Money

Lalit Mohan Pant
Department of Management Studies
Pal College of Technology & Management
Haldwani Nainital
5/10/2016Akshi_LalitMPant1
Money

Theme of presentation
 Introduction of money
 Nature of money
 Definitions of money
 Evolution of money
 Importance of money

The Concept of Money
 It is often said that money is not the most important thing in the world.
For many people, however, it is right up there next to air in importance.
 Money is not necessarily Coins and Currencies.
 Money is something which facilitates the transaction of goods and
services.
 Money is any good that is widely used and accepted in transactions
involving the transfer of goods and services from one person to another.
 Money is the most important invention of modern times. It has
undergone a long process of historical evolution. I
 n the absence of money when goods were exchanged for goods it was
called barter exchange. The inconveniences of barter, led to the
invention of a medium of exchange i.e. money.

Nature of Money
 It facilitates exchange of goods and services and helps in carrying on trade
smoothly.
 The present highly complicated economic system will not exist without
money.
 Money helps in maximizing consumers’ satisfaction and producers’ profit. It
helps and promotes saving.
 Money promotes specialization which increases productivity and efficiency.
 It facilitates planning of both production and consumption.
 Money can be utilized in reviving the economy from depression.
 Money enables production to take place in advance of consumption.
 It is the institution of money which has proved a valuable social instrument
of promoting economic welfare.
 The whole economic science is based on money; economic motives and
activities are measured by money.

Definition of Money
 According to Prof. A. Walker “Money is What Money Does.”
 According to Prof. D.H. Robertson “Anything which is widely accepted in
payment for goods or in discharge of other kinds of business obligation is
called money.”
 According to Seligman “One thing that possesses general acceptability”
 According to Prof. Ely “Money is anything that passes freely from hand to
hand as a medium of exchange and is generally received in final discharge of
debts.”
 But these definitions are defective because they do not lay proper emphasis
on all the essential functions of money. Prof. Crowther’s definition of money
is considered better as it takes into account all the important functions of
money. He defines money as – According to Prof. Crowther’s “Anything that
is generally acceptable as a means of exchange (i.e., as a means of setting
debts) and at the same lime, acts as a measure and a store of value”

Evolution of Money
The money as we see it today is the outcome of evolution. The following are
the stages of evolution:
 Commodity money
 Metallic money
 Coins
 Paper Money
 Bank Money or Credit Money
 Plastic Money
 E-Money

Commodity Money
 Various types of commodities have been used as money from the
beginning of human civilization. Stones, spears, skins, bows and
arrows, and axes were used as money in the hunting society.
 The pastoral society used cattle as money.
 The agricultural society used grains as money.
 The Romans used cattle and salt as money at different times.
 The Mongolians used squirrel skins as money.
 Precious stones, tobacco, tea shells, fishhooks and many other
commodities served as money depending upon time, place and
economic standard of the society.

Disadvantages of Commodity Money
 The use of commodities as money had the following defects.
 All the commodities were not uniform in quality, such as cattle,
grains, etc. Thus lack of standardization made pricing difficult.
 It is difficult to store and prevent loss of value in the case of
perishable commodities.
 Supplies of such commodities were uncertain.
 They lacked in portability and hence were difficult to transfer from
one place to another.
 There was the problem of indivisibility in the case of such
commodities as cattle.

Metallic Money
 With the spread of civilization and trade relations by land and sea,
metallic money took the place of commodity money.
 Many nations started using silver, gold, copper, tin, etc. as money. But
metal was an inconvenient thing to accept, weigh, divide and assess in
quality.
 Accordingly, metal was made into coins of predetermined weight. This
innovation is attributed to King Midas of Lydia in the eighth century B
C. But gold coins were used in India many centuries earlier than in
Lydia.
 Thus coins came to be accepted as convenient method of exchange. As
the price of gold began to rise, gold coins were melted in order to earn
more by selling them as metal.
 This led governments to mix copper or silver in gold coins since their
intrinsic value might be more than their face value. As gold became
dearer and scarce, silver coins were used, first in their pure form and
later on mixed with alloy or some other metal.

