Type of Money: Understanding Financial Transactions for Beginners

Type of Money: Understanding Financial Transactions for Beginners

The word money has been derived from the Latin word known as Moneta. This is also known as Goddess Juno’s name. This term refers to the object that can be accepted as the medium of various services and goods in repayment in the socio-economic or particular country framework. The type of money is defined as the medium of purchase of any goods and services. Here, we will understand the usage in detail.

Functions of the Money

The economist considers the four primary functions of the money. Further, these are the medium of exchange, the standard of the deferred payment, the measure of the value, and the benefits store.

Medium of exchange

The medium of exchange refers to the function where the money is the medium of exchanging the services and goods. Moreover, this function is the primary use of money and altered the barter system.

In this function, both parties need to require good, which they will be receiving. When it became difficult to exchange goods due to inaccurate measurement practices, money resolved the problem. This is because the economy is accepting money. The money is the medium because it is easily divisible and portable by the government.

Measures of value

The measure of value refers to the function, which helps to determine the value of the goods. The cost of the services and products gets expressed in terms of money. When the number of services and goods are measured, the payment has been taken as the denominator.

This function has its advantages:-

  1. It helps in calculating and comparing exchange rates between different goods
  2. Money provides logical accounting systems
  3. It helps in comparing and determining the country’s national income

Store of value

This one refers to the function derived from the first function (medium of exchange). Moreover, in this function, the individual stores their wealth in the form of money. Here the money is an asset that contains the sustainable value for some time.

Standard of deferred payments

It refers to the essential factors of the money. This means the payments made on salaries, loans, Interests, rent, and insurance premiums. Moreover, the condition applicable for deferred payment is that the repaid money must be the same at the purchase time.

Approaches of the Money

The economist has defined various procedures for money. They discovered the concepts regards to multiple aspects. There are many controversies on which the money aspects must include in the money definition in recent times. The different approaches include:-

Conventional approach

This approach is being considered as the oldest approach in terms of defining the money concept. In this approach, generally, two main functions are taken into consideration named as a measure of value and exchange medium. According to this approach, any service and goods which fulfill these functions than the money will be subjected by the government. As per this approach, the commodities which serve money’s purpose are grains, cattle, metals, and stones. These are considered as the money when they are fulfilling the conditions of the capital.

Modern approach

Over some time, people understood the conventional method was a restrictive mode of money. Thus, the money’s function was limited to the exchange medium and the measure of value; it even performance a vast service. This approach is being defined in three categories:-

Chicago

Milton Friedman has given this approach at Chicago University. They have classified the money’s definition in three concepts that have been given in the conventional method. Thus, it includes currency, time deposits, and demand deposits. The economist who has the traditional approach’s viewpoint tends to be against the concept of the time deposit. Moreover, in terms of the conventional method, the time deposits are not readily available in liquid form. They do not tend to serve the purpose.

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Gurley-Shaw

This approach includes liabilities of the non-banking intermediaries in the money’s definition. The major contributors to the procedure were Edward S. Shaw, G. Gurley. Because they explain the money’s concepts by highlighting the substitution relationship in various factors like demand deposits, currency, bank deposits, and time deposits.

These mentioned factors tend to acts as sources for storing value. According to the Gurley-Shaw, the money can be defined as the sum of currency, deposits, and the claims. The weights must be allotted in terms of currency’s substitutability.

The approach’s practical implications tend to be impossible because they are very tricky for determining the substitutability of claims and deposits. The assigning weights for measuring the supply of money tend to be a challenging risk.

Central bank

It gives you a broad view of the money’s concept. The Central Bank’s function is to regulate and control the money flow in the economy. So therefore, the bank implements and formulates the monetary policy for achieving the objectives and goals.

According to this purpose, determining payment modes became easy. Moreover, in the view of a central bank, currencies and every other asset can be converted in the capital gains included in the supply of money.

Types of money

The following points define the type of money and will help you understand how to use it correctly:

Commodity money

This type of money refers to the form of the money interns of the classical approach. This form of the cash involves commodities like grains, cattle, utensils, skins, weapons, and leather. People don’t prefer commodity money due to its lack of specific characteristics like homogeneity, uniformity, portability, divisibility, standard weight, and size.

