Money is anything generally acceptable as a medium of exchange. It is most common in the form of coins and banknotes. Before money was used, there was barter which involved the exchange of goods for other goods. Barter allowed trade to occur between countries. However, there were limitations. The main limitation of barter was that of the goods to be traded must have been of the same value. For example, if Barbados wanted to import $100.00 million worth of fruits from Japan and Barbados was willing to give vegetables to Japan for the fruits, the fruits and vegetables must be of the same exact value. Another problem with barter was that of indivisibility. Some goods are not divisible. For example, a car could not have been divided to obtain other items. The solution was money in the form of coins and notes which is legal tender.
Legal tender is any official medium of payment recognized by law that can be used to meet a financial obligation. The national currency is legal tender in practically every country.
Functions of Money
Money has four major functions; they are:
- Medium of exchange – consumers use money in exchange for goods and services which they buy.
- Unit of account – the unit of account is the unit in which values of goods and services are stated, recorded and settled. For example a cell phone is valued at TT$1000 while a notebook is valued at TT$20.
- Standard of deferred payment – this function of money allows for settlement of debts. Deferred payment means a payment made in the future. Money therefore allows for payments at a later date.
- Store of value – this function of money allows households to maintain the value of their wealth.
Characteristics or Qualities of Money
- Acceptability – in terms of a form of currency being accepted within society, money must be accepted by everyone in the economy. This acceptance is for the purpose of the exchange of money for goods and services.
- Divisibility – this relates to money being easily divided into smaller denominations for transactional purposes. It is necessary therefore for money to be easily broken down for different types of transactions. For example a $10 note can be broken up into two $5 notes or ten (10) $1 notes.
- Durability – this simply refers to the physical wear and use of money over a period of time. If money is easily destroyed or damaged it is likely that it is fraudulent and therefore cannot be trusted.
- Limited supply – in order for money to retain its worth, it must be limited in supply. The more money in circulation the less it is valued by the economy.
- Portability – it is necessary for money to be easily transported so that people can carry it around with them easily. This also allows for the ease of transaction so that money can be transferred from one place to another.
- Uniformity – depending on the different types of currency that are available, money within that specific currency must look the same. This also allows for money to be counted and measured accurately.
Types of Money
The following are the kinds of money:
Representative money - consists of token coins, other physical tokens such as certificates that can be reliably exchanged for a fixed quantity of a commodity such as gold. Representative money thus stands in direct and fixed relation to the commodity which backs it, Fiat money - is any money whose value is determined by legal means, rather than the strict availability of goods and services which are named on the representative note. Fiat money is created with a type of credit money (typically notes from a Central Bank) and usually trades against each other in value in an international market, as with other goods.