Disadvantages of Metallic Money
 It was not possible to change its supply according to the
requirements of the nation both for internal and external use.
 Being heavy, it was not possible to carry large sums of money in the
form of coins from one place to another by merchants
 It was unsafe and inconvenient to carry precious metals for trade
purposes over long distances.
 Metallic money was very expensive because the use of coins led to
their debasement and their minting and exchange at the mint cost a
lot to the government.

Coins
 Coinage was the first great invention in the evolution of money.
 It is believed that first coins were struck in the 11th Century BC in China.
 For a long period of time full bodied coins, particularly of gold and silver,
served as money.
 Now all coins of different metals are only token coins. In India only
Government can issue coins.

Paper Money
 The development of paper money started with goldsmiths who kept strong safes to store their
gold. As goldsmiths were thought to be honest merchants, people started keeping their gold
with them for safe custody. In return, the goldsmiths gave the depositors a receipt promising to
return the gold on demand. These receipts of the goldsmiths were given to the sellers of
commodities by the buyers.
 Thus receipts of the goldsmith were a substitute for money. Such paper money was backed by
gold and was convertible on demand into gold. This ultimately led to the development of bank
notes.
 The bank notes are issued by the central bank of the country. As the demand for gold and silver
increased with the rise in their prices, the convertibility of bank notes into gold and silver was
gradually given up during the beginning and after the First World War in all the countries of
the world. Since then the bank money has ceased to be representative money and is simply
‘fiat money’ which is inconvertible and is accepted as money because it is backed by law.
 The money made of paper is called paper money. It consists of currency notes issued by the
government or the central bank of a country. In India, one rupee notes and all coins in
circulation are issued by the Ministry of Finance of the Government of India, and all other
currency notes of higher denominations and commodity coins are issued by the Reserve Bank
of India.
 Paper Currency is of four types:
 Representative paper Currency or Money,
 Convertible paper Currency or Money
 Inconvertible paper Currency or Money, and
 Fiat Currency or Fiat Money.

Representative paper Currency or Money
 Representative paper money is fully backed by gold and silver reserves.
Under the monetary system of representative money, gold and silver equal
to the value of paper currency issued are kept hi the reserves by the
monetary authority. Advantages of representative paper money
 It economizes the use of precious metals. These metals are kept hi the
reserves,
 There is no fear of over- issue of representative money since paper money
is fully backed by metallic reserves,
 It inspires public confidence because the public can get the paper money
converted into gold as and when needed.

Disadvantages of representative paper money
 Since gold and silver reserves are to be maintained, these metals cannot
be put to other uses,
 Representative paper money system lacks elasticity because under this
system money supply cannot be increased unless equivalent amount of
metallic reserves are kept,
 It is not suitable for the poor nations which have deficiency of gold and
silver.

Convertible Paper Money
 The paper money which is convertible into standard coins is called
convertible paper money. The main characteristics of convertible paper
money are:
 The individuals can get their paper money converted into cash,
 The paper money is backed by gold and silver reserves. But, on the
assumption that all the currency notes are not simultaneously presented by
the public for encashment, the value of metallic reserves is less than the
value of the notes issued,
 The reserves comprise of
 metallic portion containing gold, silver and standard coins, and
 fiduciary portion containing approved securities.
 Generally, the public gets gold and silver in exchange for paper money for
making foreign payments.

Advantages & Disadvantage of the convertible paper money
Advantages of Convertible Paper money
 It economizes the use of valuable metals.
 It is flexible because money supply can be increased without maintaining
cent per cent metallic reserves.
 It inspires public confidence because paper money is convertible into
standard coins,
 It facilitates foreign trade because paper money is converted into gold and
silver to make foreign payments.
Disadvantages of Convertible Paper money
 Since the paper currency under this system is not cent per cent backed by
gold and silver, there is a fear of over-issue of money supply and the
resultant danger of inflation,
 The convertible paper money does not inspire as much public confidence as
the representative paper money.

