Question

What are the three main functions of money? Explain each function using the example of how cigarettes performed each function in the prisoner of war camp article. Which function is the most important and why?

Answer 1

Money has various functions such as-

a) medium of exchange- Money is a very good substitute for the complex and tiring barter system. Acting as the medium of exchange is probably the most important function of money. Money is simply an IOU. It is universally accepted and despite being pegged to nothing it in itself has value.

In the war camp, the prisoners started using cigarettes as a form of currency and depending on the demand and supply of certain good or service it was valued in cigarettes. Initially, goods were exchanged which was not very efficient but the use of cigarettes as money made things easier as everyone accepted it and it had some intrinsic value of its own.

b) unit of account - another important function of money is that it is used as a unit of account. It can be used to compare the value of certain goods by measuring the worth of that good or service in terms of the money. it is also used in recording transactions and maintaining account books.

As already mentioned earlier different goods were valued in terms of cigarettes which could then be used to compare the worth of those goods. these goods included meat.

c) store of value - Money can be used to store the purchasing power for future transactions. Money is highly liquid and can anytime in the future be traded for goods or services.

when any prisoner had an excess of some good he could trade it for cigarettes and not any other good which he did not want knowing that the cigarettes could later be traded in the future depending on the requirement.

The most important function of money is medium of exchange, as it is the primary reason for its existence. As it is universally accepted and is backed by the government. It made the life of traders easily.