Introduction to Money Introduction: Money comes from the Latin word "Moneta" which denotes Goddess Juno in whose

temple money was minted in Rome. Money has been defined in different ways by different writers. Some have defined it in a very narrow sense and others in a very wide sense. In the narrowest sense the term money includes only the commodity that may serve the purpose of money, that is, metallic coins only. In the widest sense, money signifies each and every form of medium of exchange gold, silver, copper and other metallic coins, paper note, cheques, bills of exchange etc. Modern economists have, however, adopted the golden means and have defined money as anything that is generally acceptable in a community in exchange for all other commodities and services. Definitions:Ely says: "Anything that passes freely from hand to hand as a medium of exchange and it is generally, received in final discharge of debts." Robertson says: "Anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations." G.D.H.Coley says: "Purchasing power, something which buy things." J.M.Keynes says: "Money is that by the delivery of which debt contracts and price contracts are discharged and in the shape of which generally purchasing power is held." Geoffrey says: "Anything that is generally acceptable as a means of exchange (i.e. as a means of settling debts) and at the same time act as a measure and as a store of value." R.P.Kent says:

"Money is anything which is commonly used and generally accepted as a medium of exchange and as a standard of value."

What is Money?
Before the development of a medium of exchange, people would barter to obtain the goods and services they needed. This is basically how it worked: two individuals each possessing a commodity the other wanted or needed would enter into an agreement to trade their goods. This early form of barter, however, does not provide the transferability and divisibility that makes trading efficient. For instance, if you have cows but need bananas, you must find someone who not only has bananas but also the desire for meat. What if you find someone who has the need for meat but no bananas and can only offer you bunnies? To get your meat, he or she must find someone who has bananas and wants bunnies... The lack of transferability of bartering for goods, as you can see, is tiring, confusing and inefficient. But that is not where the problems end: even if you find someone with whom to trade meat for bananas, you may not think a bunch of them is worth a whole cow. You would then have to devise a way to divide your cow (a messy business) and determine how many bananas you are willing to take for certain parts of your cow. (It can be hard to talk about money with your children, especially when times are tough. Talking about Money When Times Are Tough has some tips to make it easy.) To solve these problems came commodity money, which is a kind of currency based on the value of an underlying commodity. Colonialists, for example, used beaver pelts and dried corn as currency for transactions. These kinds of commodities were chosen for a number of reasons. They were widely desired and therefore valuable, but they were also durable, portable and easily stored. Another example of commodity money is the U.S. currency before 1971, which was backed by gold. Foreign governments were able to take their U.S. currency and exchange it for gold with the U.S. Federal Reserve. If we think about this relationship between money and gold, we can gain some insight into how money gains its value: like the beaver pelts and dried corn, gold is valuable purely because people want it. Functions of Money The functions of money can be divided into three main categories: Primary Functions

Secondary Functions Contingent Functions

A. 1.

Primary functions Money as a Unit of Value:

Money measures the value of various goods and services which are produced in an economy. In other words, money works as unit of value or standard of value. In barter economy it was very difficult to decide as to how much volume of goods should be given in exchange of a given quantity of a commodity. Money, by performing the function of common measure of value, has saved the society from this difficulty. Now the value of various goods and services are expressed in terms of money such as Rs. 10 per metre, Rs. 8/- per kilogram etc. In this way, money works as common measure of value by expressing exchange value of all goods and services in money in the exchange market. By working as a unit of value, money has facilitated modern business and trade. 2. Medium of Exchange:

