Chapter Nineteen: The Functions of Money
Money is anything that is generally accepted as a medium of exchange, store of value, a unit of account and standard of deferred payment.
The functions of money will always include:
- A medium of exchange, which means money as a payment for exchange of goods and services.
- A store of value, which means that money is an asset and can be stored for use in future.
- As unit of accounts, meaning as a standard unit for accounting prices. It makes money a powerful medium of comparing prices of goods and services.
- As the standard of deferred payments, which means as a standard of payments contracted to be made at some future date.
The most common characteristics of any form of real money will include:
- Its general acceptability
- Its divisibility
- Its easy trans-portability (credit money issued by banks, central bank or by government has a quality of trans-portability.)
- Its durability
- Its ability to be standardized – meaning that money units can all be alike with respect to their size, quality and design.
So far we have looked at the functions and characteristics of money, and will now compare the costs and benefits of it. This means, however, that there must be a range of different money types, and these include:
Commodity money is that which is used as money that has an intrinsic value in some other use.
Cost of commodity money:
- It is an alternate to money in direct exchange of goods and services, like barter system.
- It requires double coincidence of wants. For example: If we want to purchase a product, we need to find a person who will buy our products and in exchange will give us his products. It involves intolerable amount of efforts.
- It lacks a common unit of value: The problem here is that a rate of exchange is to be made. The price of each commodity would have to be coated in terms of every other commodity.
- Suitable system of storing wealth: It has no suitable system of storing wealth. No good can serve as a convenient asset for use in the future if storage of that asset is difficult. It should be portable, not perishable, require little space, and should be acceptable for exchange in other goods.
- Goods cannot serve as the standard of payment contracted to be made in future.
- It is very difficult for any good to serve as a standard of deferred payments in case a person borrows something and promises to return the same number of units of the same good at a future date. Such a repayment system involves many problems; the borrower may not be a position to arrange the same goods and the same quantity at the time of repayment.
Benefits of commodity money:
- Commodity money can bring liquidity in the market by trading all types of products in exchange of any other good.
- Barter systems lead quite rapidly in trade to several types of goods produced in an economy, and which are being imbued with lots of monetary properties.
- At the time of emergency, when the country does not have its own currency and generally they adopt the foreign currency, commodity money can be beneficial.
Fiat money is designated as money that is intrinsically worthless. It is not backed by reserve of any other commodities.
Costs of fiat money:
- It is not backed by reserves of any other commodity.
- The money supply overtakes economic value when the government produces money more rapidly than economic growth. Therefore, the excess money eventually leads to the inflation in the economy.
- In reality, the real value of a fiat currency is unclear.
Benefits of fiat money:
- The money itself is given the value by the government.
- At the time of war or emergency, government often adopts the Fiat money by exchanging it for the other commodities.
- It is the legal tender declared by most governments.
- It is the money without intrinsic value.
Representative money refers to money that consists of a token or certificate made of paper. The use of the various types of money including representative money, tracks the course of money from the past to the present.
Costs of Representative Money:
- It is defined as a claim on a commodity. For example: gold certificates or silver certificates. In this sense it may be called “commodity-backed money”.
Benefits of Representative Money:
- Representative money is backed by an underlying commodity. For example: Dollars backed by gold are representative money.
- It tracks the course of money from the past to present.
- Governments through history have often switched to forms of fiat money in times of need such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed.
In this case, the money is the main driving point. The money invested into the purchase of private label rights receives a great return in the form of increased traffic and sales generated from the additional material and the additional memberships or other purchases.
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