Money-Role of Money In Economic System
What Is Money?
Dr.Sachidanand Sinha
B.A.Part-1(Hons.) ( Paper-2)
Money is an economic unit that functions as a generally recognized medium of
exchange for transactional purposes in an economy. Money provides the service of
reducing transaction cost, namely the double coincidence of wants. Money originates in
the form of a commodity, having a physical property to be adopted by market
participants as a medium of exchange. Money can be: market-determined, officially
issued legal tender or fiat moneys, money substitutes and fiduciary media, and
electronic cryptocurrencies.
Understanding Money
Money is commonly referred to as currency. Economically, each government has its
own money system. Cryptocurrencies are also being developed for financing and
international exchange across the world.
Money is a liquid asset used in the settlement of transactions. It functions based on the
general acceptance of its value within a governmental economy and internationally
through foreign exchange. The current value of monetary currency is not necessarily
derived from the materials used to produce the note or coin. Instead, value is derived
from the willingness to agree to a displayed value and rely on it for use in future
transactions. This is money's primary function: a generally recognized medium of
exchange that people and global economies intend to hold, and are willing to accept as
payment for current or future transactions.
Economic money systems began to be developed for the function of exchange. The use
of money as currency provides a centralized medium for buying and selling in a market.
This was first established to replace bartering. Monetary currency helps to provide a
system for overcoming the double coincidence of wants. The double coincidence of
wants is a ubiquitous problem in a barter economy, where in order to trade, each party
must have something that the other party wants. When all parties use and willingly
accept an agreed-upon monetary currency, they can avoid this problem.
In order to be most useful as money, a currency should be: 1) fungible, 2) durable, 3)
portable, 4) recognizable, and 5) stable. These properties ensure that the benefit of
reducing or eliminating the transaction cost of the double coincidence of wants is not
outweighed by other types of transaction costs associated with that specific good.
Fungible
Units of the good should be of relatively uniform quality so that they are interchangeable
with one another. If different units of the good have different qualities, then their value
for use in future transactions may not be reliable or consistent. Trying to use a non-
fungible good as money results in transaction costs of individually evaluating each unit
of the good before an exchange can take place.
Durable
The physical character of the good should be durable enough to retain its usefulness in
future exchanges and be reused multiple times. A perishable good or a good that
degrades quickly with use in exchanges will not be as useful for future transactions.
Trying to use a non-durable good as money conflicts with money's essentially future-
oriented use-value.