This may be considered as the most basic function of money. Money has the quality of general acceptability. As such, all exchanges take place in terms of money. In ancient times, commodities used to be exchanged for commodities. That was known as Barter system. But, with the lapse of time, the barter system proved difficult and inconvenient for the people. The main difficulty of the barter system was the lack of double coincidence of wants. It was on account of the difficulties and inconveniencies of barter that money came into existence. In the modern money exchange system, the prices of goods and services are expressed in terms of money. On account of the use of money, the exchange transactions have now come to be divided into two parts. One is purchases and another one sale. Thus, in the modern society money acts as intermediary are sales and purchases. It is on this account that money is referred to as the medium of exchange. The difficulty of the lack double coincidence of wants no longer exists now on account of the invention of money. Since money is generally acceptable, everyone accepts it in exchange for goods and services and utilizes it for purchasing goods and services of his choice. Money thus, promotes specialization among individuals, firms and regions. Since money is a medium of exchange, it bestows upon the holder the power to command marketable goods and services at his own option whenever he needs them. If the individual

concerned has no money, he may have to borrow it to acquire the necessary command over marketable goods and services for his own benefit. 3. Standard of Deferred Payments: Modem economic setup is based on credit and credit is paid in the form of money only. In reality the significance of credit has increased so much that it will not be improper to call it as the foundation stone of modem economic progress. Money, besides being the basis of current transactions, is also the basis of deferred payments. Only money is such a commodity in whose form accounts of deferred payments can be maintained in such a way so that both creditors and debtors do not stand to lose. 4. Store of Value:

It was virtually impossible to store surplus value under barter economy; the discovery of money has removed this difficulty. With the help of money, people can store surplus purchasing power and use it whenever they want. Saving in money is not only secure but its possibility of being destroyed is very less. Besides, it can be used whenever need be. By facilitating accumulation of money, money has become the only basis of promoting capital formation and modern production technique and corporate business facilitated there from. B. Secondary Functions:

The less important functions of money are called secondary function. Since, this function originates from primary functions. These functions are also called derived functions. The secondary functions of money are as follows: 1. Standard of Deferred Payment:

Money serves as the standard of deferred payment. The lending and borrowing act are expressed in money. Due to the qualities of stability in value, general acceptability and durability, money is regarded best for transactions. Money encourages lending and borrowing. If Rs 1000 is given as credit for 10 years. It is paid back after 10 years. But if a cow is given as credit for 10 years, only the low quality can be got back after 10 years. The credit can be expressed in other commodities as well, but those commodities are less convenient. The purchasing power of money falls when there is rapid rise in the price of goods and services. Money ceases to be the good store of value and men lose faith in money. Money ceases to work as a standard of deferred payment after it loses faith. As for example, most of the contracts in Germany were made in Swiss Frank

or U.S. Dollar in 1923, Whereas Mark was the national currency of Germany. 2. Store of Value:

Money also serves as a store of value. Money serves as store of value in the short run as well as long run. In barter exchange commodities could not be stored for a long time. Due to the quality of durability and stability in value money can be stored for a long time. This has enabled people to save some part, of their income for future. The store of value function is a necessary but not sufficient condition to term anything as money. Although, money functions as a store of value, but all things functioning as store of value cannot be termed as money. The things like diamond, jewellery work as a store of value. But, these things should be first purchased by money be kept and sold by money. But money should be only kept. Benham has explained the function of money as a liquid asset instead of store of value. According to him money is most liquid of all the assets. Men can use it without loss at the time of emergency. If price level is rising rapidly, it will have adverse effects on the store of value function. The purchasing power of money declines if there is instability in future price of commodities. Hence, money becomes a weak store of value during inflation 3. Transfer of Value:

Money serves as the transfer of Value or purchasing power. People transfer value by selling commodities or property to others and by buying commodities and property with others. Money has facilitated the transaction of goods in distant places. This has extended exchange and widened the market. C. Contingent Functions

Prof. Kinley has mentioned four contingent functions of money. These functions are as follows: 1. Basis of Credit:

In present days, the credit money like cheque, draft, bill of exchange, promissory note are in wide use. The credit instruments are issued on the basis of cash reserve. The credit instrument like cheque is issued on the basis of deposit. Hence, money is a basis of credit. 2. Distribution of Social Income:

The national dividend or social income is produced by the joint efforts and coordination of different factors of production. This national dividend is

distributed among the factors in money. The contribution of all factors is calculated in money and is made payment accordingly. The distribution of production among factors would be difficult in the age of modern specialized labour in the absence of money. 3. General Form of Capital: Money works as a general form of capital. In present times almost all wealth or capital are kept in the form of money. This increases the liquidity and mobility of capital. Hence, capital can be used in a useful way. 4. Measure of Marginal Productivity:

The marginal productivity of each factor of production is measured with the help of money. 5. Liquidity of Property:

Money gives liquid form to wealth. A property can be converted into liquid form with the use of money.

