Money does not just consist of notes and coins. Only
about 3 to 5% of the UK’s money supply consists of actual cash. Most money is
held as deposits in banks and other financial institutions. The bulk of these
deposits only appear as book keeping entries in these institutions accounts. It
is possible for people to access this money in their accounts through the use
of debit cards, cheques, standing orders, direct debits etc without the need
for cash. This means that banks and other financial institutions need to keep
only a small percentage of these deposits in their safes and at their counters
in the form of cash.
Medium of exchange.
Money's most important function is as a medium of exchange to facilitate
transactions. Without money, all transactions would have to be conducted by barter,
which involves direct exchange of one good or service for another. The
difficulty with a barter system is that in order to obtain a particular
good or service from a supplier, one has to possess a good or service of equal
value, which the supplier also desires. In other words, in a barter system,
exchange can take place only if there is a double coincidence of
wants between two transacting parties. The likelihood of a double
coincidence of wants, however, is small and makes the exchange of goods and
services rather difficult. Money effectively eliminates the double coincidence
of wants problem by serving as a medium of exchange that is accepted in all
transactions, by all parties, regardless of whether they desire each others'
goods and services.
Store of value.
In order to be a medium of exchange, money must hold its value over time; that
is, it must be a store of value. If money could not be stored for some period
of time and still remain valuable in exchange, it would not solve the double
coincidence of wants problem and therefore would not be adopted as a medium of
exchange. As a store of value, money is not unique; many other stores of value
exist, such as land, works of art, and even baseball cards and stamps. Money
may not even be the best store of value because it depreciates with inflation.
However, money is more liquid than most other stores of value because as
a medium of exchange, it is readily accepted everywhere. Furthermore, money is
an easily transported store of value that is available in a number of
convenient denominations.
Unit of account.
Money also functions as a unit of account, providing a common measure of the
value of goods and services being exchanged. Knowing the value or price of
a good, in terms of money, enables both the supplier and the purchaser of the
good to make decisions about how much of the good to supply and how much of the
good to purchase.
Store of wealth. People and organisations need to be
able to use the earnings of one days labour or operation to purchase goods and
services in the future. This would mean they would need to store their wealth
and that they need a means of saving. Money facilitates the storing of wealth
as it can be saved.
Source :
Conclusion :
Money is any object that is generally accepted as payment for goods and
services and repayment of debts in a given country or socio-economic
context. The main functions of money are distinguished as: a medium of
exchange; a unit of account; a store of value; and, occasionally, a
standard of deferred payment.
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