Money
The money came into existence to overcome the drawbacks of the barter system. Earlier, people use to exchange goods and services as a form of commerce. This often led to many disadvantages, one of which was the double coincidence of wants. To solve this problem, a standard medium of exchange, money, was introduced.
What is money?
A medium of exchange that is centralized, generally accepted, recognized, and facilitates transactions of goods and services, is known as money.
- Money is a medium of exchange for various goods and services in an economy.
- The money system varies with the governments and countries.
- Different countries have different currencies.
- The central authority is responsible for monitoring the monetary system.
- There are many forms of money, and cryptocurrency is the newest addition to the forms of money and can be internationally exchanged.
Characteristics of Money
Fungible currency: A currency must be fungible which means that the units used as a currency must be equal in quality and shall be interchangeable. A non-fungible form of currency is not considered reliable for transactions.
Durable: A good currency is durable enough to be used more than just one time. It should not be perishable. A perishable good or article should not be used as a currency because it cannot be used multiple times and also cannot be stored for future transactions. Therefore, to conserve the future-oriented use-value of the money, a currency must be durable.
Easily recognizable: The users of the money must be ascertained of its authenticity. In other words, the currency must be universally recognized. An unrecognized currency or money leads to disagreement with the exchange terms. A recognized currency ensures trust in the money system as well as its acceptance.
Stability: A currency must be stable in terms of value. In simple terms, money should have a constant or increasing value. Money cannot be unstable whose value keeps drastically changing. An unstable currency can give room to the risk of a sudden drop in value which can hamper the acceptance and authenticity of the money system.
Portable: A currency must be portable and can be conveniently transported from one place to another. The money must be divisible into various quantities making its use better. Money if not portable can lead to an exceeded cost of transportation of the currency itself. Therefore, money should be able to be divided into further smaller units to facilitate smooth transactions of various quantities of goods. Secondly, it should be easily transferable and portable.
Functions of Money
Medium of exchange: Money is the 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 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:
The following are the types of money:
Market Determined Money: Any good that can be generally accepted by the people of the economy to exchange it indirectly for various goods and services between different parties is called Market determined money.
Fiat Money and Legal Tender: The form of money that is issued by the government and is not backed by any commodity is known as fiat money. Ex: INR, Dollar, Pounds, etc. The term legal tender states the money that is legally issued by the government. Ex: Coins and Banknotes.
Cryptocurrencies: 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 and has opportunities for international exchange.
What is the functional definition of money?
The functional definition of money states that the money should be capable of bringing a generally accepted medium of exchange, the measure of value, the standard of deferred payment, and a store of value.
How many functions of money are there?
There are three functions of money: Primary, secondary, and other functions.
What is Convertible Virtual Currency?
Convertible virtual Currency is used as a substitute for the legal money accepted in the economy. These currencies can easily be exchanged for fiat money like cryptocurrencies.
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