Money: its functions and characteristics
Money is anything that is regularly used to buy goods and services.
Normally, this is cash in the form of coins and notes but the
definition also includes bank deposits, cheques, debit cards and
credit cards. To be acceptable from a day-today practical
standpoint, money must also be portable and durable. However,
money can also be in the form of a valuable commodity such as
gold or platinum. In Russia, for example, oil has been widely
exchanged for imports such as buses and trucks from Hungary or
agricultural goods from Poland.
Economists also talk about near money. This is a term that is used
to denote non-cash assets that can be quickly and easily turned into
cash. Such assets include foreign currencies, savings accounts,
bonds and certificates of deposits.
(Continuation) Where there is hyperinflation, as in Zimbabwe and Venezuela in recent
years, people lose confidence in money. Many farm workers, for instance, have preferred
to be paid in produce as this will keep its value and can be easily swapped for other
things such as cooking oil, sugar or bread. The direct exchange of one good or service for
another in this way is known as barter. Where this is the only way of exchange, then the
process of trade and exchange becomes lengthy and difficult. It is also very impractical
since there must be a coincidence of wants, whereby both parties in a transaction actually
have the goods or services that the other wants. Money is therefore essential if the
processes of exchange and trade are to take place.
Zimbabwe’s descent into economic catastrophe was a long drawn-out affair. Following a
drop in agricultural production after controversial land seizures, exports fell and foreign
investors went elsewhere. The government sought to solve its liquidity problems by
borrowing from foreign banks, knowing that it could not meet its loan repayments. The
government made the situation worse by printing more money, much of which was used
to pay the army, police and civil servants. Eventually, inflation reached more than one
million per cent and local people lost all confidence in the Zimbabwean dollar. More
stability has come about since the country’s decision in 2009 to use the South African
rand, the Botswana pula, the pound, the euro and the US dollar for all transactions.
Bearing the above in mind, economists recognise the following four essential
functions of money:
1 A medium of exchange: Money is the ‘medium’, or form, that buyers use for
purchases; sellers are willing to accept this medium in exchange for these
purchases. By handing over money physically, or by transferring money
electronically through the banking system, this is a common, automatic
acceptance of money fulfilling this function.
2 A unit of account: Prices are quoted in terms of common monetary units. For
instance, in the USA dollars and cents are used, while in Pakistan rupees and
paise are used. This function is of relevance for current and future transactions
since it is quite clear just how much money is required for a particular
transaction. It also allows different values to be added, measured and compared.
Where money is borrowed, then the lender usually requires interest to be paid
for this privilege. The ‘account’ aspect allows the sum of money to be recorded
and for different values to be added or compared.
3 A standard for deferred payment: Not all payments we make are
immediate. Some household bills are paid monthly, others may be paid annually.
Following on from money as a unit of account, payments can be made in the
future once terms have been agreed between the parties involved.
4 A store of wealth: Money can be held or ‘stored’ for a period of time, usually
with a bank or other financial institution, before it is used. This important
function means that money is a measure of value over time. Where this value is
accumulated, then it represents a source of wealth to its owner. In 2011, the two
richest people in the world were both from the USA: Warren Buffet and Bill
Gates. Their personal wealth was in a wide range of assets, not just in bank
accounts. Money was the common basis on which their wealth was estimated.
These functions of money are vital for the smooth operation of all economies. If
any of the functions breaks down – as in the case of Zimbabwe, where money
lost all meaning as a store of value or wealth – economic collapse is the
inevitable outcome. It is therefore essential that a prudent government puts
economic policies in place to ensure that this does not happen.
