Definition, Function, History, and Types of Money

Types of Money – Money is one of the massive transaction tools used by the majority of people. Usually, the physical form of money is paper and metal. However, in this modern era, transactions can use other than physical money, such as payments via Qris.

In Law Number 7 of 2011 concerning Currency, money is a legal means of payment. Meanwhile, in the Big Indonesian Dictionary (KBBI), money is defined as a valid medium of exchange or a standard measure of value (unit of account), issued by the government of a country in the form of paper, gold, silver or other metal printed with certain shapes and images.

To understand more about money, Readers can listen to the opinions of several experts about money. In the view of Albert Gailort Hart, money is a wealth by its owner that can be used in making transactions or paying debts immediately and without delaying.

Meanwhile, according to Arthur Cecil Pigou, money is anything that is used as a medium of exchange. Meanwhile George N. Halm argues that money is a tool used to facilitate exchange and overcome all forms of difficulties in bartering or transactions.

Dennis, Holme Robertson also argues that money is considered as anything that can be accepted to make payments in order to obtain money. Meanwhile, Frederic S. Mishkin defines money from an economic standpoint as something that is generally accepted in payment for goods and services or payment of debt.

From the several expert opinions above, it can be concluded that money is a type of transaction tool used to obtain goods or services with the basic ingredients of making paper, silver, gold, or other metals.

Money Function

Launching from the and pages, money has several functions as follows.

1. Original Function of Money

Money has three original functions, namely as a legal medium of exchange, a unit of account, and a store of value. The legal medium of exchange means that the person who will make the exchange does not need to exchange it for goods, but only uses money.

Money as a calculating tool means that money can be used as a pointer or giver of value to various kinds of goods or services that are traded. Money can also show the amount of wealth. As well as calculating the loan amount.

Money as a store of value means that money can be used as a transfer of purchasing power from the present to the future. When someone receives money for the sale of goods or services, the money can be saved and reused in the future.


2. Money Derivative Function

In addition to the main function, money also has a derivative function as written in as follows.

  • Money as Legal Instrument of Payment

Complex human needs cannot be met simply by bartering. Therefore, money appears as a transaction solution to make it easier and more efficient.

  • Money as Debt Payment Instrument

Money can be used as a measure of payment in the future, one of which is for debt payments.

  • Money as a Tool for Hoarding Wealth

When the money is left by the community, it will usually be saved. Or they deliberately set aside money for future needs.

  • Money as a Transferring Tool for Wealth

Money can be used as a means of transferring wealth, for example land or other property is sold to be transferred in the form of money. The money can be used for various purposes, such as education, health, and so forth.

  • Money as a Driving Tool for Economic Activity

When the value of money is stable, people will be more enthusiastic or passionate about investing. Investment can encourage economic activity to increase.

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History of Money

In the beginning, humans fulfilled their daily needs by utilizing natural resources. They try to meet their needs with their own efforts. For example by making their own clothes, looking for their own fruit, and so on.

Gradually, people realize that their own products or efforts to meet their daily needs are not enough. Therefore, to meet their daily needs, they barter or exchange goods to complement each other’s needs.

However, this method is also not effective. Because of the difficulty finding people who have the desired goods and are willing to barter. Not only that, barter does not have an equal or nearly equal exchange value. The bad political situation also caused fear to barter.

From this anxiety, came the idea to use certain objects to barter. Objects designated as a medium of exchange are objects that are generally accepted, have high value (do not have magical or mystical value), or are different objects that are primary needs.

For example, salt was used by the Romans as a medium of exchange or wages. The Roman influence is still visible from the British people who call wages as salary which comes from the Latin, salarium which means salt.

Then, coins appeared in 1000 BC in China. Metal was chosen because it has a high value and is popular in general, is easy to break without reducing value, is durable, easy to move around, and is not easily damaged.

Gold and silver are used as a medium of exchange because they fulfill these conditions. Silver and gold money is also referred to as full money ( full bodied money ). Full money means the intrinsic value (material value) of money is equal to its nominal value (the value stated on the currency).

At that time, everyone had the right to forge money, sell it, melt it, or use it. Also has unlimited right to save it. Over time, the notion emerged that the need for coins was getting higher. but the amount of precious metals (gold and silver) is very limited.