6.

Maximum Satisfaction:

Money enables consumers to get maximum satisfaction through the law of Equi-marginal utilities. Similarly the producer can get maximum profit by equalizing the marginal productivity of different factors of production. 7. Maximum Benefit

People derive maximum satisfaction from own income by the help of money. According to law of Equi-marginal utility, people derive maximum satisfaction when they spend by making marginal utility equal in all goods. People spend money to make marginal utilities of all commodities equal and derive maximum satisfaction by the help of money. Likewise, the producers also spend money in different factors so as to make marginal productivity of all factors equal. This increases total output and yields maximum benefit to the producer. Qualities / Characteristics of Good Money

Following are the qualities or characteristics which good money should possess: 1. General Acceptability:

Good money is accepted by all because it serves as a medium of exchange. Metallic money is acceptable due to its utility and value. Gold and silver coins had general acceptability. The holder can use it as money or as metal. He does not lose value in both cases. 2. Malleable:

A good money material must be malleable. A metal is melted and then coins are minted. The proper designs are made on it. The money material, which can be melted, is fit for making coins. The malleable materials have impression on its face and back for recognition. 3. Elastic:

The good material has the quality of elasticity. The business needs from season to season. Paper money possess the quality of expansion and contraction of money supply. 4. Recognizable:

Good money is recognized either by sight or touch. The printing of notes is secret. The imitation is not possible, because the process of colouring and the quality of paper are always in the hands of central bank. The general public is familiar with the various kinds of notes.

5.

Durable:

Money should be durable. The money must not lose its value with the passage of time. Metals are most durable as compared to other forms of money. The gold and silver do not wear out quickly but it can be treated as durable due to replacement by the bank. 6. Portable:

Good money must be portable easily. It should have more value in small quantity. The passenger must feel easy while taking money with them. 7. Storable:

A good money material is storable for for meeting the future demand. The minimum space and lowest storing expenses are necessary for keeping the money material. The rupee notes and coins have this quality. . 8. Standardized:

The good money material is of standardized nature and quality of its material does not undergo great change. 9. Stable:

Money must have stable value because it serve as a standard for measuring the value of other things. A change in its value brings change in the prices of goods and services. The public confidence is developed if value of money is stable. The money having ever-changing value is not liked by the people. 10. Divisible:

The money is always divisible without losing its value. The small units of money are needed for making the smallest payments. The metallic money is to make nominal payments in paisa. Public confidence develops due to this quality of money. 11. Difficult to duplicate:

Good money is one which is difficult to duplicate. There should be no danger of fake issuance of money. 12. Scarce:

The scarcity is the quality of good money material. Good money is always scarce. Money must be limited in supply as compare to demand for it. This quality induces the people to have more and more money for meeting their basic necessities of life. 13. Homogenous:

Good money must be of the same quality and quantity. The unit of money must be of the respects otherwise there will be confusion in buying and selling of goods and services. The colour and size of money material help the people to deal in the market. 14. Economical:

The good money material has economical quality. The cost of printing currency notes and minting coins must be lower. The money system cannot last for a longer period if it is too much costly. 15. High Value:

The money material should possess high value in small bulk, so that it can be conveniently carried and handled.

16.

Effective Supervision:

The good money is one that can be effectively supervised by a central monetary authority. It is of such a nature that central authority is able to keep records of the amount of money in circulation and the pattern of its distribution. 17. Government Support:

The good money material must be supported by the government. The people accept even fiat money (money issued without keeping any metallic reserves) due to the government support. The government's backing to money creates a sense of confidence. Conclusion:After discussing the essential qualities of a good money material, we find that so far not a single commodity has been discovered which possess all the attributes given above in their entirety. Gold and silver do satisfy of the conditions of standard coinage. These have been discarded in the past in favour of paper currency and bank money. Some material is yet to be found which can serve as ideal money.