Money and Its Functions in Modern Economy

The Finance University under the Government of the Russian Federation

International Finance Faculty

Term Paper

Money and its functions in modern economy

Klyagin M.I.

Group IFF 2-2

Tutor: Olga V. Kadysheva/ Svetlana E. Tsvirko

Moscow 2010

Table of contents

INTRODUCTION 3

CHAPTER 1. Nature of money in today's economy 5

1.1. The concept and types of money 5

1.2. Functions of money 7

CHAPTER 2. The role of money in the modern market economy. 17

2.1 The role of money in the production process. 17

2.2. Differences in characteristics of the role of money. 22

Conclusion. 25

The list of references. 26

Introduction

Money is one of the greatest inventions of a human thought. Perhaps, the whole structure of today's economy is predetermined by the existence of money.

But when did money occur and what was the reason for its occurrence?

Money is a public institution, which increases wealth buy reducing the cost of exchange and contributing to greater specialization in occupation o, according to ones comparative advantage.

Money appeared due to trade, and since it is established that trade is one of the most ancient occupations of mankind, therefore the emergence of the monetary system can be dated back to the times of antiquity. The origin of money is associated with 7-8 thousand years BC, when primitive tribes understood that they had surplus of some goods, which could be exchanged for other needed products. Historically, as a means of exchange, human used animals, furs, stones, shells etc. So money is determined by society itself, whatever the society recognize as a mean of exchange - is money.

Money is an integral element of commodity production, which means its simultaneous development, so it can be considered that money take certain shapes at each stage of economy, which best correspond to the nature and needs of its current level. Understanding of such term as money, their role in the economy and the logic of its development comes from the knowledge of the laws of economics.

Similar to any social phenomenon, money show itself in the action - through its functions. In the course of evolution, some functions of money gradually change and transform into new, more mature and sophisticated forms. After many centuries the four following forms of many have been determined: a measure of value, a means of preserving of value, a means of exchange and a means of payment. Moreover money as a measure of value and as a mean of preserving of value got formed as basic functions and from these ones later it started to function as a mean of exchange and payment.

All the varieties of money function as a measure of value, as all of them serve as means of expressing of value of goods and resources, existing in global economy. Therefore, being a measure of value at a first place can be considered a prime function and a common feature of all types of money from the times of its occurrence. Basically, with the introduction of a new product this function of money is involved, expressing the value of the goods in terms of money, and then the shell of the goods is discarded and money act in a symbolic way - as a mean of a public expression of a value of that goods, which is represented in some quantity of money.

The aim of the current course work is to study the money and its roles and functions in the modern economy.

CHAPTER 1. Nature of money in today's economy

1.1. The concept and types of money

Money - is a multifunctional product, a universal equivalent which expresses the value of other goods. At the same time it is a counting unit, a unit of exchange and the most convenient unit of value calculation and accumulation. Money is an important component of modern society which has emerged as a product of economic relations and trade activities. The appearance of money was preceded by barter, but due to rapid evolution it eventually lost its effectiveness and relevance.

Modern money is a result of long evolution, which includes the following stages:

1. Commodity money (The ancient people of Oceania expressed the cost of goods in terms of rare shells, pastoralist tribes used cattle for the same purpose, ancient Celtics used stones and people of North used the skins and furs of valuable animals. For a long period a measure of value of ancient people was expressed through the products of their occupations (hunting or gathering).)

2. Silver monometallism - the era of money made of silver.

3. Bimetallism - it became possible to pay for goods not only for silver but also for gold;

4. Gold monometalism - gold gradually replaced old forms of money and the era of the gold standard started. The demand for gold was totally due to its properties, as it was rather convenient to manufacture coins of such a rare and beautiful metal.

Paper money appeared as a consequence of the inconvenience of gold coins in use (they were quickly losing their appearance and weighted a lot). Therefore the Gold standard finally collapsed in the first half of the XX century.

In the period of the First World War banks started to refuse to change paper money into gold and this situation got even more intense in the times of the Great Depression of 1929-1933. At the end of the World War II a dollar standard had been set at a conference in USA, and in 1973 in Jamaica a system of floating currencies was adopted. Today's money is easy in use and being constantly modified, often changes its forms.