Money: definition, characteristics, and functions

Money, which lies at the heart of economic mechanisms, is a difficult concept to define. The concept covers several definitions, each of which gives a meaning to money.

Definition of money

Etymology of the term

The word “money” comes from the Latin word “moneta”, meaning “that which warns”. There is therefore no link between this Latin name and the meaning of this element called “money”.

Some definitions from economic literature

“Money is a commodity generally accepted within a payment community” R. BARRE

“Money is the modern intermediary of exchanges and the unit of account in which prices and debts are expressed” P. SAMUELSON

“Money is a specific good which makes it possible to measure the value of other goods, acts as an intermediary in the exchange of goods and can, finally, be kept or lent in the expectation of a later exchange for goods” M. MARCHESMAY

Mr Friedman advocates that “any good that can provide a provisional guarantee of general purchasing power can be used as money”.

M. de Mourgue proposes the following institutional definition: “Money is the instrument of exchange which allows the immediate purchase of all goods, services and securities, without transaction costs or search costs, and which retains its value between two exchanges. It is a social phenomenon because it is based on the confidence of agents in the system that produces it”.

François Perroux proposed the following functional definition: “money is an indeterminate, general and immediate instrument of payment”.

There are many definitions of money, but they generally focus on the functions it performs in the economic and social context.

Characteristics of money

Following this non-exhaustive inventory of definitions, it is clear that money is characterised by a set of features that can be summarised as follows:

The first fundamental characteristic associated with money is that its nature is very similar to that of a public good. The benefits that an individual can derive from its use come exclusively from the fact that other people are already using it.

Unlike a private good, which has a utility independent of the number of consumers, the utility of money is zero if there is only one agent using it. It only has value for an individual if others use it. Similarly, consumption by any one individual in no way reduces consumption by others (absence of rivalry).

A second characteristic of money is that it is not considered to be a consumer good, since it does not provide direct satisfaction. Nor does it constitute technical capital, since it cannot be included in a productive combination of factors of production.

Furthermore, the decision to hold money is based on the individual’s confidence in the stability of its value. For a particular currency to be accepted, economic agents must be sure that the issuer will do nothing that could lead to its depreciation.

Based on the trust of its users, money is thus seen as a symbol of the social relations that unite agents within a monetary community, which is generally the nation.

However, certain monetary instruments can be used across borders and acquire the characteristics of international currencies (Dollar, Euro, Gold, etc.).

Another characteristic of money is its institutional basis. In its current form, it no longer has any intrinsic value. Its value is fixed and guaranteed by the State. It is said that the State confers on money “a liberatory power”.

Finally, money has a particular quality, which is that it is immediately convertible into any good or service. As a result, it offers those who possess it a wide range of choices (money is said to “carry choice”).

At the end of this conceptual review, it is appropriate to briefly understand money as a symbolic good, guaranteed by the State and accepted as a general, indeterminate and immediate means of payment within a monetary community.

Symbol: Symbol or sign money is a payment instrument whose value or purchasing power as money far exceeds its cost in other uses. In modern economies, this form of money has three main characteristics: the uniqueness of the issuer, the forced exchange rate and the legal tender rate.

General: This means that money must be accepted everywhere, by everyone and at all times.

Indeterminate: This means that money must be able to be used to settle any debt or buy any good.

Immediate: This means that the currency can be exchanged without transformation and without risk of capital loss.

Functions of money

As recommended by R.G. Hawtrey, some objects find their best definition in the use we make of them: this is the case of money.

Since antiquity, it has been traditional to attribute three functions to money: intermediary of exchange, store of value and unit of account.

Money as a medium of exchange

The main function of money is to facilitate exchange. It is a specific good that is exchanged for goods and services. It is therefore an essential intermediary in the exchange of goods.

Originally, exchanges were carried out by means of barter. Barter is the exchange of goods for goods, meaning that if someone wants to obtain a good, they must offer another good in return. The barter economy is a system in which there is no money.

Certain conditions have to be met for the barter system to work: the barter economy presupposes a small community of individuals, a limited supply of goods, a twofold coincidence of desires, and the prices of goods must be easy to establish and equally incontestable.

In reality, these conditions were difficult to meet, which led human societies to feel the need to adopt a common standard accepted by everyone. That standard was money.

Money was introduced to deal with the constraints of bartering, such as the time and cost of research, the constraints of double coincidence of desires and the calculation of the value of goods.

Clearly, the emergence of money was no accident. It came into being in response to the obstacles preventing the development of transactions and, consequently, the development of the economy.

Money as a unit of account

As a unit of account, money is a measure of value. The value of a good expressed in money is the price of that good. The price is therefore the monetary representation of the value of the good.

This function has made it possible to abandon the notion of relative price, whereby the price of one good is expressed in terms of the quantity of the other good (example: a television costs 3,000 euros and a computer costs 9,000 euros. The computer costs 3 televisions. The relative price of the computer = 9000/3000 = 3). On the other hand, this function is used to determine the absolute price, which is expressed in a unique form by a number (example: the price of good A is equal to 100 euros).

Money is used not only to determine the value of a good, but also to make comparisons in space and time. In spatial terms, money makes it possible to compare the prices of different goods on the same market on the one hand, and to compare the price of the same good on different markets on the other. In terms of time, money makes it possible to anticipate prices.

Money as a store of value

In the barter economy, buying transactions are simultaneous and instantaneous, whereas with money, it becomes possible to sell without buying.

In general, there are two cases: money can be exchanged for any good, or it can be kept for later use, and therefore purchasing power is deferred. In this respect, money becomes part of the assets of economic agents and a means of accumulating value (securities, gold, property, etc.).

The limits of the 3 functions of money

To play its full role in trade and maintain its power as a medium of exchange, money must circulate in sufficient quantity, because if it is scarce, trade will fall.

What’s more, money is tending to lose more and more of its functions, both as a unit of account and as a store of value. This is due to the instability of its value over time, which is a function of the general level of prices and the quantity of money in circulation. If the general price level rises, the value of money falls, and if the price level falls, the value of money rises.

Secondly, the instability of the monetary unit cannot preserve purchasing power. In the case of depreciation, economic agents are more inclined to get rid of the currency by exchanging it for goods that are not likely to lose value.

In short, money is a fundamental part of our lives. It permeates our daily lives, giving them a social character. Its emergence highlighted the limits of its absence and led the economy towards development and expansion.

Accepted by all through its principal functions, money has become an object. And more than an object, it is a bearer of choice and is distinguished by the property of liquidity, whereby money is a means of immediate payment.

Finally, money is an indeterminate and unallocated medium.

Conclusion

In conclusion, money is a central element of the modern economy. It facilitates the exchange of goods and services by providing a commonly accepted medium of exchange and a unit of account for measuring value. Money also stores value and is an important instrument of monetary and economic policy.

Translated with DeepL.com (free version)

Previous articlethe 4 forms of money
Next articleWhat Is Promotion Mix? Explained

LEAVE A REPLY

Please enter your comment!
Please enter your name here