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The Nature and Functions of Money By: Mrs.Saira Sajad MS (Management Sciences) MBA (Marketing and Finance) M.Sc (Economics). Chapter # 1. What is Money?.
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The Nature and Functions of MoneyBy: Mrs.SairaSajadMS (Management Sciences)MBA (Marketing and Finance)M.Sc (Economics) Chapter # 1
What is Money? • Money is one of the most wonderful and important inventions of man in economic sciences. It is defined from different angles by different economists.
Crowther in his book, An outline of money “defines money” as any thing that is generally acceptable as a means of exchange and that at the same time acts as measure and store of value.
In the words of Coulborn “Money is a mean of valuation and payments”. • According to Cole, “Money is any thing that is widely used as mean of payments and is generally acceptable in settlements of debts”.
According to professor Knap “Any thing which is declared by the state as money is money”. • Professor Hartley also believes that money should be legal tender. • What is legal Tender? • Legal tender or forced tender is an offered payment that, by law, cannot be refused in settlement of a debt. • Currency is the most common form of legal tender.
It should be declared by the government of a country as a mean of payment and people should be forced to accept it for the purpose of money.
The legal tender definitions of money are considered as narrow because the government cannot force the people to accept money. • German currency “Mark” was not accepted as money in 1923 by the people although it was declared money by the government. • Even the death penalty could not force the people to accept Mark as money.
According to Seligman, Money is one thing that posses general acceptability. • Kent says that, “Money is any thing which is commonly used and generally accepted as a medium of exchange or as a standard of value”.
Robertson has describe that money as; “Any thing which is widely accepted in payments for goods or in discharge of any other kind of business obligation.”
Mishkin says that; “Money is any thing that is generally accepted in payments for goods and services or in the repayments of debts”.
The definition of money which is generally accepted is defined as under: “Money is any thing that is regularly used in economic transactions and serve as a medium of exchange, a unit of account and a store of value”.
Stages in development of money Different stages of evolution of money • First stage: Commodity money: (animals, salt, stone, skin etc). • Second stage: metallic money: (Gold and silver) • Third stage: Paper money: (currency)
Fourth stage:credit money or bank money: (checks, bank draft,) • Fifth stage:Electronic money: (ATM, Credit cards).
Barter system. • There was a time when money was not existed , people used to exchange goods for goods or services for the satisfaction of their needs and wants. • This system of direct exchanging goods for goods is known as a Barter System.
Butlater on with the passage of time, human needs and wants began to increase and such system brought a list of difficulties to man. • To overcome all those difficulties money came into being.
Inconveniences of barter system. • Before the introduction of money, the following difficulties and inconveniences were experienced in the barter system. • lack of Double co-incidence of wants • Indivisibility of goods • Difficulty in storing of value • Lack of common measure of value • Difficulty in transfer of wealth • Difficulty in state Taxes and payments
Lack of double coincidence of wants First difficulty was that… exchange of goods can take place between those two persons only if one posses the good which other need. For example, a person has surplus wheat with him and wishes to exchange it with cloth. He will have to find a person who not only possess sufficient cloth but also desire wheat. This double coincidence is very difficult to attain.
Indivisibility of certain goods.. Certain goods are indivisible and cannot be purchased in parts. For example, If a person posses a buffalo and he wants to buy sugar and wheat which is available from two different people so he cannot divide his buffalo between those two persons.
Difficulty in storing of value Perishable goods cannot be stored for a long time, because their value decreases as time passes.
Lack of common measure of value Another difficulty which arises under the system of barter is the absence of common measure which can help in the estimation of relative values of the two commodities. For instance, a man has a horse with him and the other a cow and both are willing to trade.
A man who has a horse assigns the value of one horse as two cows. • And the other who has a cow assign the value of one cow as one horse and both stick to their valuation, so this exchange can not take.
Difficulties in transfer of wealth.. There is great difficulty in transferring of wealth under barter system. For example… If a person has to take 100 cattle from one place to another he would felt much difficulty.
Difficulties in state taxes and payments: The state faces difficulties in receipts of taxes and payments under barter system. For example… The state cannot collect the taxes in the form of commodities and cannot offer salaries and pensions in the form of goods.
How money has removed the difficulties of Barter System • The use of money has converted a barter economy into a monetary economy. • Money has overcome the difficulties of barter in the following ways: • (i). Money is accepted as a medium of exchange both by buyers and sellers. It has removed the difficulty of coincidence of want.
(ii). Money has a high degree of acceptably in the country, it, therefore serves as a standard for measuring the value of all goods and services. • The prices of goods and services are now quoted in money.
(iii). Money retain purchasing power overtime, and has removed the difficulty of store value. • The money stored as wealth can be used in future as and when needed.
(iv). Under barter system time spent in exchange of goods for goods was very high. (called transactions cost). • This transactions cost has been greatly reduced with the use of money.
(v). Commodities were difficult to transfer from one place to another, but money has made the transfer of wealth easier and safer. • (vi). In barter economy, the process of development was very slow. • With the use of money technology has developed, researches are being carried out. In a monetary economy there is all round economic progress.
Function Of Money • To fully understand the nature and importance of money, we have to consider the various functions it perform. Following are the important functions of money… • 1 . Money as Medium of Exchange… • As a medium of exchange it solves the “double coincidence” • of wants problem in barter system….with a money a person can buy anything he like. • 2 . Money as a measure of value… • In money economy value of all goods and services are expressed in terms of price …. • like ( price for wheat in Kg and Cloth in meter etc). The Economic Problem
Continue… 3 . Standard of deferred payments. In a money economy the contracts are made for future payments in money terms, with a promise to repay the loan in money. 4 . Money as a store of value. Money acts as a store of value without loss in its value over period of time. in barter system much difficulty was faced in storing value in terms of goods. The Economic Problem
Continue… 5 . Source of Government receipts. • Government can collect taxes from the people with the help of money easily. • On the other hand Government gives salaries and pensions to the people without any difficulty. 6 . Money as unit of account. • We count the amount of different goods and services with the help of money. Different countries have different unit of account such as Afs for Afghanistan, USD for America, Pond for UK, Yen for Japan, Rupee for Pakistan etc. In this way the figure of National income, wealth and assets are expressed in terms of money. The Economic Problem
Qualities of a good money material • General Acceptability • Stability of value • Transportability • Storability • Divisibility • Homogeneity • Recognisability • Distinguishable formation
