Functions Of Money | Meaning, Types, Characteristics

Hello, welcome to this hall on the meaning and functions of money.

Table Of Contents

1. Definition of Money
2. History of money
3. Functions of money
4. Advantages of money
5. Types of money
6. Characteristics of money
7. Revision Questions.

Meaning of money: Money is anything that is generally accepted as a medium of exchange and in settlement of debts. Money can also be defined as anything that is generally acceptable as a means of payment. Legal definition of money says it is what the law says it is. Before the advent of money, exchange took place by means of barter. The use of money facilitates exchange of goods and services. Money includes all those things that perform the functions of money. Money can come to be employed as a result of the numerous defects of barter.

HISTORY OF MONEY

Money originated because of the various difficulties that arose from trade by barter. In the olden days, different commodities serve as money in different countries. Cattle, cowry shells, tobacco, salt and beads were used as medium of exchange at one period Or Another. Later, precious metals like silver and gold were used. The amount of metals were weighed out whenever a payment was to be made. With time, the metals were cut into pieces of definite weights and so, coins of limited face value where issued.

The use of paper Money originated from the use of receipts issued by goldsmith in exchange for deposits of precious metals. The receipts became bank Notes and the goldsmith became bankers. In recent time, people started accepting inconvertible paper money as medium of exchange. Over the years, different forms of money has been introduced to facilitate exchange. For anything to serve as money, it must enjoy people’s confidence. The principal stages in the development of money have therefore been the use of it.

FUNCTIONS OF MONEY

The followings are the functions of money:

1. Medium of exchange: Money can serve as medium of exchange through which people can exchange goods and services. Money can be used to buy different varieties of goods and services. This facilitates the means of exchange. It came into use as a result of the inadequacies of the barter system. Money is therefore widely accepted as payment for debts.
2. Standard of deferred payments: This is another functions of money, since money cannot be stored, it can be accumulated to pay debts that are fixed in terms of money. Money can serve as a medium by which business transactions on credit can be settled in the future. The use of money makes it possible for payment to be deferred from present to some future dates.
3. Unit of account: Unit of account is another functions of money; IN serving as a unit of account, it becomes practically possible for individuals and companies to keep accounting record of their transactions in bank statements, ledgers and invoice.
4. Store of value: Money is a good store of value because wealth can be stored for future use. When there is no inflation, money stored or saved retains is value for many years.
5. As a measure of value: Measure of value is another functions of money. The value of goods and services are expressed by prices, therefore money is used as a yardstick to measure and compare the worth of goods and services as well as occupation.

ADVANTAGES OF USING MONEY

The following advantages can be derived from using money

• Money makes deferred payment possible.
• money makes it easy and possible to obtain loans
• The use of money makes division of labour possible.
• Money ensures that people can purchase goods which will satisfy them.

CHARACTERISTICS OF MONEY

The following are the qualities or characteristics of money:

1. General acceptability: Money must the generally acceptable by all in the society or country as a means of exchange. This shows the confidence people have in money.
2. Portability: The object that serve as money must be something that can be easily carried about from one place to the other, which means such object has to be light in weight.
3. Relative scarcity: Money must be relatively scarce, that is, it must not be too many so as not to lose it’s value.
4. Homogeneity: Another characteristics of money is homogeneity; Each unit of money must be the same in size, colour and quality and be the same nationwide.
5. Durability: The object that will serve as money must be able to last long, it must not be a perishable commodity; it must be able to stand the test of time.
6. Stability: Another characteristics of money is stability: The value of money must be stable. The Stability of it’s value will help business to be predictable and encourage lending and borrowing of money.
7. Divisibility: Money must be capable of being divided into smaller units, e.g, N20 N50 N100, or $1, $100, to enable it to purchase both high and low priced commodities.
8. Recognisability: Another characteristics of money is recognizability; Money must be easily recognized and identified by the totality of the people in the society. It must not be easily counterfeited.
9. No intrinsic value: The commodity that should serve as money must have little or no value in itself as opposed to it’s value of exchange.

FORMS OR TYPES OF MONEY

The followings are the forms or types of money:

1. Legal tender: Legal tender is any means of payment by which a trader is compelled by the law of a state to accept in settlement of debt, e.g, Dutch Mark. This is money which has the backing of the law and it is an offense to reject it.
2. Coins: Coins is another types of money; coins are precious metals made of silver which have a defined amount of metallic content. They also have an official stamp of authority placed on them. Coins are homogenous and indestructible, e.g, 25k, 50k and N1.
3. Bank notes: Bank notes is another types of money; These are slip of papers or currency issued by the Central Bank. Paper money originated from the receipt issued by gold Smith to those who deposited precious metals. Example; gold, with them for safekeeping. There are in denominations and are portable. Example; 35, 310, 320, 350 and 3100.
4. Partial Money: Partial money is another types of money; These are representative of money which may not be legal tender. They are acceptable within a certain restricted area. Partial money are not made mandatory for acceptance by all the people. They are not backed by law, and the examples include petrol voucher, tickets and cheques.
5. Commodity Money: This is the types of money which has value as money and also has commodity. Commodity money is valuable for it’s own sake since it can be put to some other use. They can be used as medium of exchange, e.g, gold, diamond and cattle.
6. Token Money: This is a form or types of money with a face value which is greater than the value of the metal content. When coins were made from gold, and increase in the value of the metals could tempt people to melt them for other purposes. Token money have face value in excess of metal content, that is, the intrinsic value is less than the face value.
7. Deposit Money: This is a form of money kept in the accounts of the bank. Any money saved in the bank will be credited to the account of the depositor. The money in the deposit can be transferred through the use of cheque. Cheque is just an order to pay somebody and not to be considered as money. Bank deposits now form the chief source of money in a country.
8. Fiat Money: Fiat money is another types of money; Fiat money is any money the government has declared to be legal tender but it is not backed by reserve. Paper money is Fiat money since it’s can no longer be redeemed for gold and it’s intrinsic worth is almost nill.
9. Fiduciary Note: Fiduciary note is an issued bank note not back by gold but by government securities.

Revision Questions

1. What is money?
2. Outline 7 functions of money listed above.
3. (a) State 5 characteristics of money. (b) state four advantages of using money.
4. Briefly list and explain 6 types of money.
5. Write short note on the History of money.