Money is widely described as the root of all evil. It is also described as a blessing to mankind. So what is money? In simple terms, money is a medium of exchange. Wikipedia defines money as any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. Some may ask, what are the five functions of money? In this article we are going to take a look at three primary functions of money in economics.
We will take a look at 3 functions of money in economics and the effect that is has on us. Irrespective of the currency that you use, the functions of money remain the same. It is important to understand the nature and functions of money. So what are the 3 functions of money? Lets get into it and all other contingent functions of money.
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1. Medium of exchange
I guess the most important and well known function of money is a s a medium of exchange. I am sure you have used money to buy something before. Imagine how difficult and problematic it would have been to buy something without money? How would you agree on a price? would there even be a price? Without money, we would have traded for goods through a barter system which was practiced a long time ago when money was not around.
The barter system simply meant that if you wanted something, you would have to trade it with another. So if I wanted to by a crate of eggs during the barter trade era, I would maybe exchange a crate of eggs for a tuber of yam. This system as you can see did not have much structure and when people could not agree of the value of a crate of eggs to that of a tuber of yam, exchange or commerce would be stalled. This made the exchange of goods and services especially difficult and burdensome.
The introduction of money as a medium made these transactions more structured and practical. This allowed commerce to flourish since people received money for their goods and services rather than other goods and services. Money was is basically a type of good that functions as a currency.
Money as a medium
The money that you use today went through many different phases before settling on a national currency like the Ghana Cedis. Back in the 17th and early 18th centuries, Beaver pelts, cowries and dried corn were used by American colonialists in transactions. The values of these objects had generally accepted values and so were used to buy and sell. Some of the characteristics of money is that it has to be;
- widely desired hence valuable.
- easily storable
But as time went on, money advanced from beaver pelts and dried corn to precious metal like gold. Gold became the main medium of exchange for money as it was precious and people wanted it. Gold served as the physical token for wealth since it could not be eaten or used to keep you warm at night. It was simply precious.
2. Store of value
When something is of value, it means that it is greatly desired by many. Money serves that purpose. Even as you are reading this, the money in your pocket or bank account is of value to you that is why you take measures to ensure that your money is safe. But when we talk about a store of value, it is an asset that maintains its value without depreciating. A good example of stores of values are gold and other metals. They do not have a shelf life like milk, eggs or yam hence they maintain their value over time.
Money serves as a good store of value since it is not perishable. Investments like lands are also stores of values but what is unique about money is that it is liquid and so can be carried around unlike a piece of land. Money has been used by governments in the form of treasury bills which are very good stores of value because they generate interest income and their principal balances are backed by legal contracts. If we think about this relationship between money and gold, we can gain some insight into how money gains its value – as a representation of something valuable.
Any healthy economy knows how to preserve wealth in the formation of currency and monetary units. The economic value of individuals or a business's accumulated labour relies on money to work efficiently. An economy's savings can be compromised through a poor monetary unit. This reduces the willingness to trade. A credible and formidable currency must be established for people to gain confidence in trading.
3. Unit of account
Money makes accounting a whole lot easier. Because it serves as a common measure of the value of goods and services. Money united the supplier and the purchaser as they both stand on common ground when it comes to the value of a product or service. This helps in personal and business accounting as value is mathematically and universally calculable via money. In the barter trade system, value was a personal opinion and that created a chaotic system which did not facilitate trading as much as you think it would.
Money has become and integral part of our daily lives and so have the functions of money. I don't know what we would have been doing without money. It is true that money habours greed which has driven many to destruction but money has also helped many live a comfortable life. I will leave you with an old proverb which says that money is a good servant but a bad master. Don't let you life be run by money, rather let it function for you. I hope these functions of money above will guide you in doing so.