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After money was invented, it soon began to fulfill a number of different but related functions. The variety and complexity of production relations, which are embodied in money, determine the multiplicity of forms of manifestation of money itself. Each of these forms is called the function of money.

The function of money is a certain action or “work” of money to serve the movement of value in the process of social reproduction.

The question of the functions of money is one of the most controversial in the theory of money. The disagreements concern not only the interpretation of certain functions of money, but also their quantity. Discussions are conducted both between representatives of different theoretical schools and within each of them. Thus, most representatives of the Marxist theory of money recognize five of their functions, but they have different views on the essence of each of them. The differences in the interpretation of the functions of money among representatives of non-Marxist theories are even more noticeable. Without denying the existence of the functions of money at all, most of them recognize only three functions and abstract themselves from the rest. Thus, in the well-known book by the English economist L. Harris “Monetary Theory” it is said about the functions of a medium of exchange, a means of storing value and a unit of account, and no other functions are mentioned at all. At the same time, the classics of economic theory and some of its representatives of the late 19th – early 20th centuries also recognized five functions of money.

The functions of money are a specific manifestation of their essence. In this regard, it is obvious that the transformation of the economic nature of modern money determines the modification of their functions.

The functions of money are in constant dynamics: some arose earlier, some later; some functions have changed their content and even lost their noticeable meaning.

The emergence of the functions of money in the process of their evolution can be represented as follows:

  • Stage I. Money as a measure of value. Historically, the first function of money. As a measure of value, money is a unified measure of the value of all goods.
  • Stage II. Money as a means of purchase. Money as a means of purchase is a medium of exchange.
  • Stage III. Money as a means of payment. In the function of money as a means of payment, a time lag (time mismatch) arises between the sale of a product and the receipt of money for it. In these conditions, conditions are objectively created for such an economic phenomenon as credit.
  • Stage IV. Money as a means of distribution. In the distribution function of money, there is only their movement from their owner to the recipient. This function is an objective economic prerequisite for the emergence of public finance.
  • Stage V. Money as a means of accumulation and savings. The process of savings and savings is an essential element of a modern economy.
  • Stage VI. Money as a measure of the exchange of one currency for another. In the function of world money, money contributes to currency exchange, the creation of a balance of payments, and the formation of an exchange rate.

At the moment, it is generally accepted to distinguish the following main functions of money:

Functions of money

  1. The function of money as a measure of value lies in the fact that money is the universal embodiment and measure of the value of a wide variety of goods. To determine the value of goods in money, a certain amount of monetary material must be taken as a unit (to determine the scale of prices). The scale of prices is established by the state by law, while the function of a measure of value is performed by money objectively. The scale of prices does not depend on the change in the value of the monetary metal, since it is a fixed weight quantity of the metal.
  2. The function of money as a medium of exchange is that money is an intermediary in the exchange of goods. This function is performed by real full and defective money.
  3. The function of money as a means of payment is closely related to the function of money as a means of circulation. In commodity circulation mediated by money (sale for the sake of purchase), money acted as a fleeting intermediary and performed the function of a medium of exchange. When money carries out an independent movement, passing from one owner to another, then they perform the function of a means of payment (that is, they are used for payments without direct exchange for goods (payment of taxes, utility bills, wages, etc.)).
  4. The function of money as a store of value. Money performs this function when it leaves the sphere of circulation (“falls out” of circulation) and remains in the hands of certain persons. Money, appearing in its gold and silver form (as real high-grade money) forms a treasure. Note that along with the direct accumulation of treasures in coin form, they are accumulated in the form of luxury items made of gold and silver. This leads to the fact that, on the one hand, the market for gold and silver is expanding more and more, regardless of their function, and on the other hand, a hidden source of money supply is created, which is especially effective during periods of social upheaval.
  5. The function of money as world money is that world money functions as a universal means of purchase (when money is paid for an international commodity transaction) as a general embodiment of social wealth (when wealth is transferred from one country to another). In addition, gold as a treasure is also a reserve fund for world money. Note that the real role of national reserve currencies and other types of money in this function is also growing.

All the above functions of money in their systemic unity constitute the real movement of money (the real functioning of the money supply). The content of this or that function of money reflects the features of the achieved level (stage) of the evolution of money itself.

Post Author: Rachel Reinbauer

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