From the inadequacies of the barter system, our pre-historic ancestors developed the concept of money. It was essentially an object of some value, like scraps of metal or coins, animals and even conch shells and crude ornaments. The primitive form of money is called commodity money, derivative of the fact that the object exchanged had its own value as a commodity or its possession of definite value to the owner as well as others.
Money today is an abstract concept, because the physical representative of money has no value of its own. It acquires worth because the government of a nation declares its value within the boundaries, as a mode of buying or paying debts. Money, therefore, becomes a legal tender. This system is known as the Fiat money system and is followed by most countries of the world. Fiat money systems use currency in the form of banknotes and coins.
The supply of money in a country usually exists as currency or floating money and demand deposits or the money in the bank in various savings and current accounts. The latter is almost always greater than the former. Bank money is intangible and exists as records only. But it does have the power to perform all the functions that tangible money or currency would. Checks or drafts from banks are known to be widely accepted, and is now a more frequented mode of transfer of deposit money.
In the world of modern finance, money has mainly three functions.
It is an exchange medium
It is a unit of account, and
A store of value
When money is used to obtain goods or services, it is acting as an exchange medium. This was the first originated use of money, in pace of the barter system.
As a unit of account, it acts as a numerical measurement. It measures the market value of all transactions, goods or services. For it to be a unit of account, it needs to have certain characteristics, devoid of which it will not be recognized as money. The money system should allow it to be broken down into smaller denominations without losing its total value. One piece of certain denomination should be as valuable as another, of the same denomination. Lastly, its make size, weight, density etc., should be verifiable.
To act as a store of value, one should be able to save or store money, to be able to retrieve it at a later time. At the time of retrieval, it should be of the same value, proving that is value was duly stored.
Any financial instrument which fulfils these functions can be termed as Money. These instruments together in an economy constitute the Money Supply of the country. A cumulative of these- currency, demand deposits and other deposits is called the monetary aggregate of a country.
From primitive times to modern, money has existed in various forms. Changing definition and value, it forms the backbone of a modern society.