Money is any
object or record that is generally accepted as
payment for
goods and services and repayment of
debts in a given
country or socio-economic context.The main functions of money are distinguished as: a
medium of exchange; a
unit of account; a
store of value; and, occasionally in the past, a
standard of deferred payment.
Any kind of object or secure verifiable record that fulfills these functions can serve as money.
Money originated as
commodity money, but nearly all contemporary money systems are based on
fiat money.
Fiat money is without intrinsic
use value as a physical commodity, and derives its value by being declared by a government to be
legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private".
The
money supply of a country consists of
currency (banknotes and coins) and
bank money (the balance held in
checking accounts and
savings accounts).
Bank money usually forms by far the largest part of the money supply.
Functions
In the past, money was generally considered to have the following four main functions, which are summed up in a
rhyme found in older economics textbooks: "Money is a matter of functions four, a medium, a measure, a standard, a store." That is, money functions as a
medium of exchange, a
unit of account, a
standard of deferred payment, and a
store of value.
However, modern textbooks now list only three functions, that of
medium of exchange,
unit of account, and
store of value, not considering a standard of deferred payment as a distinguished function, but rather subsuming it in the others.
There have been many historical disputes regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. One of these arguments is that the role of money as a
medium of exchange is in conflict with its role as a
store of value: its role as a store of value requires holding it without spending, whereas its role as a medium of exchange requires it to circulate.
Others argue that storing of value is just deferral of the exchange, but does not diminish the fact that money is a medium of exchange that can be transported both across space and time.
The term 'financial capital' is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender.
Medium of exchange
When money is used to intermediate the exchange of goods and services, it is performing a function as a
medium of exchange. It thereby avoids the inefficiencies of a barter system, such as the '
double coincidence of wants' problem.
Unit of account
A
unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt. To function as a 'unit of account', whatever is being used as money must be:
- Divisible into smaller units without loss of value; precious metals can be coined from bars, or melted down into bars again.
- Fungible: that is, one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art or real estate are not suitable as money.
- A specific weight, or measure, or size to be verifiably countable. For instance, coins are often milled with a reeded edge, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
Store of value
To act as a
store of value, a money must be able to be reliably saved, stored, and retrieved – and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time. Some have argued that
inflation, by reducing the value of money, diminishes the ability of the money to function as a store of value.
Standard of deferred payment
While
standard of deferred payment is distinguished by some texts,
particularly older ones, other texts subsume this under other functions.
A "standard of deferred payment" is an accepted way to settle a
debt – a unit in which debts are denominated, and the status of money as
legal tender, in those jurisdictions which have this concept, states that it may function for the discharge of debts. When debts are denominated in money, the real value of debts may change due to
inflation and
deflation, and for sovereign and international debts via
debasementand
devaluation.
Measure of Value
Money, essentially acts as a standard measure and common denomination of trade. it is thus a basis for quoting and bargaining of prices. It has significantly in developing efficient accounting systems. But the most important usage is that it provides a method to compare the values of dissimilar objects.
Money supply
In economics, money is a broad term that refers to any
financial instrument that can fulfill the functions of money (detailed above). These financial instruments together are collectively referred to as the
money supply of an economy. In other words, the money supply is the amount of financial instruments within a specific economy available for purchasing goods or services. Since the money supply consists of various financial instruments (usually currency, demand deposits and various other types of deposits), the amount of money in an economy is measured by adding together these financial instruments creating a
monetary aggregate.
Modern monetary theory distinguishes among different ways to measure the money supply, reflected in different types of monetary aggregates, using a categorization system that focuses on the
liquidity of the financial instrument used as money. The most commonly used monetary aggregates (or types of money) are conventionally designated M1, M2 and M3. These are successively larger aggregate categories: M1 is currency (coins and bills) plus
demand deposits (such as checking accounts); M2 is M1 plus
savings accounts and
time deposits under $100,000; and M3 is M2 plus larger
time deposits and similar institutional accounts. M1 includes only the most liquid financial instruments, and M3 relatively illiquid instruments.
Another measure of money, M0, is also used; unlike the other measures, it does not represent actual
purchasing power by firms and households in the economy. M0 is
base money, or the amount of money actually issued by the
central bank of a country. It is measured as currency plus deposits of banks and other institutions at the central bank. M0 is also the only money that can satisfy the
reserve requirements of
commercial banks.
Market liquidity
Market liquidity describes how easily an item can be traded for another item, or into the common currency within an economy. Money is the most liquid asset because it is universally recognised and accepted as the common currency. In this way, money gives consumers the
freedom to trade goods and services easily without having to barter.
Liquid financial instruments are easily
tradable and have low
transaction costs. There should be no (or minimal)
spread between the prices to buy and sell the instrument being used as money.
Types of money
Currently, most modern monetary systems are based on fiat money. However, for most of history, almost all money was commodity money, such as gold and silver coins. As economies developed, commodity money was eventually replaced by
representative money, such as the
gold standard, as traders found the physical transportation of gold and silver burdensome. Fiat currencies gradually took over in the last hundred years, especially since the breakup of the
Bretton Woods system in the early 1970s.
My opinion about this article :
The main functions of money are distinguished as: a
medium of exchange; a
unit of account; a
store of value; and, occasionally in the past, a
standard of deferred payment.Any kind of object or secure verifiable record that fulfills these functions can serve as money.
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