Reading the functions of money

If changes in money supply have a major effect on the economy, and if the government therefore attempts to control the supply of money, it is important to have a clear understanding of (a) the purposes of money and (b) the definition of money.

The main purpose of money is as a 'medium of exchange'. It also has three other important functions.

A medium of exchange

In a subsistence economy where individuals make their own clothes, grow their own food, provide their own entertainments, etc., people do not need money. If people want to exchange any goods, they will do so by barter. In other words, they will do swaps with other people.

The complexities of a modern developed economy, however, make barter totally impractical for most purposes. Someone else may have something you want, but there is no guarantee that they will want what you have to offer them in return. What is more, under a system of capitalism where people are employed by others to do a specialist task, it would be totally impractical for people to be paid in food, clothes, cars, electrical goods, tickets to entertainments of various kinds and so on. What is necessary is a medium of exchange which is generally acceptable as a means of payment for goods and services and as a means of payment for labour and other factor services. 'Money' is any such medium.

Money may be in the form of some physical item that is actually handed from one person to another: for example, gold, silver, other coin, banknotes, or even something like cigarettes. To be a suitable physical means of exchange, money must be light enough to carry around, must come in a number of denominations, large and small, and must not be easy to forge. Alternatively, money must be in a form that enables it to be transferred indirectly through some acceptable mechanism. For example money in the form of bookkeeping entries in bank accounts can be transferred from one account to another by the use of such mechanisms as cheques, debit cards, standing orders and direct debits.

A means of storing wealth

People need a means whereby the fruits of today's labour can be used to purchase goods and services in the future. People need to be able to store their wealth: they want a means of saving. Money is one such medium in which to hold wealth. It can be saved.

A means of evaluation

Money is the unit used to value goods, services and assets. It allows the value of one good to be compared with that of another. In other words, the value of goods is expressed in terms of prices, and prices are expressed in money terms. It also allows dissimilar things to be added up. Thus a person's wealth or a company's assets can best be expressed in money terms. Similarly, a country's national income is expressed in money terms.

A means of establishing the value of future claims and payments

People often want to agree today the price of some future payment. Thus workers and managers will want to agree the wage rate for the coming year. Firms will want to sign contracts with their suppliers specifying the price of raw materials and other supplies. When people employ a builder to repair their house, they will probably want to agree a price beforehand. The use of money prices is the most convenient means of measuring future claims.

Comprehension check

I. Have you learnt anything new while reading the text? Say what? Have you changed your idea of money? What were the most interesting facts for you?

II. Answer the following questions.

1. What is the main purpose of money?

2. How do people get the goods which they don’t produce in a subsistent economy?

3. Does barter still exist in developed countries?

4. Would you like to be paid in food? Why is it impractical?

5. What are the main requirements to money?

6. In what way can people make payments without using coins and banknotes?

7. Why do people need to store their health?

8. How can dissimilar things be compared?

9. Do you think everything in the world can be expressed in money terms?

10. How do you understand the words “money is the means of future payments”?

III. Complete the sentences.

1. Money has … purposes.

2. A subsistence economy is economy where …

3. Barter is … with other people.

4. Money is generally acceptable …

5. There are two forms of money: physical and …

6. Money can help … in the future.

7. The wealth and income of people can be …

8. Prices for work and services … beforehand.

IV. Translate into English.

1. Деньги можно определить как любую вещь, которая по закону или традиции принимается в обмен на товары или услуги.

2. В необычных обстоятельствах, таких как гражданская война или гиперинфляция, деньги заменяются бартером.

3. Мы работаем за деньги и меняем деньги на то, что нам нужно.

4. Самая большая проблема бартера – это то, что называется «отсутствием двойного совпадения потребностей».

5. Люди надеются, что деньги сохраняют свою стоимость и их можно будет использовать для покупки товаров в будущем.

6. Чеки, дебитные карточки помогают использовать деньги в их «нефизической» форме.

7. Подписывая контракт, фирма определяет цену сырья заранее.

Word power

I. Give English equivalents for the following words and phrases from the text.

Средство обмена, экономика, основанная на натуральном хозяйстве, товарообмен, приемлемое средство, передавать от человека к человеку, подделывать, плоды труда, хранить богатство, сравнивать стоимость товаров, национальный доход, подписать контракт, средства хранения богатства.

II. Match synonyms in columns A and B.

A. to add up affect complexity to employ guarantee to store to attempt beforehand denomination to purchase dissimilar barter

B. to try face value swap (swop) to hire to buy unlike influence in advance difficulty promise to keep to count

III. What words can be used as a word-combination? Give as many variants as you can.

Money, to make, term, to carry (out), exchange, payment, to compare, purpose, to pay, value, definition, future, to accept.

Use some of these word combinations in your own sentences.