electronic payment systems falls under this category.
The rise of digital currencies is transforming the nature of transactions.
8. Legal Tender: Legal tender is currency that must be accepted for transactions and debts as recognized by law
Characteristics: Not all forms of money are necessarily legal tender.
Governments typically define what constitutes legal tender in a particular jurisdiction.
These categories illustrate the diverse forms and functions of money in different economic systems.
The evolution of money continues with technological advancements and changes in financial landscape. The coexistence of various types of money reflects the dynamic nature of modern economics.