Inconvertible Paper Money
 Inconvertible Paper Money: The paper money which is not convertible into
standard coins or valuable metals is called inconvertible paper money. Under the
system of inconvertible paper money, the monetary authority maintains no
metallic reserves against paper currency. It also gives no guarantee to convert the
paper currency into gold and silver.
Merits of inconvertible paper money
 Such a paper currency system economizes the use of valuable metals,
 It is also elastic in the sense that the monetary authority can change money
supply according to the needs of the economy without keeping proportionate
metallic reserves.
Demerits of in-convertible paper money
 The danger of paper currency, leading to inflation, always exists in this system,
 It inspires less public confidence than a system of representative paper money.

Fiat money
 Fiat Money: Fiat money is only a variety of inconvertible paper money. Fiat
money is backed neither by the metallic nor the fiduciary reserves. In other
words, the monetary authority gives no guarantee to convert fiat money into
valuable metals.
 According to Keynes, “Fiat money is Representative (or, Token) Money (i.e.,
something the intrinsic value of the material substance of which is divorced
from its monetary face value) now generally made of paper except in the case
of small denominations - which is created and issued by the State, but is not
convertible by law into anything other than itself and has no fixed value in
terms of an objective standard.”

Characteristics of the fiat money
 It has significantly less intrinsic value than its face value,
 It is not convertible into any valuable asset,
 It is accepted in transactions at face value because it is unlimited legal
tender.
 Initially, fiat money was used during the period of war or emergency.
But, now, it has become a common phenomenon in most of the
countries of the world. Fiat money is particularly useful for
underdeveloped countries which generally lack financial resources for
economic development. Fiat money removes this deficiency and
promotes economic development by providing sufficient resources to
the government.

Demerits of fiat money
 The danger of over-issue of fiat money (or inflation) is always present
in a system of fiat money,
 It lacks public confidence as it is not backed by metallic reserves,
 Foreign exchange rates are liable to wide fluctuations under fiat money
system because fiat money is not linked with other country's money
through gold.

Advantages of Paper Money
 Cheap and economical: Normally paper money is much easier to issue.
Practically it costs nothing to government. Printing of paper currency
requires certain special type of paper, ink, and printing technology. These
things no doubt are costly but overall printing cost is quite low.
 Convenience: Paper money is convenient to transfer and carry. It can be
easily kept in pocket. Further it can also he readily converted into cheques,
drafts, etc.
 Copying: The design of paper money is very difficult to copy. Further
special type of paper and ink is used in paper money which makes it quite
impossible to copy it. Even if it is copied by some fake means then it can be
checked by electronic machines.
 Elastic Supply: Paper money due to its elasticity is very useful for
government. Supply of money can he increased or decreased according to
the needs of the economy,
 Legal Tender: Paper money is unlimited legal tender i.e. any amount of
payment or of debt can be paid in it. It can be used to discharge all kinds of
business obligations.

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 Saving of Precious Metals: Use of paper money results the saving of
precious metals of the country. The metals can be used for other useful
purposes.
 Ease of counting: Paper money is much easier to count than metallic
money. The counting of large amounts in metal form is very difficult.
On the other hand counting of paper money is easy, convenient and
requires little time.
 Recognizable: The paper money is easily recognizable. There is no
inconvenience of testing the exactness of the money material.
 Useful in emergency: The paper money can be used in emergency like
war and floods. The government can meet the expenses by printing
notes in shorter time.
 Uniform quality: The paper money has another advantage that it has
uniform quality and the holder does not bother for possession of new or
old money

Disadvantages of Paper Money
 Demonetization – The demerit of paper money is that the holder may have to suffer
loss. The paper money is fiat money. It is issued by fiat (order) of the government.
In case the government cancels the currency notes the holder has to bear full loss.
 Restricted acceptability Or Limited Acceptance – One of the demerits of paper
money is that it has limited acceptance. Its acceptance is limited within the
boundaries of a country. It cannot be used to make payments to other countries.
 Monetary mismanagement – Purchasing power of paper money is an ever-
changing process. This means that its face value remains same but its purchasing
power may decline due to monetary mismanagement.
 Exchange rate instability– The value of paper money is instable and is subject to
fluctuations in the exchange rates. The fluctuations in the exchange rate market also
produce serious effects on the price level in the economy.
 Troubling balance of payments – Over issuance of money results in decrease of
value of money and causes inflation. Due to which price of imported goods
increases because they are to be paid by exchanging devalued currency for foreign
currency. It results in unfavourable balance of payment.
 Short life – Although the paper currency is not affected by wear and tear but it can
be damaged due to fire or water. Due to this the life of the paper currency is much
less than the metallic money.

