Money performs a wide variety of important services. It serves as a standard of value for all goods and serices. Without money the price of every goods or service we might wish to trade would have to be expressed in terms of exchange ratios with all other goods and services—an enormous information burden for both buyers and sellers. We would need to know,for example, how many loaves of bread would be required to purchase a quart of milk or what quantity of firewood might exchange for a suit of clothes. To trade just 12 different goods and services, we would have to remember 66 different exchange ratios.In contrast, the existence of money as a common standard of value permits us to express the prices of all goods and services in terms of only one goods-the monetary unit. In China that unit is, of course, the RMB yuan. In France the official monetary unit is the franc; in the United States the unit is the dollar; in Britain, the pound sterling; and in Japan, the yen, etc. Whatever the monetary unit is called, however, it always has a constant price in terms of itself ( i. e., a yuan always exchanges for a yuan). The price of all other goods and services are expressed in multiples or in fractions of the monetary unit.
Money also serves as a medium of exchange. It is usually the only financial asset which virtually every business, household, and unit of government will accept in payment for goods and services. By itself, money typically has little or no use as a commodity (except when gold or silver used as the medium of exchange). People accept money only because they know they can exchange the monetary medium at a later date for goods and services. The monetary unit itself need have little or no intrinsic value as a commodity once it is widely accepted. This is why modern governments have been able to separate the monetary unit from precious metals like gold and silver bullion and successfully issue fiat money(i. e., pieces of paper) not tied to any particular commodity.
Money's service as a medium of exchange frees us from the terrible constraints of a barter economy. Money allows us to separate the act of selling goods and services from act of buying goods and services. For example, we can sell our own labor skills for money and then later convert the money earned into food, clothing, and shelter. A medium acceptable to all saves enormous amounts of time. We do not have to search around to find a seller who is offering exactly the same goods and services we need and is willing to buy precisely the goods and serivices we are offering. With a medium of exchange, buyers and sellers no longer need to have an exact coincidence of wants in terms of quality, quantity, time, and location.
Money serves also as a store of value-a reserve of future purchasing power. We need not spend yuans right away but can hold them until circumstances are right and our need for goods or services is imminent. For example, we may wish to buy bonds and stocks, but their prices are falling, and it seems logical to wait for a lower price. Purchasing power can be stored in currency or in a checking accunt until the time is right to buy. Of course, money is not always a good store of value. The value of money, measured by its purchasing power, can experience marked fluctuations. For example, prices of consumer goods represented in the retailing price index have increased steadily in China since the middle of the 80's. If individuals or families had purchased in each of these years the identical market basket of goods and services represented in China retailing price index, they would have found that the purchasing power of their money had decreased during this period.
Money functions as the only perfectly liquid asset in the financial system. An asset is liquid if it can be converted into cash quickly with little or no loss in value. All assets-real and financial-differ in their degrees of liquidity. Generally, financial assets, especially the Treasury bills, bank deposits and bonds and stocks issued by major corporations, tends to be highly liquid, while real assets, such as a home, an automobile, clothing, furniture, and diamonds, may be extremely difficult to sell in a hurry without taking a substantial loss. Money is, of course, the most liquid of all assets since it need not be converted into any other form in order to be spent. Unfortunately, the most liquid assets, including money, tend to carry the lowest rates of returns. One measure of the "cost" of holding money is the income foregone by the owner who fails to convert his or her money balances into more-profitable investments in real or fiancial assets. The rate of interest, which is the price of abtaining credit in the financial system, is a measure of the penalty suffered by an investor for not converting money into earning assets.
