ECONOMICS

Money: What is it, Definition, Functions, Types & Policies

Money

Money is any merchandise or object that is socially accepted as a means of payment or exchange and that serves as a measure of value. 

Money is a means of payment in relation to goods and services, and it’s considered that money is the representation of the value of human labor, which when attributed to a physical thing, it serves as an instrument of exchange and contemplates two aspects:

  • An economic aspect: It’s the quality that society attributes to goods to represent value and serve as a means of payment.
  • A physical aspect: It’s the material aspect, many things serve and have served as currency, such as animals, stones, pearls, banknotes, bills, etc.

Contents

Functions of money

Money has certain functions that allow it to fulfill its objective, they are the following three functions:

  • Unit of account: Money is a unit of account and comparison between things, so that everything can be measured with the monetary unit, for example, a telephone costs $200, a hamburger costs $3.
  • Medium of exchange: It’s the possibility of exchanging the money for goods and services.
  • Store of value: It’s the possibility of saving it to use it en the future.

Qualities of money

The qualities that a good must meet to be chosen as money are:

  1. To be easily divisible in order to be a unit of account, for example, to be able to buy 2 kg of beef.
  2. To be homogeneous when divided, so the sum of the parts is equal to the whole, an example is that 10 bills of 10 are equal to 1 of 100.
  3. To represent great value in small volume, this is useful when making large purchases and not having to carry so many bills, coins, etc. As it happens with a $100 bill.
  4. To be accepted by the entire society so that it can fulfill its function of payment and exchange.
  5. To be difficult to imitate, so nobody can replicate it.
  6. Be durable over time in order to fulfill the function of a deposit of value or savings.

Types of money

There are two types of money, commodity money and fiduciary money, the classification is done according to the intrinsic value they may have.

  • Commodity money

Commodity money is money that has an intrinsic value, it has value by itself, as with animals, gold, shells (1). Commodity money is one of the first forms to represent the value of labo. In ancient times people used shells, hooves, camels, animal parts, among others. Current examples are gold, silver, and copper.

  • Fiduciary money

Fiduciary money has the function of serving as money only because it was decreed that way, unlike commodity money, fiduciary money is not intrinsically useful. It happens with current currencies, where the competent entities issue it and declare it to be legal medium of exchange, with sufficient legitimacy to represent value, like dollar bills.

Money and monetary policy and money supply

Governments formulate measures called monetary policies to regulate and control the money that exists in the hands of the public. Monetary policies are measures taken by governments, through the Central Bank or Federal Reserve if it’s the United States, to guarantee the value and stability of a country’s currency.

The money supply is the amount of money in circulation in the economy and is made up of cash in the hands of the public and deposits in banks. 

The central objective of monetary policy is to guarantee the value or support that a country’s money has by issuing an amount that is proportional to production or growth and that there is neither a surplus nor a shortage.

See also