The Meaning and Function of Money

17.10.2021
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The Meaning and Function of Money

Money is any particular object which is normally accepted as payment for goods and/or services and payment of debts in a particular country or socio-cultural context. Money can be used for financial transactions, buying and selling of goods, services and commodities and even payments for various legal services. The main functions of money as defined by economists are: a medium of exchange; a measure of value used for the transaction process; a store ofvalue.

money

Why then does commercial bank money make money? There are two basic reasons for commercial bank money being considered money: first, it is a loan; and second, it is a stock of wealth which accumulates over time and is tradable. The value of this stock is not fixed because it is influenced by the market value of all other kinds of assets and liabilities of the borrowers of commercial bank money. This means that how much money the bank makes changes from day to day depends on how much it has lent out.

One kind of money, which we will look at in more detail below, is fiat money, also known as currency. Fiat money, because it can never be issued in a similar fashion to physical commodities (such as gold and silver) such as wheat, pork bellies and so on, is not backed by anything tangible. It is a kind of stock in trade. So how does this work?

Let us look at an example of how money works in practice. Say you want to purchase some goods from your local supermarket using your credit card. The shopkeeper takes your debit card and verifies the amount of money you owe him. He then offers you, in trade for your chosen goods, a standard unit of currency, usually the euro, which is then written on your debit card in small print.

The central bank then becomes the holder of this currency, which acts as legal tender for the exchange of goods. The value of this commodity money is set by the government, although it varies in relation to other factors such as current interest rates, inflation and political conditions. If you want to purchase more goods from the shop, all you have to do is withdraw the money from your account.

This is how money gets created through the process of currency exchange. Let’s now take a look at how the prices of commodities (that we are talking about here are not specific items) are determined. Commodities prices are determined by the prices of gold, crude oil, copper, wheat, pork bellies and so on. In turn, these prices are influenced by different things, including the economic standing of a country and its national economy in general, the stability of its banking system and even the standing of its central bank.

Money as we know it today is nothing but a very complex set of concepts. Let’s start with the definition of money as a medium of exchange. Money has always been considered as a medium of exchange or a source of financial security. Now, if you think about it carefully, it would appear that money is a very complex thing indeed. It certainly is not a free resource, since it has to be accepted by a third party in the form of commodity money and it usually has to be backed up by some physical commodity.

Take the case of money. You purchase food with your debit card and later on you pay for your dinner with your credit card. You may think that this transaction is completely transparent since you are only buying food, but the whole transaction happens inside the commodities market and since you did not have any physical commodity to back up your credit card, you automatically lose your money to the seller. Money therefore is used as a medium of exchange to make trade and sale of goods easier and simpler. This is why we see that in most cases, goods are not sold in the market by people themselves, but rather they are bought and sold by agents, banks and other big organisations that have the power to make the exchange.

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