IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.
Today, money is an important matter for all things because money performs various and unavoidable functions. Money helps people to label value for goods and services. Any way evolution of money is considering as one of the greatest milestones in the history of human beings. In ancient times, livestock, food grains etc were accepted as money. Later many evolutions witnessed in the economic dealings. And now, we arrived at a destination which enable us to use highly developed form of money like plastic money, e-money etc. Anyhow, this essay is aimed to understand what is money, and different types of money or different forms of money and their functions.
What is Money ?
Giving a perfect definition for money is something very difficult. Various economists and monetary experts defined money from different angles.
“money is what money does”.
— Sir John Hicks
Types of money
Generally there are two types of money like commodity money and fiat money.
Commodity money: commodity money was widely used before many years back. Commodity money refers to a particular type of commodity which is widely acceptable for making transactions. In olden times agricultural products, livestock, gold, silver etc were used as money. Even though these commodities were accepted as a medium of exchange it performed many other functions too. For example gold was commodity money which used not only for making transactions but also for other purpose like store of wealth, security etc. But now, commodity money has no much significance.
Fiat Money: Now, fiat money is a type of money widely accepted all over the world. Fiat money has no intrinsic value, but having value for making transactions which promised by government or currency issuing authority. For example, now we use paper money for making exchanges but in reality the paper has no any intrinsic value or metal value. But the value is on the sanction of government or central bank.
Compared to commodity money, fiat money is reduced the complexity and the cost for making transactions. In short, fiat money is the existing type of money in the world.
Forms of Money
According to the nature and uses there are different forms of money. Some of them are very briefly explained below.
a) Money of Account:
Money of account refers to the unit in which the transactions of an economy are settled. It may vary from economy to economy. For example, in U.S economy transactions are accounted in Dollar, in Indian economy it is in Rupees, in European economy it is in Euro and so on. The entire transactions of such economies are delivering by money of account.
b) Legal Tender Money
Legal tender money is one which is sanctioned legally, since it ensures the acceptability of money. That is any amount of debt can be paid by the money. Generally legal tender money includes both notes (with high face value) and coins (with less face value). In India paper currency or notes have the quality of unlimited legal tender while coins lack. That is coins cannot used to pay huge amounts, it creates difficulties. In such a case the money receiver can reject the payment. So, it shows limited legal tender of the money.
c) Standard Money
If the entire value of an economy’s transactions is measured in a particular label, then we can say it as standard money. For example; Dollar, Euro, Rupee, Yen etc are standard money forms, and the goods and service s are measured based on these standard money. It includes all the coins and notes. So, it performs the quality of legal tender money.
d) Full Bodied Money
Full bodied money is a form of money which is based on the intrinsic value. That is the face value of the money will equal to the metallic value contained in the money. Actually this form of money was widely used in olden times.
e) Token Money
This is the advanced form of full bodied money. Token money is a form of money in which the face value is greater than the metallic value. Today almost all the money is coming under this form. We use paper notes of high values, but the metal value of the paper is very less.
f) Bank Money / Deposit Money
Bank money refers to the deposits in the bank. Generally there are two types of deposits like time deposits and demand deposits. Time deposits are deposited by the people based on a specific maturity date. At the same time demand deposits are widely assisting the business people and allow to deposit and withdrew at any time.
g) Inside Money and Outside Money
Today, people are borrowing loans and advances from financial institutions. That is the private debt of inside the economy. This is actually meant by inside money. In other words inside money is the quantity of money which created from endogenous private sector, and it is the debt of private units.
On the other side, outside money is the amount of money in the economy which created by exogenous unit, that is government. So, government issued money is called outside money.
Functions of Money
Money performs numerous functions. For simplicity the entire functions can be classified under three heads like primary functions, secondary functions and contingent functions. Each of them is very briefly described below.
I – Primary Functions
Primary functions consist of two main functions like money as a measure of value and as a medium of exchange.
Measure of value: Money use as a tool to measure the value of goods and services. In olden times commodities were used as money. But it lacks the quality of measuring the value of goods and services. Now, modern form of money is more easy to assign value for any commodity. Any commodity can be measured in monetary terms.
Medium of exchange: Medium of exchange is simply refers, using of money for buying and selling. Now, we use money to purchase something and the same money can be further use for anything what the shopkeeper wanted to. That is economic transactions or exchanges are delivering through the medium of money.
II – Secondary Functions
Secondary functions of money include two functions like money as a store of value and as a standard of differed payments.
Store of value: This function refers to the transferring of present purchasing power to coming days or months. That is people hold money for aiming future. Since, money has high liquidity people like to store value in terms of money.
Standard of deferred payments: Since the value of money is less stable (normally) today’s credit transactions are accounted in money, but the debt may paid only in future. Here the current credit transactions are measured in money with a future value. This function of money may not true in economic instability conditions like inflation, deflation etc.
III – Contingent Functions
There are many other functions which money is performing other than primary and secondary functions. Some of them are listed below.
a) Money assists to transfer of value
b) Medium for making compensations
c) Money determines total production and consumption etc.
d) National Income or total output of an economy can measured in money
e) The amount of is the base for determining the solvency of a person or a firm. Etc.
Irenee on February 06, 2019:
Thank you, you made my assignment so easier.
LOLLO on February 06, 2019:
functions of money is it in terms of India
icv (author) on March 28, 2016:
Thanks Venkatachari M for your comments.... I hope, It will be useful to those who are interested in Banking and finance.
Venkatachari M from Hyderabad, India on March 27, 2016:
Very informative article. Types and forms of money are explained very well by you in this article.
icv (author) on July 09, 2015:
Thanks Rachel Alba for your comment... Money is a wonderful concept we are all using with out knowing its many factors... It can bring many socila changes in the society if we use it in a right way...
Rachel L Alba from Every Day Cooking and Baking on July 01, 2015:
I knew we needed money but never thought of the many factors of it. Thanks for the information. I voted up and useful.
Blessings to you.