Money allows consumers to trade indirectly, know prices ofgoods and provides a means to save for future purchases. Money has beenfundamental in developing our modern international trade system and has evolvedalongside civilisation.
There is debate among economists regarding the originof cash, its nature, and primary functions. Is money created by the governmentor by the market? To answer this question, we must be critical of the importancefor understanding the business cycle and concluding the appropriate policytools to eliminate unemployment and reduce inflation (Kaboub, 2013).Money is defined and serves three basic function, a store ofvalue, medium of exchange and a unit of account. Money stems its value frombeing a store of value where it can be saved and used later, smoothing theirpurchases over time. Consider a £20 note that you misplaced in a jacket pocketa year, once found you will be delighted because the £20 still has value whichhas been in effect stored in the note. Money differs to others that store valuesuch as Houses, land and various commodities as money is easily redeemable forother commodities, accessible in many convenient denominations and its functionof a medium of exchange makes it appropriate store of value.
Money has risksassociated being a store of value as inflation decreases the value of money andperiods where inflation rises rapidly, many rely less on money as a store ofvalue and move towards other commodities such as gold.A unit of account which provides a common and consistentbase for prices. Knowing the price of goods in monetary terms allows thesupplier and consumer to make choices on quantity supply and quantitydemand. Without a unit of measurementaccounting, implementing, and establishing value would be difficult. A medium of exchange is money’s most important function as exchanginggoods and services is one of the most universal actions in society and toenable these exchanges people select and settle on money which can be used tobuy and sell from one another and we all agree to accept money in transactions.Without money, transactions would be operated in under a barter economy whichis problematic as one has to possess a good with value equal to the gooddesired. Money effectively removes the double coincidence of wants issue byacting as a medium if exchange which is acknowledge by all transactionsirrespective of desires for each other’s goods.
There are two types of money, money that has intrinsic valueand money that doesn’t. Commodity money has other value apart from being usedas money and possesses intrinsic value independently as it contains its ownworth. Throughout history numerous commodities have been utilized as a form ofcurrency, just as the money’s value derives from material that it consists ofand not a slightly subjective decree from a government body. The opposite tocommodity money is fiat money and it is derived from its value from duties ofthe law. Fiat money is intrinsically invalid and cannot be converted for anycommodity, it has value due the government valuing it for a specific purpose.