Large transactions are also difficult when using coins. Therefore, paper money appeared. Paper money was first used by Chinese people in the Tang Dynasty. In the beginning, paper money was used as proof of ownership of gold and silver as a tool or intermediary for making transactions.

Simply put, banknotes (as proof of transactions) in circulation at that time were money guaranteed by 100% gold or silver kept at a gold or silversmith which could be exchanged at any time in full with the guarantee. Gradually, people no longer use gold as a medium of exchange, but use the evidence as a medium of exchange.


Types of Money

Money can be grouped based on four categories, namely the material it is made of, the institution that issues it, the value it has, and the area where it is used. The following details the types of money.

1. Types of Money Based on Materials Made

Based on the material it is made of, money can be grouped into several categories as follows.

  • Paper Money

Paper money is made from paper with certain images and stamps. According to Law No. 23 of 1999 concerning Bank Indonesia, paper money is money in the form of sheets made of paper or other materials that resemble paper.

  • Coin

Coins are usually made of gold or silver. The two types of metal were chosen because they met the requirements for efficient money. Not only that, the relatively high prices of gold and silver made these two materials more acceptable to people.

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However, currently, the type of coin is not seen from the gold or silver weight, but the nominal value. Coins also have their own exchange rate. Among them are the intrinsic value or the value of the materials it is made of and also the exchange rate.

2. Types of Money Based on Institutions That Issue It

Based on the issuing institution, money can be categorized into several groups as follows.

  • Currency

Currency is usually issued by the Central Bank. For example, in Indonesia, currency is produced by Bank Indonesia which is used throughout Indonesia. Currency consists of coins and paper money.

Following are the characteristics of currency which can be used by all Indonesian people; the nominal value of the currency has been stated and is limited; currency value guaranteed by the government; there is certainty of payment in accordance with the existing nominal.

  • Giral Money

Demand deposits in the form of banknotes and coins issued by commercial banks. Not only that, the form of money issued was in the form of a check or giro. To better understand demand deposit, Readers can examine its characteristics, including that it can only be used in certain circles.

Not only that, the nominal must be written according to the desired needs, besides that the nominal of the demand deposit is not limited; the value is only guaranteed by the issuing commercial bank; there is no certainty of payment.


3. Types of Money Based on Value

Money can be categorized based on its value as follows.

  • Full Value ( Full Bodied Money )

Money’s full value is intrinsic value and face value is the same. Usually applies to precious metal money made of gold or silver.

  • Not Full Value ( Full Bodied Money Representative )

Incomplete value means that the intrinsic value is less than the nominal value. Money whose value is not full is usually found in banknotes.

4. Types of Money Based on the Area of ​​Use

Based on the area of ​​use, money is categorized into three groups as follows.

  • Local Money

Local money only applies in one particular country. For example, the Rupiah currency is only valid in Indonesia.

  • Regional Money

Regional money is money whose use is wider than local money. For example, the euro currency can be used in several European countries, such as Germany, Spain, Austria, and so on.

  • International Money

International money applies all over the world. It can be used as a means of payment in any country. The international currency used and the standard for payment is US Dollars.

Money Terms

Launching from the page, an agreement regarding money must meet at least the following 7 conditions.

  • There is a guarantee, meaning that it must be guaranteed by the government so that its use for various purposes can be trusted by the public.
  • Generally accepted ( acceptability ), namely its use must be accepted as a medium of exchange, hoarding wealth, or paying debts.
  • Its value is stable ( stability of value ) meaning it does not fluctuate (fluctuate) so that people want to use it as a medium of exchange.
  • Easily stored ( storable ) means the physical form should not be too large.
  • Portability means that it must be easily transferred from one hand to another.
  • Not easily damaged ( durability ) so that it can last for a relatively long period of time.
  • Easy to divide ( divisibility ) means that if the nominal amount of money only consists of one type of denomination, it does not allow us to make transactions. Imagine if you wanted to buy clothes for Rp. 80,000, but the nominal denominations available were only Rp. 100,000. Then, what about the return? It’s difficult if there is no other nominal?