Money is what money does. Therefore it is defined as an instrument that serves as a medium of exchange, store of value and a standard of deferred Payments.
Forms of Money
Some important forms of Money are described as under:
(i) Fiat money and Fiduciary Money, and
(ii) Full bodied Money and credit Money.
(i) Fiat Money and Fiduciary Money
Fiat money refers to that money which is issued by order/authority of the Government. It includes all notes and coins which the people in a country are legally bound to accept as a medium of exchange.
Fiduciary Money is that money which is accepted as a medium of exchange because of the trust between the payer and the payee.
Example: Cheques are fiduciary money as these are accepted as a means of payment on the basis of trust, not on the basis of any order of the Government.
(ii) Full bodied Money and Credit Money
Full bodied Money refers to money in terms of coins whose commodity value is equal to the money Value as and when these are issued.
Example: A rupee coin during the British period in India was made of silver. Commodity value of the coin was equal to its Money value at the time of its issuing. Or, the market value of the silver contained in the coin was equal to Rs1.
Credit Money refers to that money of which money value is more than commodity value.
Example: What is the market value of the metal that the rupee coin. Otherwise, People would have melted the coins and sold the metal in the market at a price greater than one rupee.
Functions of Money.
(1) Primary functions
Money performs two primary functions, as under:
(i) Medium of Exchange: Money act as a medium for the sale and purchase of goods. This required double coincidence of wants. Implying that, exchange was difficult, and therefore, limited. Introduction of money has separated the acts of sale and purchase: Double coincidence of wants is no longer a limitation.
(ii) Measure of Value or Unit of Value: Money serves as a measure of value. In other words, it serves as a unit of Account. Unit of Account means that the value of each good or service is measured in the monetary unit. Measurement of value was very difficult in the barter System: one good was valued in the term of other. There was no common unit of value. Introduction of money has removed this difficulty. Now, each good is valued in terms of money.
It is because of the existence of money as a common unit of value that we are able to construct Consumer price index and wholesale price index. Index numbers reflects: (i) Cost of Living of the people, and (ii) rate of inflation in the country.
(2) Secondary or Subsidiary Functions.
(i) Standard of Deferred Payments: Deferred Payments refer to those payments which are made sometimes in the future. Money has made deferred Payments which are made sometimes in the future. Money has made of deferred payment much easier than before. When we borrow money from somebody, we have to return both the principal as well as interest amount, sometime in the future. Money is convenient mode of these payments. It is difficult to make such payments in terms of goods and services. Imagine that we have taken a loan from somebody in terms of wheat. How difficult it to return this loan in terms of wheat of the same quality?
(ii) Store of Value: Store of Value implies store of wealth. Storing wealth. Storing wealth has become considerably easy with the introduction of money. Wealth can be stored just in terms of paper titles like FDR (fixed deposit receipt). It was not convenient to store value in the barter System of Exchange. Because, goods tend to wear-out or perish.
(iii) Transfer of Value: Money serves as a convenient mode of transfer of value (wealth). Money value can be conveniently transferred (or can be e-transferred) to any part of the World. It is transfer of value, which has led to the emergence of MNCs ( Multinational Corporations). Accordingly, the concept of global economy has come into existence.