Functions of Money

Definition of Money

Money has defined differently by different economists as there is no unanimity over its definition. Some definitions are too extensive and some are too narrow like.

• According to Rebertsn, “Money is anything which is widely acceptable in discharge of obligations”. (This definition unnecessarily narrows down the field of money because it said that only metallic money deserves to called money in the strict sense of the term because it alone is generally acceptable by the people, left to themselves.)
  
  
• In the words of Francis Walker, “Money is what Money does”(according to this definition we can include all those things in money which perform the functions of money.)
  
  
• According to Marshall, “Money includes all those things which are (at any time and place) current without doubt or special enquiry as a means of purchasing commodities and services and defying expenses” (this definition also include those entire thing in money which perform the function of many at any time and place.)
  
  
• According to Whitelsey, “If a particular unit is a commonly employed to state values exchange, goods and services or perform other money functions then it is money whatever its legal as physical characteristics” (This is too Extensive Definition.)
  
  
• In the words of Coulborn, “Money may be defined as the means of valuation and of payment”.

(This definition unnecessarily narrows down the field of money.)

None of the above definitions is satisfactory since they are either to wide or too narrow. A suitable definition of money should emphasize not only the important function of money but also its basic characteristics namely general acceptability from this point of view ‘Crowthers’ definition appears to be the ideal definition. He defines money as “Any things that is generally acceptable as a means of exchange and that at the same time acts as a measure and as a store of value.

This definition point out that money should perform all the three important functions of being a medium of exchange, a standard of value and a store of value besides money should be a commodity which is generally acceptable by the people in payment for anything.

In Brief we can say that money is any clearly identifiable object of value that is generally accepted as payment for goods and services and repayments of debts with in a market or legal tender within a country.

Theory of Orgin of Money

There are differences of opinion amongst economists regarding orgin of money but two main ideologies are generally found.

Theory of Spontaneous Growth

Spalding was the main supporters of this theory and in their opinion neither money was invented nor any effort was made by man in this respect money suddenly came in existence and was used spontaneously as medium of exchange and measurement of value. Commodities were suddenly used as money at different places separately. According to availability and its suitability in the form of money material used continued changing.

Theory of Evolution of Necessity

Othemarspan, Adom smith, Hanson and G. Crowther are was the main supporters of this theory and in their opinion that money was not born suddenly rather money was invented by some intellectuals for overcoming the difficulties of the barter system and from time to time it is being changed and improved by other peoples continuously according to its need.

According to G. Crowther to us this inventions seems very simple it is merely the application to the sphere of value of the same idea which has produced meter to measure length, the gram to measure weight the degree to measure temperature and so forth. But at the same time it was doubtless the invention of money and it undoubtedly was an invention simple. It needed the conscious reasoning power of man to make the step from simple barter to money accountancy”.

Functions of Money

The function of money has been divided into the classes by economists as follows:

Primary Functions

These are also referred to as main functions of money. These functions are the following.

• Medium of Exchange: Money has the quality of general acceptability. As such all exchange take place in terms of money. In the primary stage of economic development money was not the medium of exchange money. Was not in existence commodities used to be exchanged for commodities. Which was known as barter system in due course of time number of problem started in barter system in the mean time money came into existence the modern money exchange system the prices of goods and services are expressed in terms of money.
  
  
  In the modern exchange system money acts as the intermediary in sales and purchases. The difficulty of the lack of double coincidence of wants no longer exists now on account of the invention of money. Now it we want use can save money to be spent in future as it is indeed. Since money is medium of exchange. It gives upon the holder the power to command marketable goods and services at his own option whenever he needs them.
  
  
• Standard of value: Money is used as standard of value. The prices of all goods and services are expressed in terms of money since all values are expressed in terms of money it its easier to determine the rate of exchange between various types of goods and services in the country. In other words we can say that money is the standard of value or a unit of measuring the value of goods and services in general but the people enjoyed no such facility under the barter system.
  
  
  In that system it was difficult to determine the rate of exchange between various type of goods and services, Because there is no single commodity then interms of which all values were measured but this difficulty has now disappeared with the of money now it is easier and simpler now to determine the rate of exchange between various types of goods and services in view of its function as a measure of value also serve as a unit of account all records are kept and maintain in terms of monetary unit like as yen, Rubal, Pound, sterling, Dollar Euro, Rupee etc.

Secondary Functions

Following are the secondary functions of the money;

• Storage of Value: we know that under barter system savings were discouraged the reason was that in the absence of money saving could be done only in terms of commodities since of which happened to be perishable. Thus, savings done in terms of commodities were not permanent but with the invention of money the difficulty has now disappeared Since saving are now done in terms of money.
  
  
  The invention of money has made possible capital accumulation which is an essential pre requisite of economic growth. Money also serves as an excellent store of wealth as it can be easily converted into other marketable assets. But money can perform this function satisfactory only its own value is fairly stable
  
  
• Transfer of value: The field of exchange also went on extending with growing economic development the exchange of goods now extended to distant areas. It was therefore felt necessary to transfer purchasing power form one place to another. After the discovery of money it performed this function easily and quickly.
  
  
  Since money possesses the quality of general acceptability a person can dispose of his property at one place and buy new property at another place. Furthermore borrowing and lending also take place in terms of money it is on account of the general acceptability of money that purchasing power can be transferred from one person to another, now physical transfer of commodities or assets are not necessary. Their values are now transferred from one place to another.
  
  
  This function of money has its important in socio economic life of the community it is on account of this function of money That Excess Funds lying with one person can be lent at interest to another person who can put it more productive uses.
  
  
• Means of deferred Payment: storage of values was not easy before the present form of money invented borrowing and lending were difficult under the Barter System In the Absence of money The borrowed commodities could be returned only in terms of goods and services but the modern money has greatly facilitated the borrowing and lending process.
  
  
  In other words money now acts as the means of deferred payments. Money has proved to be suitable standard of deferred payments for the following reason:
  
  
  • The value of money is stable compare to the other commodities values
    
    
  • Money is more durable compared to other commodities
    
    
  • Money has the quality of general acceptability.

Hence it continues to be always desirable

Above functions of money is very important for the economy. According to English poem the functions of money is described as.

Money is a matter of functions four: A Medium, a measure, a standard, a store

Contingent Functions

Beside the primary and secondary functions various other functions are also performed by money in developed economics. These are known as the contingent functions of money.

• Basis of Credit: In present time in developing countries credit transactions are continuously increasing credit transactions are based on credit of the parties. It should however remembered that money is the basis of credit without money credit instrument cannot circulate.
  
  
• Distribution of Social Income: In modern age production is made possible by the collective cooperation of the various factors of production. The share of each factor out of total production is determined in terms of money according to their contribution they are paid, wages, salaries interest, rent, and profit which determined and paid in terms of money.
  
  
• Helpful in Capital Formation: Capital is to be found in several forms but money is the most liquid form of capital. In others words capital in the form of money can be put to any use. It is on account of this liquidity of money that capital can be transferred from the less productive to more productive uses. The mobility of capital has also increased on account of the liquidity of money.
  
  
• Liquidity of Money: Money is the most liquid assets in comparison to all the other assets money can be put to any use. Money is very important from this point of view it is essential to keep capital in a liquid form for a income motive, transaction motive, precautionary motive, and speculative motive.
  
  
• Repayment Capacity: Money has the quality of general accept ability. So to maintain its repayment capacity every person has to keep some amount in liquid form. But so doing the person safeguards its repayment capacity.
  
  
• Carries of the Desire: whatever is desired by you can fulfill it with the help of money provided that commodity is readily available in the market.