Money allowsconsumers to trade indirectly, know prices of goods and provides a means tosave for future purchases. Money has been fundamental in developing our moderninternational trade system and has evolved alongside civilisation. There isdebates between economists concerning the origin of cash, its nature, andprimary functions. Is money created by the government or by the market? To solvethis question, we must be critical of the importance for understanding thebusiness cycle and concluding the appropriate policy tools to eliminateunemployment and reduce inflation (Kaboub, 2013).Money isdefined and serves three basic function, a store of value, medium of exchangeand a unit of account. Money stems its value from being a store of value whereit can be saved and used later, smoothing their purchases over time. Consider a£20 note that you misplaced in a jacket pocket a year ago, once found you willbe delighted because the £20 still has value which has been in effect stored inthe note.
Money differs to others that store value such as houses, land andvarious commodities as money is easily redeemable for other commodities,accessible in many convenient denominations and its function of a medium ofexchange makes it appropriate store of value. Money has risks associated beinga store of value as inflation decreases the value of money and periods whereinflation rises rapidly, many rely less on money as a store of value and movetowards other commodities such as gold.A unit of accountwhich provides a common and consistent base for prices. Knowing the price ofgoods in monetary terms allows the supplier and consumer to make choices onquantity supply and quantity demand. Withouta unit of measurement, accounting, implementing, and establishing value wouldbe difficult. A medium ofexchange is money’s most important function as exchanging goods and services isone of the most universal actions in society and to enable these exchanges peopleselect and settle on money which can be used to buy and sell from one anotherand we all agree to accept money in transactions. Without money, transactionswould be operated in under a barter economy which is problematic as one has to possessa good with value equal to the good desired.
Money effectively removes thedouble coincidence of wants issue by acting as a medium if exchange which isacknowledge by all transactions irrespective of desires for each other’s goods.There aretwo types of money, money that has intrinsic value and money that doesn’t.Commodity money has other value apart from being used as money and possessesintrinsic value independently as it contains its own worth. Throughout historynumerous commodities have been utilized as a form of currency, just as themoney’s value derives from material that it consists of and not a slightlysubjective decree from a government body. The opposite to commodity money isfiat money and it is derived from its value from duties of the law. Fiat moneyis intrinsically invalid and cannot be converted for any commodity, it hasvalue due the government valuing it for a specific purpose.