MONEY

According to its nature and functions money has

been defined by many authors.
Walker: “ Money is what money does.”
Robertson: “ Money is anything which is widely
accepted in payment for goods or the discharge of
other kind of obligations.”
Crowther: “ Money is anything 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.”
 Functions of money
Kinley classified the functions of money as Primary
functions, secondary functions and contingent
functions.
Primary or main or original functions
Medium of Exchange: Money has the quality of
general acceptability. As such, all exchange take place
in terms of money.
In the modern exchange system, money acts as the
intermediary in sales and purchases. In this way
exchange becomes an indirect process of satisfying the
wants. The difficulty of the lack of double coincidence
of wants of barter system no longer exists now on
account of the invention of money.
 Contd,,,

Standard of Value: It measures the value of goods

and services. In other words, the prices of all goods
and services are expressed in terms of money.
One of the inconvenience of barter was lack of
common measure of values in terms of which other
value could be expressed.
In money economy, it is easy to compare the
respective values of commodities and services.
In matters of exchange, common standard of makes
the transactions easy.
Money is used as the measuring rod of value in
which the prices of all commodities are expressed.
 Secondary functions

Standard of deferred payment: It acts as a standard

of payment made after a lapse of time.
A creditor before he lends resources must be sure that
he will receive the same value in return when the
debt is paid back.
Most of the commodities deteriorate with the passage
of time. Such commodities are unsuited for this
purpose.
The value of some commodities also change with the
change in conditions of production. So no commodity
can serve as a deferred payments. Money whether
gold, silver or paper remains more or less stable
 Contd….

Store of value: money serve as a store of value.

It enables a person to keep a portion of his assets in
the form of liquid.
Liquid assets are those which can be used for any
purpose at any time one likes.
Everyone is in need of keeping a certain amount of
purchasing power due to the fact that money is
deemed to be relatively more stable in value and
indestructible.
More over this is the cheapest and most convenient
store of value.
 Contd..
These four important functions of money can be
summarised up in a couplet thus:
“ Money is a matter of function four
A medium, a measure, a standard, a store.”
Means of transferring value
The field of exchange also went on extending with
growing economic development. The exchange of goods
now extended to distant land. It was, therefore, felt
necessary to transfer purchasing power from one place to
another and it could not be exactly evaluated in terms of
commodities. Money performs this function easily and
quickly. One can sell movable or immovable property for
money at one place and can buy it elsewhere. Value will
thus be transferred.
 Contingent function

Contingent functions are ordinary but rather special

functions of money. They go on changing and multiplying
with the changing face of development. The important
contingent functions are:
Distribution of national income:
The national income of an economy is the result of the
collective effort of productive resources. This income is in
the form goods and services. The share of each factor out of
total production of goods and service cannot be distributed as
such. Money facilitates this function.
Money is the basis of credit:
In recent years , the importance of credit has increased as the
credit is a cannon of economic progress. The credit depend
upon money supply.
 Contd…

Helps the consumer securing equi marginal utility:

Every consumer arranges his expenditure in such a
way as to get maximum satisfaction and this can be
done by equating marginal utility of each commodity
buys. Since there is no measure of satisfaction and
utility. Money helps him in this manner as an
approximate measure of utility.
Bearer of the option:
In the absence of money consumer is sometimes forced
to buy whatever he gets in exchange of his product
rather than what he is willing to consume. Money
generalises purchasing power enable the consumer to
exercise his option freely in the matter of consumption.
 Contd…

It gives liquidity form to all capital:

Capital goods in the forms they are, have less
mobility than capital in the form of liquid asset
money. Thus money helps in allocating capital in
the best fitted places by giving it a liquid form.
 Types of Money
According to nature of money: J.M Keynes classified
money on the basis of its nature as actual money and
money on account.
Actual Money
The money which is current in practice in a country is
called actual money. It includes all kinds of coins and
currency notes backed by the government.
J.M .Keynes classified actual money as commodity
money and representative money.
Commodity money: it is invariable made of a certain
metal and its face value is equal to its intrinsic value. It
is referred to as full bodied money.
 Contd..

Face value is the legally defined value of the coin

relative to other units of currency, whereas intrinsic
value refers to the market value of the constituent
metal within a coin.
Face value refers to the value which is written on the
unit of money e.g. face value of a 100 rupee note is
equal to 100 rupees means goods and services worth
100 can be purchased using this note.
Whereas .intrinsic value refers to the commodity or
metallic value of the unit of money e.g the gold coin
contains gold in it , if the coin is sold as gold the
value at which it is sold is known as its intrinsic
value
 Contd..

Representative money: it is that money which is in

circulation and serves as a medium of exchange, but
purchasing power cannot be stored in terms of this
money. Paper money is a good example for this.
Representative money is further classified under two
heads
Convertible paper money: paper money which the
issuing authority is under an obligation to convert into
commodity money.
Inconvertible paper money: Paper money which the
issuing authority is under no obligation to convert into
commodity money.