Bank Money or Credit Money
 Another type of money in the modern world is the use of the cheque as
money. The cheque is like a bank note in that it performs the same function. It
is a means of transferring money or obligations from one person to another.
But a cheque is different from a bank note. A cheque is made for a specific
sum, and it expires with a single transaction. A cheque is not money. It is
simply a written order to transfer money. However, large transactions are
made through cheques these days and bank notes are used only for small
transactions. Further credit and debit cards issued by banks are also falls
under credit money or bank money. In modem economies, with the
development of banking activity, credit money is being widely used. Demand
deposits of banks, which are withdraw able through cheques, serve as money
and the cheques are accepted as a means of payments. It is to be noted that a
cheque by itself is not money; it is only a credit instrument which performs
the functions of money. That is why credit money is regarded as near money.
In a modern economy, currency money (paper money and coins) and bank
money constitute the major portion of money supply. As the economy
becomes more and more advanced, the proportion of bank money in the total
money supply increases. The currency money is a legal tender and is
generally accepted. While bank deposits are conventional money and lack
general acceptability.

E – Money
 Electronic Money (E – Money) is the term used for new age Money
system.
 E-Money is also called online banking and it is an outgrowth of PC
banking.
 E-money uses the internet as the delivery channel by which to conduct
banking activity, for example, transferring funds, paying bills, viewing
checking and savings account balances, paying mortgages and
purchasing financial instruments and certificates of deposits.
 Electronic Money (E-Money) is broadly defined as an electronic store
of monetary value

Internet Banking or online Banking
 Online Banking (OLB) is an electronic payment system that enables
customers of a financial institution to conduct financial transactions on a
website operated by the institution, such as a retail bank, virtual bank, credit
union or building society.
 Online banking is also referred as Internet banking, e-banking, virtual
banking and by other terms. To access a financial institution's online
banking facility, a customer with Internet access would need to register with
the institution for the service, and set up some password (under various
names) for customer verification. The password for online banking is
normally not the same as for telephone banking.
 To access online banking, a customer would go to the financial institution's
secured website, and enter the online banking facility using the customer
number and password previously setup. Some financial institutions have set
up additional security steps for access to online banking, but there is no
consistency to the approach adopted.

Features of Online Banking
1. A bank customer can perform non-transactional tasks through online banking, including
 Viewing account balances
 Viewing recent transactions
 Downloading bank statements, for example in PDF format
 Viewing images of paid cheques
 Ordering cheque books
 Download periodic account statements
 Downloading applications for M-banking, E-banking etc
2. Bank customers can transact banking tasks through online banking, including –
 Funds transfers between the customer's linked accounts
 Paying third parties, including bill payments and third party fund transfers
 Investment purchase or sale
 Loan applications and transactions, such as repayments of enrolments
 Credit card applications
 Register utility billers and make bill payments
 Financial institution administration
 Management of multiple users having varying levels of authority
 Transaction approval process
 Some financial institutions offer unique Internet banking services, for example: Personal
financial management support,

Advantages of E Money
There are some advantages on using e-banking both for banks and
customers:
 Permanent access to the bank
 Lower transaction costs / general cost reductions
 Access anywhere

Type of E-money
 In general, there are two distinct types of e-money: identified e-money and
anonymous e-money also known as digital cash.
 Identified e-money: Identified e-money contains information revealing the
identity of the person who originally withdrew the money from the bank.
Also, in much the same manners as credit cards, identified e-money enables
the bank to track the money as it moves through the economy.
 Anonymous e-money: anonymous e-money works just like real paper cash.
Once anonymous e-money is withdrawn from an account, it can be spent or
given away without leaving a transaction trail. You create anonymous e-
money by using blind signatures rather than non-blind signatures.
 Varieties of e-money: There are two varieties of each type of e-money:
online e-money and offline e-money.
 Online e Money means you need to interact with bank to do a transaction
with a third party.
 Offline E Money means you can do a transaction without having to directly
involve a bank. Offline digital cash is the most complex form of e-money
because of the double-spending problem.

