Friday, August 21, 2009
Money and its Functions
Money has been defined in various ways. Walz Ken says “Money is what money does”. In other words, any thin that performs the function of money is money. In the widest sense, the term ‘money’ includes all media of exchange-gold, silver, copper, cheques, commercial bills of exchange etc. but this definition is too wide; cheques, bills etc have been called representative money as they are only convenient representatives of the standard of value. Some writers narrow down the definition to include only the commodity such as gold that may serve the purpose of money. This excludes bank notes or government currency notes from the category of money. These instruments cannot, logically speaking, be excluded because they possess all the attributes of money.
The most commonly agreed view on the definition of money is that “anything which is widely accepted in payment for goods, or in discharge of other kinds of obligations is money”. In Growther’s words “The only essential requirement is general acceptability. Money … need not itself be valuable. It must indeed be relatively scare, since it would hardly do if money could be plucked off every tree. Pout provided precautions are taken to keep it relatively scare and it may be added comparatively in variable in amount of money can consist of things as worthless as a scare of paper or the scratch of Clerk’s pen in the books of a bank”.
FUNCTIONS OF MONEY
The functions of money can be conveniently divided into three parts. (A) Primary (B) Secondary (C) Contingent functions. These functions are discussed as under.
A. PRIMARY FUNCTIONS OF MONEY
(1) Money as a Medium of Exchange: In all market transactions, money is used to pay for goods and services. The sale or purchase of goods is done through money. Money other words acts as medium of exchange and helps in overcoming the difficulty of double coincidence of wants of the barter economy.
The use of money as a medium of exchange has helped in promoting efficiency in the economy. It has reduced much of the time spent in exchange goods and services. It has also promoted efficiency of allowing people to specialize in any area in which they have comparative advantage and receive no money payments for labour. The use of money as medium of exchange has permitted more specialization by lowering transactions cost and encouraging division of labour.
(2) Money as a unit of account: Another important function of money is that it provides a unit of account. The monetary unit of account is used to measure the value of goods and services in the economy. Just as we measure weights in terms of grams or kilograms, and distance in kilometres, similarly we measure and compare the value of goods and services in terms of money. Money is the yardstick that allows the individuals to measure the relative value of goods and services. The use of money as unit of amount has greatly reduces transaction costs i.e. the time, effort and expenses that go into purchase or sale of goods.
(3) Money as a standard of deferred Payments: Another function of money is that it is used as mean of setting debts maturing in the future. In modern economy, most of the business is done on credit. Goods are brought and sold on the promise to pay money on a certain date in future. Debts are stated and paid in terms of units of account.
(4) Money as a store of value: Money also functions as a store of value. It is reservoir of purchasing power overtime. The money which we have to day can be set aside to purchase things later on. This function of money is useful because most of us do not to spend our income immediately upon receiving it. We prefer to wait until we have the time or desire to spend it. Money held in the form of cash is considered highly liquid asset.
B. SECONDARY FUNCTIONS OF MONEY
Money as potential to influence the economy. It influences the price level, interest rates, utilization of resources etc. The secondary functions of money in brief are as under:
1. Aid to specialization, production and trade: The cese of money has helped in removing the difficulties of barter. The market mechanism, production of commodities, specialization, expansion and diversion of trade etc have all been facilitated by the use of money.
2. Influence on income and consumption: The use of money has direct bearing on the levels of income and consumption in the country. All production takes place for the market and the factor payment (rent, wages, interest and profits) are made in money. The higher the production the higher are the remunerations to the factors and vice versa.
3. Money as an instrument of making loans: People have money and deposit it in banks. The banks and advance these saving to businessmen and industrialists. Money is thus an instrument by which saving are transferred into investment.
4. Money as a tool of monetary management: Money is an important tool of monetary management. If the money is effectively used, it helps in increasing output and employment. Money is also an important factor in determining the distribution of income and health among members of the society.
5. Instrument of economic policy: Money is an important instrument of economic policy of the government. In order to achieve growth, reduce unemployment and maintain regular expansion of economic activity, money is the most powerful factor.
C. CONTINGENT FUNCTIONS
Contingent functions are derived from primary and secondary functions. According to Kinley, the contingent functions of money are as follows:
(i) Distribution of National Income: Money facilitates the distribution of national income among various factors of production. It also helps in bringing justice in distribution.
(ii) Basis of Credit system: Banks create credit on the basis of their cash serves. Any change in the volume of money is brought about mainly by an increase or decrease in money supply.
(iii) Measure of Marginal Productivity: The marginal productivity of each factor of production is measured with the help of money. Money also helps in equalization of marginal utility in expenditures.
(iv) Liquidity of Property: Money gives liquid form to wealth. A property can be converted into liquid form with the use of money.
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