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The functions of money can be classified into two major forms: the primary functions and the secondary function of money.
Nature of Money
A reasonable part of the output produced in our society today results from the communally organized productive activities of the people who efficiency and development depend on the existence of three major conditions.
These conditions include:
- The ability to make rational decisions in the use of resources and outputs
- The installation of an effective means of co-ordinating these decisions.
- The existence of a variable means of settling efficiently, the innumerable exchanges in the system.
The economy is able to absorb and facilitate these process because it runs on money.
An individual use money to purchase goods and services, while businesses use it to expand production.
National government use it to satisfy social wants. The interaction of these economic units also creates economic problems such as inflation arising from the productive and exchange activities of business and households, with its disruptive effect on economic life, and depression which is often accompanied by unemployment of men and machines.
Solutions to these problems must involve monetary measures and these in turn requires a knowledge of how money functions and how its working can be regulated.
Money does not however always function properly. It’s performance frequently leaves it’s effect upon all people.
Sometimes businesses, individuals and government, all feel that there is a shortage of funds as in periods of recession or inflation such that people are forced to reduce their spending in the face of rapidly rising prices.
The role of money can be viewed as facilitating the functioning of the economy through such functions as a unit of account, medium of exchange and store of value.
Talking about value, the value of the national monetary standard affects directly the lives of the individuals accustomed to using it.
At the international level, the interdependence of world economy implies that alterations of the monetary standard in one count may have serious effects upon the world economy and upon the welfare of other nations and their citizens.
For instance, the devaluation of the United States Dollar or the British Pound Sterling affects not only the lives of Americans or British citizens but also the level of world economic activities and the lives of citizens in Canada, France, Asia and other nations.
Functions of Money
The functions of money can be classified into two major forms: the primary functions of money and the secondary functions of money.
The primary functions refers to the use of money as a unit of account and as a medium of exchange, while the secondary functions includes the use as a means of deferred payment and as a store of value.
Money as a Unit of Account
As a unit of account, money is a fundamental measure of value and thus facilitates the accounting of one item against another.
It makes it possible for us then to express the value of all our goods and services on a common basis and measure the transactions in them in an economic society,
For us in United States of America, our unit of exchange is the Dollar, Pound Sterling for the British, etc.
These units are more or less abstract measures of value just as the kilogram and gram are abstract measures of weight, but with them we can relate one quantity or value to another.
The thing which serve as money in our economy that is currency and cheqing deposit are also expressed in terms of unit of account.
Money as a medium of exchange
Money acts as a medium of exchange in terms of its use as a means of payment for things or debts when purchases are made of either goods or of services.
In that function everyone struggle to acquire it through using our productive resources and then in turn use money to make our purchase.
It gives one a generalized command over goods and services. Money as a medium of exchange is probably as old as mans organized economic activities.
Many different things have served as the means of exchange from ancient times – gold, stones, paper, goats and account with a bank are only a small fraction of the complete list of things that have served as money.
Without money, the exchange process would be cumbersome, hence it serves as a facilitator.
Money as Standard for Deferred Payment
Money serving as a standard for deferred payment implies futurity and deferment between a debtor and a creditor, that means that money as a unit of value is important not only for current exchange but also for transactions or contract drawn from the future.
Contracts are often drafted in money sums. It may be the case of a lending agreement requiring repayment in one day or in 10 years or that of an employee who starts work on Monday on the promise of receiving payment on Friday.
Again, we can think of the instance of a bond – which is the contractual promise of a company to make periodic interest payments to bondholders and to redeem the bond at full face value at some specific time in the future.
The principal and interest on these bonds are usually paid in the form of money.
This money is both the standard by which deferred payment of bond interest are reckoned and the means by which these payments are made.
Money as a store of Value
Money serves as a store of value because it is widely accepted and represents, in effect, generalized purchasing power.
People desire it not only for the payment of their consumption of goods and services but also for their expected future consumption of these and other items.
Again, many people use money as a precaution against such contingencies as the loss of a job, fire disaster or accidents or for medical emergencies.
Note that, money is not only the store of value. Value can be stored in other commodities or assets such as stocks, bonds, life insurance policies, real estate, etc.
All these and more are the functions of money from the inception of the barter system.