What Is Money?
Money is defined by the Webster’s dictionary as “a medium of exchange in which money is transferred from one person to another.” Money is any tangible or verifiable asset that is usually accepted as payment for specific goods and/or services and payment of debts, including taxes, in a certain country or cultural context. The general function of money in our modern economy is to facilitate commerce, provide incentives to encourage production, guarantee the return of investment and facilitate the transfer of funds from one nation to another. In addition, money has a general role to play in the accounting process and in price determination both within a market based economy and in the international market.
A medium of exchange, like money, is a means of payment that gives the seller or buyer the capacity to purchase goods with just cash and barter for other goods or services. It is a means of exchange that has certain characteristics that make it easy to identify, process, transfer, and calculate the value of a transaction. It is usually issued by a government or central bank backed up by a collateral. This usually facilitates the efficient transfer and effective measurement of transaction costs between buyers and sellers.
A medium of exchange is normally chosen because it offers a platform that facilitates both transaction costs and efficient transfer of information. Money is a scarce resource so it can be used as a tool to improve efficiency in all economic activity. Money, unlike plant and physical plant, is not destroyed in the process of trade and therefore money is not wasted.
Money facilitates trade because it is a scarce resource that, when properly managed, maximizes productivity. Money, as distinguished from plant and physical goods, is not produced out of the ground but rather is issued from a bank, deposited in an account, and spent as credit on goods and services that are the object of exchange in the market. Money, unlike plant and physical goods, cannot be destroyed in the process of trade. Therefore, it serves as a tool for efficient transfer of information and payment between sellers and buyers.
In contrast, an inferior money like bank notes serve as a medium of exchange only because its supply is controlled and, hence, its value appreciates with the increase of demand for the underlying goods. Unlike the production of goods and services, money production is not linked to the growth of the production of goods and services. Banknotes, unlike plant and physical goods, are not produced out of the ground but rather are issued from a bank and are thus intrinsically worthless. The concept of deferred payment is important here because deferred payments ensure the protection of money from loss through increase in demand.
Deferred payment refers to the holding of money as an asset and not as a liability. Money is a medium of exchange only when properly managed. A money problem occurs when there is an excessive accumulation of debt and when the interest rate on debt is high relative to the cost of creditor’s assets. In such a situation, the creditor tends to expand his liabilities, thereby decreasing the value of the creditor’s assets and forcing him into a position where he is either compelled to accept bad terms for loan (selling of his assets to cover bad debts) or to resort to a position of complete bankruptcy (closure of the bank).