Nature and Functions of Money

NATURE OF MONEY :-

            While explaining the nature of money, it is essential to point out that money is only a means. not an end in itself. As a well known man buys various types of goods and services to satisfy his wants. Under the economic system, these goods and services can be purchased only with the help of money. In other words, money is only a mean to satisfy the wants of man. Money in itself has little value. Money is desired by man because it helps to satisfy his wants. Thus money is only a means, not an end itself.

FUNCTIONS OF MONEY :-

            Various functions of money can be classified into three broad groups : (a) Primary functions which included the medium of exchange and the measure of value; (b) Secondary functions which includes standard of  deferred payments, store of value and transfer of value; and (c) Contingent functions which include distribution of national income, maximization of satisfaction, basic of credit system, etc.

            These functions have been explained below :-

[1]Medium Of Exchange :- The most important function of money is to serve as a medium of exchange, money must be commonly accepted by people in exchange for goods and services. While functioning as a medium of exchange, money benefits the society in a number of ways : (a) It overcomes the inconvenience of barter system (i.e. the need for double coincidence of wants) by splitting the act of barter into two acts of exchange, i.e. sales and purchase through money. (b) It promotes transaction efficiency in exchange by facilitating the multiple exchange of goods and services with minimum efforts and time. (c) It promotes allocation by facilitating specialization in production and trade. (d) It allow freedom of choice the sense that a person can use his money to buy the things he wants most, from the people who offer the best bargain and at a time he considers the most advantages.

[2]Standard Measure Of Value :- It is the second primary function of money. Money helps in measuring or expressing the value of goods and services in the society. Exchange of two commodities in a proper ratio was not possible in barter exchange. Such ratio can be determined only when there is money for the purpose of measurement. Today we can express the price of commodities in terms of money hence, it has become the important function of money to measure the value of goods and services. Such values is known as economic value.

SECONDARY FUNCTIONS :-

(1) Basis Of Deferred Payment :- If transactions are settled at the time of purchasing the commodity and payments are made immediately it will be treated as cash transaction but if the payment of the present purchase is made after some days or month i.e. in future payment because he trust that value and importance of money will generally remain unchanged in the future period also. Thus money helps for performing such deferred payments. Major economic activities in the market are performed on credit basis, it is possible because of durability and wide acceptability of money. People would like to settle there dues in future because they are assured that the value of money will not decline rapidly. Thus money is commonly used as a standard of deferred payments.

(2) Store Of Value :- In the olden days, animals and food grains etc. was used as a medium of exchange. Commodities are usually perishable and did not have a long stable life. It also requires more stores for any desired period of time, and therefore it serves as a store of value. The store of value function of money, therefore, implies the shifting of purchasing power from the present to the future. In other words, when ever the need arises, this stored money can be used to purchase any commodities or services.

(3) As A Mean Of Transferring Value :- The use of purchasing power or value is transferred from one time to another, one place to another and from one person to another. One can sell immovable and movable belongings at one place and with the money so acquired can buy them elsewhere.

CONTINGENT FUNCTIONS :-

1. Distribution Of National Income :- Money facilitates the division of national income between people. Total output of the country is jointly produced by a number of people as workers, land owners, capitalists, and entrepreneurs, and in turn, will have to be distributed among them. Money helps in the distribution of national product trough the system of wage, rent, interest and profit.

2. Maximization Of Satisfaction :- Money helps consumers and producers to maximize their benefits. A consumer maximizes his satisfaction by equating the prices of each commodity (expressed in terms of money) with its marginal utility. Similarly, a producer maximizes his profit by equating the marginal productivity of a factor unit to its price.

3. Basic Of Credit System:- Credit plays an important role in the modern economic system and money constitutes the basis of credit. People deposit their money (saving) in the banks and on the basis of these deposits, the banks create credit.

4. Liquidity To Wealth :- Money imparts liquidity to various forms of wealth. When a person holds wealth in the form of money, he makes it liquid. In fact, all forms of wealth (e.g., land, machinery, stocks, stores, etc.) can be converted into money.

5. Increase The Productivity Of Capital :- Capital investment in any business is necessary for earning the profit. A capacity of a business to earn a profit is known as productivity of capital. Such productivity may reduse if there is no proper turnover in the business. In such a case, businessman may take a decision to close down the business, sell the property. Thus the capital collected from a closed business can be used for starting new business where more profit can be earned. Such shifting of the business is possible today as there is money.

QUALITIES OF GOOD MONEY :-

            To be able to perform the functions of money well, the money material must possess the following qualities.

1.  General Acceptability :- The material of which money is made should be acceptable to all without any hesitation. In this connections, gold and silver are considered as good money material because they are readily acceptable to the general public. Apart from being used as money, these metals can also be put to other uses (e.g. Making ornaments).

2. Portability :- Money should be easily carried or transferred from one place to another In other words, the money material must have large value in small bulk. On this ground various animals cannot be used as money.

3. Durability :- Money material must last for a long time without losing its value. Ice and fruits cannot become good money because they lose their value with the passage of time. Ice melts and fruits perish.

4. Divisibility :- Money material must be easily sub-divided to allow for the purchase of smaller units of the commodities. Cows, for example, cannot function as good money because a cow cannot be divided without losing its value ; a fraction of cow is quite different entity than a whole cow.

5. Homogeneity :- Money should be homogeneous. Its units should be identical ; they should be of equal quality and physically indistinguishable. If money is not homogeneous, the individuals will not be certain of what they are receiving when they make transactions.

6. Cognisability :- Money should be easily recognized. If it is not easily recognizable, it would be difficult for the individuals to determine whether they are dealing with money or some inferior asset.

7. Stability :- The value of money should remain stable and should not change for a long period of time. If the value of money is not stable, it will not be able to function as a measure of value, as a store of value and as a standard of deferred payment.

8.Malleability :- The money material should be capable of being melted and put to different forms. Gold, Silver, Copper, etc., have this quality.