Domashevska B.V.
Bukovyna State
Finance Academy, Ukraine
The functions of money in modern society
All people need money: every day, hour, minute. Money is very important for
our survival.
Money is used for buying or
selling goods, for measuring value and for storing wealth. Almost every society now has a money economy
based on coins and paper notes of one kind or another. However, this has not
always been true. In primitive societies a system of barter was used. Barter
was a system of direct exchange of goods. Somebody could exchange a sheep, for
example, for anything in the market place that they considered to be equal
value. Barter however was a very unsatisfactory system because people's precise
needs seldom coincided. People needed a more practical system of exchange, and
various money systems developed based on goods, which the members of a society
recognized as having a value. Cattle, grain, teeth, shells, features, skulls,
salt, elephant tusks and tobacco have all been used. Precious metals gradually
took over because, when made into coins, they were portable, durable,
recognizable, and divisible into larger and smaller units of value [4].
Money isn't just pieces of
paper.
Money is a medium that can be exchanged for goods and services and is
used as a measure of their values on the market, including among its forms a
commodity such as gold, an officially issued coin or note, or a deposit in a
checking account or other readily liquefiable account.
Money is an official currency, coins, and negotiable paper notes issued
by a government.
Money is any good that is
widely used and accepted in transactions involving the transfer of goods and
services from one person to another [2].
Money provides four key
functions for an economy: medium of exchange, unit of account, store of value, and standard of
deferred payment.
Medium of exchange means that
money is used to conduct transactions. . People use money to buy and sell
goods. Buyers give up money and receive goods. Sellers give up goods and
receive money. Money makes transactions easier because everyone is willing to
trade money for goods and goods for money.
To see why money makes transactions easier, let’s consider a barter economy that has no
money, where one good is traded directly for another. In other words, in a barter system, exchange can take place only if there is a double
coincidence of wants between
two transacting parties. The likelihood of a double coincidence of wants,
however, is small and makes the exchange of goods and services rather
difficult. Money effectively eliminates the double coincidence of wants problem
by serving as a medium of exchange that is accepted in all transactions, by all
parties, regardless of whether they desire each others' goods and services.
The second function (unit of
account) means that money is being used as the common benchmark to designate
the prices of goods throughout the economy. Unit of account, or measure of
value, means that money is functioning as the measuring unit for prices. In
other words, prices of goods are stated in terms of the monetary unit.
The
reason is that sellers are willing to trade for, and buyers are willing to give
up, the medium of exchange--money. That is why money is the medium of exchange.
It is used for exchanges.
Using money as the unit of account for prices, however, also provides a
measure of value - how much value buyers and sellers place on a good.
The third function, store of
value, emerges because money is one way of postponing the satisfaction obtained
from using or consuming goods until a later time. Value is obtained from a good
when it is consumed, when it is used to satisfy wants and needs. The value from
consuming goods can be stored in several different ways, one of the best is
money. The problem with storing value of money is the changes of the price.
As a store of value, money is not unique; many other stores of value
exist, such as land, works of art, and even baseball cards and stamps. Money
may not even be the best store of value because it depreciates with inflation.
However, money is more liquid than most other stores of value
because as a medium of exchange, it is readily accepted everywhere.
Furthermore, money is an easily transported store of value that is available in
a number of convenient denominations.
This fourth function means
that money is used as a standard benchmark for specifying future payments for
current purchases, that is, buying now and paying later. This function may seem
obscure, but it is a direct result of the store of value and unit of account
functions [3].
Using
money as a standard of these deferred payments is a direct consequence of the
functions of money as the unit of account and store of value. If money is the
standard for current prices, then money is also the standard for future
payments based on those prices. But, if money function as a deferred payment
standard, it must retain value, it must store value. The key to storing value of
money is price inflation.
Many people claim that one of the factors of life,
which is undoubtedly of greater importance than money is health. As Izaak
Walton said, health is 'a blessing that money cannot buy'. Besides, money is of
little consolation to those who are suffering from health problems. Despite the
fact that money can be paid for the best medical care available, it does not guarantee
long life [1].
In addition, most people would agree that personal
happiness easily outweighs money in importance. Even if an individual is
extremely rich, this does not necessarily lead to happiness. In some cases, the
contrary is true and vast wealth brings with it a whole range of problems and
insecurities. Genuine happiness cannot be bought and is usually independent of
financial status.
Money is certainly something which is often discussed
in today's world.
The literature:
1.
Bernstein,
Peter, A Primer
on Money and Banking, and Gold, Wiley 2008, pp29-39
2.
Francis
Radice. English for Banking – London and Basingstoke: Macmillan Publishers,
2005. – 156 p.
3. Mishkin K., Frederic S. The Economics of Money, Banking and Financial
Markets (Alternate Edition). Boston: Addison Wesley. p. 8.
4. [http://en.wikipedia.org/wiki/Category:Money]