Anything is Money, which is generally acceptable as a medium of exchange, and at the same time it must act as a measure and a store of value. Anything implies a thing to be used as money need not be necessarily composed of any precious metal. The only necessary condition is that, it should be universally accepted by people as a medium of exchange.

Functions of Money

Money performs five important functions:-

  1. Medium of exchange: Money acts as a medium of exchange as it's generally accepted. On the payment of money, purchase of goods and services can be made i.e. goods and services are exchanged for money. Money bifurcates buying and selling activities separately so it facilitates the exchange transactions.
  2. Measure of value: Money is a common measure of value so it is possible to determine the rate of exchange between various goods and services purchased by the people. Exchange value of commodity can be expressed in terms of money. For e.g. we can say that 10 metres of Cotton Cloth cost $220 dollars or 10,000 rupees only.
  3. Store of value: Money acts as a store of value. Money being generally acceptable and its value being more or less stable, it is ideal for use as a store of value. Being non-perishable and also comparatively stable in value, the value of other assets can be stored in the form of Property can be sold and its value can be held in money and converted into other assets as and when necessary.
  4. Standard or Deferred payment: Money is also inevitably used as the unit in terms of which all future or deferred payments are stated. Future transactions can be carried on in terms of The loans, which are taken at present, can be repaid in money in the future. The value of the future payments is regulated by money.
  5. Transfer of value: Value of any asset can be transferred from one person to another or to any institution or to any place by transferring money. The transfer of money can take place irrespective of places, time and Transfer of purchasing power, which is necessary in commerce and other transactions, has become available because of money.

Types of Money

There are four types of money.

  1. Commodity money: Commodity money started as barter. The exchange of cattle and sheep advanced to one of gold and silver because metals are not perishable, their purity and weight can be measured easily and they can be traded for any good or service. Unlike diamonds, metals can be melted down and reformed into smaller quantities for smaller purchases without losing value.
  2. Representative money: Representative money is money that consists of token coins, paper money or other physical tokens such as certificates, that can be reliably exchanged for a fixed quantity of a commodity such as gold or silver. The value of representative money stands in direct and fixed relation to the commodity that backs it, while not itself being composed of that commodity
  3. Metallic money: Metallic money refers to coins made out of various metals like gold, silver, bronze, nickel, etc. A coin is a piece of metal of a given size, shape, weight and fineness whose value is certified by the State.
  4. Paper Money: Paper money consists of currency notes issued by the State Treasury or the Central Bank of the country. In India, one rupee notes are issued by the Minister of Finance of the Government of India, while all other currency notes of higher denominations are issued by the Reserve Bank of India.
  5. Credit Money: In modern economic societies, with the development of banking activity, along with paper money, another form of convertible money has developed in the form of credit money or bank Bank demand deposits, withdrawal by issuing cheques, have started functioning as money, and cheques are now conventionally accepted as a mode of payment by the business community in general.