Functions of Money:
Money is something which people generally accept in exchange for a good or a service. Money performs four main functions: a medium of exchange for buying goods and services;
a unit of account for placing a value on goods and services; a store of value when saving;
a standard for deferred payment when calculating loans.
Properties or Characteristics of Money
Any item which is going to serve as money must be:
acceptable to people as payment;
scarce and in controlled supply
stable and able to keep its value
divisible without any loss of value
portable and not too heavy to carry.
Origins of Money
The earliest method of exchange was barter in which goods were exchanged directly for other goods. Problems arose when either someone did not want what was being offered in exchange for the other good, or if no agreement could be reached over how much one good was worth in terms of the other. Valuable metals such as gold and silver began acting as a medium of exchange. Governments then decided to melt down these metals into coins. By the seventeenth century people were leaving gold with the local goldsmith for safe keeping. Receipts of £1 and £5 were issued which could then be converted back into gold at any time. Soon these receipts were recognised as being 'as good as gold' and were readily taken in exchange for goods. Goldsmiths became the first specialist bankers and their receipts began to circulate as banknotes. Only the Bank of England can now issue banknotes in England and Wales. However, notes are not usually used to buy expensive items such as cars. The buyer is more likely to write out a cheque, which instructs his bank to transfer money from his account into the account of the seller. Hence bank deposits act as money. Commercial Banks
Banks are authorised institutions and perform four functions. They accept deposits, make loans, arrange payment of bills and provide a number of...