The Functions and Characteristics of Money Gfi

THE FUNCTIONS AND CHARACTERISTICS OF MONEY
American businesses produce, market, and distribute goods and services. Money makes it
possible for businesses to obtain what they need from suppliers and for consumers to obtain
goods. Money is defined as anything customarily used as a medium of exchange, a unit of
accounting, and a store of value. The basis of the market economy is voluntary exchange. In
the American economy, the exchange usually involves money in return for a good or service.
The Functions of Money
Most Americans think of money as bills, coins, and checks. Historically, and in other
economies, money might be shells, gold, or even goods such as sheep. Economists identify
money by the presence or absence of certain functions. Anything that is used as a medium of
exchange, a unit of accounting, and a store of value is considered money. For example, Native
Americans used wampum - beads made from shells. Fijians have used whales’ teeth.
There are three functions of money
Medium of Exchange. To say that money is a medium of exchange simply means that a
seller will accept it in exchange for a good or service. Most people are paid for their work in
money, which they then can use to buy whatever they need or want. Without money people
would have to barter - exchange goods and service for other goods and services.
Suppose you worked in a grocery store and were paid in groceries because money did not
exist. To get whatever you needed, such as clothes and housing, you would have to find people
who have the goods that you want. In addition, those people would have to want the exact
goods - in this case, groceries - that you have. Barter requires what economists call a double
coincidence of wants. Each party to a transaction must want exactly what the other person has
to offer. This situation is rare. As a result, people in societies that barter for goods spend great
amounts of time and effort making trades with one another. Bartering can work only in small
societies with fairly simple economic systems.
Unit of Accounting. Money is the yardstick that allows people to compare the values of
goods and services in relation to one another. Money that is a measure of value functions in this
way as a unit of accounting. Each nation uses a basic unit to measure the value of goods, as it
uses the foot or meter to measure distance. In the United States, this base unit of value is the
dollar. In Japan, it is the yen; in France, the franc. An item for sale is marked with a price that
indicates its value in terms of that unit.
Using money as the single unit of accounting provides a simple and convenient way to
compare the values of various items. By using money prices as a factor in comparing goods,
people can determine whether one item is a better bargain than another. A single unit of
accounting also allows people to keep accurate financial records - records of debts owed,
income saved, and so on. Businesspeople can better calculate their profits and losses over the
years by using a single money unit of accounting.
Store of Value. Money also serves as a store of value. You can sell something, such as your
labor, and store the purchasing power that results from the sale in the form of money for later
use. People usually receive their money income once a week, once every two weeks, or once a
month. However, they usually spend their income at different times during a pay period. To be
able to buy things between paydays, a person can store some of his or her income in cash and
some in a checking account. It is important to note that in periods of rapid and unpredictable
inflation, money is less able to act as a store of value.
The Types and Characteristics of Money
Anything that people are willing to accept in exchange for goods can serve as money. At
various times in history, cattle, salt, animal hides, gems, and tobacco have been used as
mediums of exchange. Each of these items has certain characteristics that it better or worse than
others for use as money. Cattle, for example, are difficult, to transport, but they are durable.
Gems are easy to carry, but they are not easy to split into small pieces to use.
The table below lists the major characteristics that to some degree all items used as money
must have. Almost any item that meets most of these criteria can be and probably has been used
as money. Precious metals, however, particularly gold and silver, are especially well suited as
mediums of exchange, and have often been used as such throughout history. It is only in more
recent times that paper money has been widely used as a medium of exchange.
Mediums of exchange such as cattle and gems are considered commodity money. They have
a value as a commodity, or good, aside from their value as money. Cattle are used for food and
transportation. Gems are used for jewelry.
Representative money is money backed by - exchangeable for - some commodity, such as

gold or silver. It is not in itself valuable for nonmoney uses, but it can be exchanged for some
valuable item. Like commodity money, the amount of representative money circulation, or in
use by people, is limited because it is linked to some scarce good, such as gold. At one time
the United States government issued representative money in the form silver and gold
certificates. In addition, private banks accepted deposits of gold or silver and issued paper
money, called bank notes. These were a promise to convert the paper money into coin or bullion
on demand. The banks were supposed to keep enough gold or silver in reserve - on hand to
redeem their bank notes. Often, they did not.

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THE FUNCTIONS AND CHARACTERISTICS OF MONEY

The Functions of Money

There are three functions of money

The Types and Characteristics of Money

Representative money is money backed by - exchangeable for - some commodity, such as

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