The application of e-money in Indian economy
 E-money is the newest payment instrument.
 As a part of the new electronic payment system (possible future substitute of
traditional payment), e-money raises the professional interest about its
implications to further development of banking functions in the global and
networked economy.
 Statistical evidence confirms the existence of e-money in the developed
countries, which is understandable because of their high technological level
and knowledge and the ability to absorb useful innovations of any kind.
 Although electronic money has been present in their markets for more than
20 years, its use is still at a very low level.
 Countries from the backward region are in the early beginning. They are in
the phase of accepting electronic banking, and putting into force the
legislation for e-money.
 The reason could be found in the level of economic and technological
development. One of the leading factors opposing the existence of e-money
is the strong competition from the debit/ credit cards. The possible influence
of e-money on the monetary policy is also a topic of professional interest
overall. E -money has the potential to substitute currency in circulation,
which is part of the monetary aggregates from the balance sheet of central
banks.

Plastic Money
 Single or limited - purpose cards – These are cards that can be used only in a specific
store or group of stores, or for a specific purpose for e.g. Cards issued by Big Bazar,
Lifestyle etc.
 Debit Cards: A debit card (also known as a bank card or check card) is a plastic payment
card that provides the cardholder electronic access to their bank account(s) at a financial
institution. Some cards may bear a stored value with which a payment is made, while
most relay a message to the cardholder's bank to withdraw funds from a payer's
designated bank account. The card, where accepted, can be used instead of cash when
making purchases. In some cases, the primary account number is assigned exclusively for
use on the Internet and there is no physical card. In many countries, the use of debit cards
has become so widespread that their volume has overtaken or entirely replaced cheques
and, in some instances, cash transactions.
 Credit Cards – A credit card is a payment card issued to users as a system of payment. It
allows the cardholder to pay for goods and services based on the holder's promise to pay
for them. The issuer of the card creates a revolving account and grants a line of credit to
the cardholder, from which the user can borrow money for payment to a merchant or as a
cash advance. A credit card is different from a charge card: a charge card requires the
balance to be paid in full each month. In contrast, credit cards allow the consumers a
continuing balance of debt, subject to interest being charged. A credit card also differs
from a cash card, which can be used like currency by the owner of the card. A credit card
differs from a charge card also in that a credit card typically involves a third-party entity
that pays the seller and is reimbursed by the buyer, whereas a charge card simply defers
payment by the buyer until a later date.

Role of Money-Static Role
 Serving as a medium of exchange: Money removes the need for double coincidence of wants
and the inconveniences and difficulties associated with barter. The introduction of money as a
medium of exchange breaks up the single transactions of barter into separate transactions of
sales and purchases, thereby eliminating the double coincidence of wants. Instead of
exchanging commodities we directly exchange Money.
 Acting as a unit of account: Money becomes a common measure of value. The use of money
as a standard of value eliminates the necessity of quoting the price of apples in terms of
oranges, the price of oranges in terms of nuts, and so on. Money is the standard of measuring
value and value expressed in money is price. The prices of different commodities are
expressed in terms of so many units of dollars, rupees, pounds, etc. depending on the nature of
monetary unit in a country. The measurement of the values of goods and services in the
monetary unit facilitates the problem of measuring the exchange values of goods in the market.
 Money acts as a standard of deferred payments: Under barter, it was easy to take loans in
goats or grains but difficult to make repayments in such perishable articles in the future.
Money has simplified both taking and repayment of loans because the unit of account is
durable. It also overcomes the difficulty of indivisibility of commodities.
 Acting as a store of value : Money removes the problem of storing of commodities under
barter. Money being the most liquid asset can be kept for long periods without deterioration or
wastage.
 Removes difficulties of barter system: Under barter, it was difficult to transfer value in the
form of animals, grains, etc. from one place to another. Money removes this difficulty of barter
by facilitating the transfer of value from one place to another. A person can transfer his money
through draft, bill of exchange, etc. and his assets by selling them for cash at one place and
buying them at another place.

