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FUNCTIONS, PROPERTIES AND KINDS OF MONEY

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In the function of money a commodity must be widely accept­able to the population of the region or country. There must be not only its voluntary acceptability, it must also be recognized by the government of the country and have legal acceptability - that is, payment with this commodity must be regarded as a legal means of settlement of debts. To acquire acceptability a commodity must have the following attributes:

Medium of exchange: To serve as a medium of exchange, people must be willing to give and receive the commodity in exchange for goods and services. More significantly a medium of exchange allows peoples to specialize in particular areas, so that they and the economy can become more efficient. Individuals can specialize in a job or profession that is the most advantageous to them. They will receive money for their labour and in exchange will be able to purchase the fruits of other people's labour. With this specialization, the volume of trade increases, the range of services and goods expands and money assumes a greater and greater role in the economy. Specialization is now so far advanced that it is almost impossible for any family to be self-sufficient in a modern society.

Store of value: Let us assume that cabbage is money and that we have it, say, £1,000's worth. If we hold it for a long time it will go bad and deteriorate in value. But if we sell the total stock for £1,000 we can hold the money in a bank without loss. This money can be used at any time for purchasing other goods. Of course, if we want to hold the money, we can invest it in an interest-bearing account and so obtain additional funds.

Unit of account: To act as a unit of account, money must be able to place a specific value on goods and services. Thus, it is able to act as a measure to value goods relative to other goods. It is a yardstick which enables people to compare the relative value of goods and services. In the UK we use the pound for valu­ing our income and household expenditure. UK businesses use the pound for pricing their goods and calculating their profits and losses. At government level, the pound is used to calculate the national income, government expenditure, and so on.



Standard of deferred payment: We have mentioned that money acts as a medium of exchange and as a unit of accounting, that its debts are stated in a currency and are settled in that cur­rency. But in modern society contracts are made for settlement at some future date. For example, a national savings certificate, repayable in five years' time, will have a future known value. Contracts made between one person and another, for completion at some future date, will have to show the amount to be paid or received on conclusion of that contract. Money must, therefore, act as a standard of deferred payment.

In order to fulfill the functions of money, a commodity must have the following properties.

Portability: Money should be easy to carry and easy to trans­fer when purchases are made anywhere in the country. If it is not portable, it cannot be widely used. With inflation, the carrying of large numbers of notes can be a nuisance, so that in due course the authorities will withdraw the notes of lower denomination and issue notes of higher denomination.

Durability: Money that does not have durability (e.g. cab­bage) will very quickly lose its value. Notes of Bank of England have a life expectancy of about six months and are quickly re­placed by the authorities.



Divisibility: Money must be capable of being divided into smaller units to allow the purchase of cheaper goods. The value of the sum of each part must equal the whole, for example five 20-pence pieces must equal £1. Some monies in the past have been indivisible, for example, alive horses, - would five one-fifths of a horse be equal to the value of one alive horse?

Stability: Today this is perhaps one of the most important properties of money. With very high inflation, people would not be keen on either to hold money or to use it. The value of goods could not then be accurately ascertained, and other commodity would be used as a medium of exchange.

Transferability: Closely linked with stability is the ability to transfer money easily and without any legal process. It should therefore be easily exchanged for goods and services.

Recognizability: All units of money must be equal in size, shape, weight, content and must be easily recognized for their worth. Counterfeit money often comes into circulation, which makes recognition difficult.

Most of the terms referring to various kinds of money have been already introduced. In view of the large number of terms in use, some of which mean the same thing, it is worth pausing to recapitulate. Coins refer to all metallic money. Examples are the Юр and 50p coins in your pocket. Notes refer to paper money. Taken together, notes and coins are commonly referred to as cash or currency. Deposit money or bank money refers to deposits held at banks.

Legal tender is money that must be accepted if offered in payment for a purchase or settlement of a debt. In the UK, legal tender consists of coins (up to certain maximum amounts) and notes. Cheques drawn on bank deposits are not legal tender, although they are commonly used in purchases and in the set­tlement of debts.

Money is said to be convertible if it can be converted into some other form of money that is legal tender. In the UK, bank deposits are convertible money since they are convertible into legal tender and they are so converted every time a customer withdraws currency from his bank account.

Convertible money is said to be backed by the legal tender into which it can be converted. It is "fully backed" if, for every unit of convertible money outstanding, there is a unit held in reserve. Convertible money is said to be "partially backed" if the reserves held to back it are only a fraction of the amount of convertible money outstanding. Money that is not convertible into anything is said to be fiat or inconvertible money. It is legal tender, but it is not convertible into anything else of value that backs it.

Today, all notes and coins in circulation are fiat money. Modern coins, unlike their predecessors, contain a value of metal that is characteristically only a minute fraction of the face value of the coin. Nevertheless, they function satisfactorily as money. Since notes and coins are acceptable, they are medium of exchange; since their purchasing power remains relatively stable in normal times, they are a satisfactory store of value; and they also serve as a unit of account and a standard of deferred payments.

 

 


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