Page 139 - Bus101FlipBook

CH 8] Business 101 8-5

Functions and Characteristics of Money

Functions Characteristics

Medium of Exchange Acceptance Durability
Measure of relative value Divisibility Stability
Store of value Portability Scarcity

money declines. To assure the store of wealth may require that the holder of money
convert its form into such things as stocks and bonds, or real estate, antiques, works of
art, gold, silver, precious gems, or any other valuable goods, that will offset the effect
of inflation and maybe increase in value. Additionally, converting money to other
goods as a store of value can produce dividends and interest payments from stocks and
bonds, rent from real estate, increased value from the scarcity of art, gold, silver and
precious gems. For example, the van Gogh painting "Irises" rose in value from
$47,000 in 1947 to $53.9 million in 1988. Money as a store of value is also liquid; that
is, once obtained it can easily and quickly be disposed of.
The van Gogh investment will increase in value; however, the owner can only
obtain money for it after finding a purchaser of substantial means; the Getty Museum
acquired the van Gogh painting in 1990 under private treaty, meaning that the value of
this transaction by the museum is not disclosed.
To convert real estate to cash, the owner contacts a broker who will seek out
purchasers for the real property, which will be an issue of time. To convert stocks and
bonds to money, the owner will contact a stock broker who will offer them for sale in
the stock market, which has many more purchasers and are thus more easily converted
to money. Of course, it is possible that the value of real estate or stocks and bonds may
be worth less than when originally purchased because they are subject to market
influences. This is an issue of timing for the market and the demand in the
marketplace.
Holding money during inflationary periods is particularly 8
disadvantageous. To illustrate, if the costs of goods and services
double, then money that is completely liquid would lose its
purchasing power by 50 percent. This means that if a steak cost
$2.50 per pound, it would take (2 x $2.50 =) $5 to purchase the same
steak. Having ready access to money has its chief advantage in its
availability to immediately purchase goods and pay debts. The
dilemma is to have money adequately placed in liquid and not so
liquid assets.

Characteristics of Money
Remembering that money can be anything, most early forms of
money possessed some unique disadvantages. The Irish farmer who
wanted to purchase an additional acre of land was faced with the fact
that it would cost him one-half of a cow; the dilemma is how does he
divide a cow and not lose its unique worth? The South Pacific Island

Copyrighted Material