What is the Purpose of Money? Origin and Functions

March 18, 2010 by Victorino
Filed under Money Matters

What is the purpose of money? Why it was invented? According to etymologists, the word “money” is derived from the moneta ephitet for Juno. Coins came to be minted at the temple of Juno Moneta. This temple at Rome was the place where the mint of Ancient Rome was located. Money is considered to have four main functions: a medium of exchange, a unit of account, a standard of deferred payment, and a store of value. The preceding functions have been taught to us by our financial teachers and mentors in the past. However, several modern textbooks now list only three functions: medium of exchange, unit of account, and a store of value, not recognizing the function of money as a standard of deferred payment, a separate function. It is rather included in the other three functions.

Money performs its function as a medium of exchange when it is used to intermediate the exchange of goods and services. This function facilitates and eliminates the inefficiencies of a barter system, where goods and services are directly exchange for other goods and services. With the use of money, now you can just conveniently pay for the things you want to buy.

Money serves as a unit of account, a standard numerical unit of measurement of the value (book value, discounted value, market value, etc.) of goods, services and other transactions. Money as a unit of account is divisible into smaller units, fungible and countable.

Money acts as a store of value. It can be saved, stored and retrieved. Though it is saved and stored, it can still be counted and measured. Also, when it is retrieved, it can still be used as a medium of exchange. Stored money must remain stable over time. If its value decreases, the ability of money to function as a store of value diminishes. This is called inflation.

When dealing with debts, money can be a standard of deferred payment as an accepted way to settle a debt. Since money is considered as a legal tender, it can be used in discharging debts. If debts are dominated in money, they can be also influenced and affected by inflation and deflation.

By understanding the origin of money and its functions, we can say that the purpose of money is to facilitate our trading process, saving system, accounting, paying debts, and collecting receivables. Just imagine if you are an employee, and your employer is paying you sacks of rice as your bi-monthly salary. How can you buy your plate?

Money serves as a tool to make people lives convenient. However, the Bible warns about money – the love of money is the root of all evil. Yes! It is “the love of money”, but not the money. Hence, money to make our lives better, should stay as an effective and efficient trading and financial tool. It should never become our master.

Reference:
Wikipedia on Money