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The word money comes either from the Latin word "monere" which literally means "remind", "warn" or "instruct" or the Greek word "moneres" meaning "alone", "unique". Money can be defined as anything that is generally accepted as payment for goods or services or in the repayment of debts.

The functions of money

In any society money serves three primary functions:

  1. Money as a medium of exchange - primary function of money recognizing medium of exchange as anything accepted as payment for products, services, and resources
  2. Money as a measure of value - a measure of value is a single standard or "yardstick" used to assign values to and compare the values of products, services and resources
  3. Money as a store of value - money can function as a means of retaining and accumulating wealth

Characteristics of Money

Apart from the functions mentioned above, money must possess the following five characteristics:

  1. Divisibility - the unit of money must be divisible into smaller units to accommodate small purchases as well as large ones
  2. Portability - money must be light and small enough to be carried easily
  3. Stability - money has to retain its value over time
  4. Durability - money should be strong enough to last through reasonable usage
  5. Difficulty of counterfeiting - money has to be difficult to imitate or to fake; thus countries should do their best to ensure that it is hard to reproduce their currency

Evolution of the payment system

The steps in evolution of money are as follows:

  1. Commodity money - money made up of precious metals or another valuable commodity
  2. Paper currency - pieces of paper that function as medium of exchange (convertible into coins or precious metal)
  3. Fiat money - paper currency decreed by governments as legal tender but not convertible into coins or precious metal
  4. Cheques (checks) - instruction from you to your bank to transfer money from your account to someone else’s account when she deposits the check
  5. Electronic money - called as "e-money"; substitute for checks and cash, time-saving; money that exists only in electronic form

See also:


Author: Aneta Rudniak