Metallic money

This type of money includes the money made of metals like brass, copper, gold, silver, aluminum, and alloys. The need for metallic money soon became limited. No one knows the exact period of the invention of metallic money. Moreover, coin took the place of metallic money soon. These coins were a form of trade around 2000 years ago in India. Like silver, copper, aluminum, and gold, the pieces of metals have dealt with the money’s purpose.

Paper money

This type of money refers to money printed and issued by the government of a specific country. The paper money is known as one of the most common forms, and it also contributes a large structure in the supply of money. In various countries, the notes have adopted a dual system.

For instance, in India, the five rupees coins and notes both have been issued. The bill which has been published by the Reserve Bank of India is known as the promissory notes. The paper money has been invented to supply metallic coins like gold and silver got less as per its demand. The vast amount of metallic coins was also not portable quickly, and the value of the metallic coins has been depreciated along with the time.

Bank deposits

This type of money refers to the money, the form of deposits like saving account, time, and current account. This form was being invented along with the evaluation of the banking system. This is not like paper and metallic money, and this cannot be passed or exchanged physically for purchasing services and goods. The deposit money has been considered as the entries in a ledger of back to credit of holder. The following deposits can only be transferred through the cheques.

The demand for money

The demand for the type of money varies differently for the commodities. This demand refers to the amount of money that is being held by businesses and individuals. On the other side, the product’s order is known as the demand for the flow of services and goods. The difference between the application of the commodity and money is the focus of holding, and later on, it focused on the flow. In previous years, the demand for money has been defined as the amount of money required to make business transactions.

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Discussing the simple terms, the demand for money depends on the transactions done in the economy. This resulted in the rise of the money’s request, and the application of cash fell during the depression time. On the other side, according to the modern view which has been given by Keynes is known as “the demand for money is the demand for money to hold.”

This demand has three motives which include:-

Transaction motive

This motive refers to the demand for money for fulfilling the needs of businesses and individuals. Moreover, the individuals require the payment for performing the current requirements that have been termed as the income motive. According to the other view, businesses need money to carry out business activities called a business motive. Check out the different motives with the following points:

Income motive

It refers to individuals’ purpose who demands the money for fulfilling their own needs. In general, the individual holds cash for meeting the gap in-between the expenditure and income. We usually receive income once in the month, but investment tends to take place every day. So there is a need to hold up a few parts of the income for making current payments. The amount needed to behold depends on an individual’s income.

Business motive

This refers to the money requirements by the businesses in the form of liquid for meeting the current needs. The company requires the money to purchase raw materials and payment of wages, transport charges, salaries, and many others. Further, the demand for money depends on business turnover. The turnover indicates the capability of covering up the expenses.

Precautionary motive

When individuals hold up money for emergencies that might occur in the future, the definition is precautionary money. Moreover, these emergencies can even include sickness, accidents, and unemployment. The money amount needed to get hold of the emergency motive will depend on the person’s nature and their living conditions.

Speculative motive

It refers to the individual’s motive for holding the cash for making out the benefits of the market movements. The speculative and precautionary purposes both act similarly to the store of value.

Supply of the money

It has been discussed previously that the demand for money is the need for money to uphold. The supply of capital refers to the supply of money for hold. Individuals need to hold onto the money or else it will not exist. The money supply refers to the amount of money owed by the community in the given period. In earlier days, metal money was a common form of cash, which constituted an essential part of the economy’s money. In modern times, we replaced the metal type of money with currency notes.

The supply of money categorizes as M1, M2, M3, and M4. Further, the M1 refers to the stock of money, including currency notes, demand deposits, and coins. While the M2 refers to the money stock, which provides currency notes, time deposits, post office deposits, coins, and demand deposits. The M3 refers to the money share, which includes currency notes, demand deposits, post office deposits, and term and savings bank deposits and coins. Lastly, M4 refers to the stock of money, consisting of currency notes, coins, lime deposits, demand deposits, and term and saving bank deposits.

Final thoughts

This explains the evolution of money over a period of time and different uses. Nowadays, people don’t count metallic coins like gold and silver due to a lack of availability. These are not money anymore but the assets we buy with money. Above, you all can see the various aspects of the money and the definitions of the money. The demands and supply of money will explain to you everything about the money in deep

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