Definition of Money, Function and Types of Money

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You must have heard the expression time is money. This expression implies the importance of money, so wasting time is the same as wasting opportunities to earn money.

Sure enough, money has become an important part of the life of every individual. How come? Everything both goods and services must be purchased with money. Actually, what is money?


Definition of money

The general definition of money is anything that can be used as a medium of exchange. The medium of exchange itself in the economy means everything that is widely accepted by the community as a means of payment in the process of exchanging goods and services.

Money is defined differently according to classical or traditional and modern economics. In traditional economics, money is defined as all kinds of objects that can be used as a medium of exchange on the condition that these objects are accepted by the general public in an area.

Meanwhile, in the view of modern economics, money has a broader meaning. Money is everything in the form of objects that are generally accepted as a means of payment for buying and selling transactions of goods or services as well as wealth or other valuable assets, and at the same time as a means of paying for debt.

From these definitions, it can be concluded that money is an object that is generally accepted by people in an area in order to measure value, exchange, and pay for every transaction of purchasing goods and services, as well as hoarding wealth.

History of money

Money as a means of payment has a long journey in its development. Before it was widely known as it is today, people used to not use money to meet their needs. All the necessities of life are obtained by utilizing the surrounding environment.

In order to meet food needs, humans hunt and look for fruits. Clothing needs are met by making simple clothes from animal skins. Meanwhile, the need for boards is also made by themselves by building huts from the trunks or roots of large trees and straw or leaves as roofs.

Civilization began to develop, which resulted in a wider variety of human needs that had to be met. The results of their own production, both hunting and farming, are no longer able to meet all needs. Therefore, they try to find people who want to be invited to exchange their goods with other items they need. This exchange of goods is then called the barter system.

Economic activity continues to grow and is even more complex. It was increasingly difficult for people to find bartering partners who had the items they needed. In addition, people also find it increasingly difficult to get goods to be exchanged with an exchange value of nearly the same or equal.

The difficulties arising from this barter system gave rise to the idea of ​​using certain objects as a medium of exchange. Objects used as a medium of exchange are objects that are generally accepted, have high value, and are needed daily. At that time, the objects used as a medium of exchange were salt, shells, and animal shells that had other beauty.

Unfortunately, these objects are not durable because they are easily fragile. This created new difficulties. Apart from being fragile, the objects used as a medium of exchange did not have fractions, making it difficult to determine the value of money.

Next came coins such as gold and silver. Apart from being of high value, the two objects are easily broken down without reducing their value. Everyone has the right to make coins by smelting, hammering, and selling or using them themselves.

Along with the development of the economy, coins were considered difficult to be used as a medium of exchange for large transactions. Because of this, paper money was born, which at first served as proof of ownership of gold and silver.

This means that banknotes in circulation represent a 100% guarantee of gold and silver ownership stored in a gold or silver smith. Now in the modern economic era, gold and silver are no longer used as a medium of exchange or payment, but people have turned to paper money.

Money Function

Broadly speaking, the money function can be divided into two, namely the original and derived functions. Of the two functions of money, each of them has the following details.

The original function of money

As a medium of exchange. People no longer have difficulty making exchanges, where exchange is no longer using goods for goods, but goods for money. The existence of this money is certainly a solution to the difficulties that arise in the barter system.

As a unit of account. Money shows the value of goods and services being traded, the amount of wealth, and also calculates the size of the loan. Not only that, money can also be used to determine the price of goods and services. In this function, money has a role in facilitating exchange activities.

As a store of value (currency). The uniqueness of this function is that money can transfer purchasing power from the present to the future. People who get money for selling goods or services can save it for later use in buying goods or services in the future.

Money derivative function

As a legal means of payment. This function allows and simplifies the buying and selling of goods or services, both small and large quantities.

As a means of paying debt. This one function is related to the original function of money as a store of value, where money can be used to measure future payments.

As a means of hoarding wealth. For some people, especially those with excess income, money is not used entirely for consumption needs, but is set aside partly to be saved in the form of savings, current accounts, deposits, or investments for future needs.

As a means of transferring assets. Anyone can move assets from one place to another with money. For example, someone who owns a house in an area can move these assets to another area by selling it first and then buying assets in the new location.

As a means of driving the economy. The economy will develop further if the value of money is stable. This stability in the value of money can trigger a positive investment sentiment, where people will be tempted to invest so that the economy will grow and develop.

Types of money

Money has various types depending on its circulation and manufacturing materials, each of which can be described as follows.

Based on circulation

Currency. As money in circulation officially in the community, currency is a legal means of payment and must be used by the community in carrying out daily economic activities.
Checking money. Like currency, demand deposits also circulate in society, only to certain circles. This means that this type of money is not obliged to be used by the community to carry out transactions or daily economic activities. Demand deposits are generally owned by certain groups of people because they are in the form of deposits in banks that can be withdrawn as needed by using a pay order in the form of a check.

Based on the material of manufacture

Coin. As the name implies, this type of money is made of metal, which is usually gold or silver whose value tends to be higher and more stable than other types of metal. In this type of coin, there are three kinds of values, namely:
  • Intrinsic value is the value of the materials used to make currency.
  • The nominal value is the value stated in the currency.
  • Exchange rate is the value that can be exchanged for an item.
Of the three types of coin values, the value used is the nominal value. So, the value of the coin is in accordance with the nominal stated on the money.

Thus the article on the definition of money, functions, and types of money, hopefully it will benefit all of you.