Role of Money-Dynamic Role
 To the Consumer: Money possesses much significance for the consumer.
The consumer receives his income in the form of money rather than in
goods and services. With money in hands, he can get any commodity and
service he likes, in whatever equalizer of marginal utilities for the consumer.
The main aim of a consumer is to maximise his satisfaction by spending his
limited income on different goods which he wants to purchase. Since prices
of goods indicate their marginal utilities and are expressed in money, money
helps in equalising the marginal utilities of goods. This is done by
substituting goods with higher utilities for others having lower utilities.
Thus money enables a consumer to make a rational distribution of his
income on various commodities of his choice.
 To the Producer: Money is of equal importance to the producer. He keeps
his account of the values of inputs and outputs in money. The raw materials
purchased, the wages paid to workers, the capital borrowed, the rent paid,
the expenses on advertisements, etc. are all expenses of production which
are entered in his account books. The sale of products in money terms are
his sale proceeds. The difference between the two gives him profit. Thus a
producer easily calculates not only his costs of production and receipts but
also profit with the help of money. Further, money helps in the general flow
of goods and services from agricultural, industrial and tertiary sectors of the
economy because all these activities are performed in terms of money.

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 Specialization and Divisions of Labour: Money plays an important role in
large scale specialization and division of labour in modern production.
Money helps the capitalist today wages to a large number of worker
engaged in specialised jobs on the basis of division of labour. Each worker
is paid money wages in accordance with the nature of work done by him.
Thus money facilitates specialization and division of labour in modern
production. These, in turn, help in the growth of industries. It is, in fact,
through money that production on a large scale is possible. All inputs like
raw materials, labour, machinery, etc. are purchased with money and all
output is sold in exchange for money. As rightly pointed out by Prof. Pigou,
“In the modern world industry is closely enfolded in a garment of money”.
 As the Basis of Credit: The entire modern business is based on credit and
credit is based on money. All monetary transactions consist of cheques,
drafts, bills of exchange etc. These are credit instruments which are not
money. It is the bank deposits that are money. Banks issue such credit
instruments and create credit. Credit creation, in turn, plays a major role in
transferring funds from depositors to investors. Thus credit expands
investment on the basis of public saving lying in bank deposits and helps in
maintaining a circular flow of income within the economy.

 As a Means to capital Formation: By transforming savings into
investment, money acts as a means to capital formation. Money is a liquid
asset which can be stored and storing of money implies savings, and savings
are kept in bank deposits to earn interest on them. Banks, in turn, lend these
savings to businessmen for investment in capital equipment, buying of raw
materials, labour, etc. from different sources and places. This makes capital
mobile and leads to capital formation and economic growth.
 As an Index of Economic Growth: Money is also an index of economic
growth. The various indicators of growth are national income, per capita
income and economic welfare. These are calculated and measured in money
terms. Changes in the value of money or prices also reflect the growth of an
economy. Fall in the value of money (or rise in prices) means that the
economy is not progressing in real terms. On the other hand, a continuous
rise in the value of money (or fall in prices) reflects retardation of the
economy. Somewhat stable prices imply a growing economy. Thus money is
an index of economic growth.

 In the Distribution and Calculation of Income: The rewards to the various factors
of production in a modern economy are paid in money. A worker gets his wages,
capitalist his interest, a landlord his rent, and an entrepreneur his profit. But all are
paid their rewards in money. An organizer is able to calculate the marginal
productivity of each factor in terms of money and pay it accordingly. For this, he
equalizes the marginal productivity of each factor with its price. Its price is, in fact,
its marginal productivity expressed in terms of money. As payments are made to
various factors of production in money, the calculation of national income becomes
easy.
 In National and International Trade: Money facilitates both national and
international trade. The use of money as a medium of exchange, as a store of value
and as a transfer of value has made it possible to sell commodities not only within a
country but also internationally. To facilitate trade, money has helped in establishing
money and capital markets. There are banks, financial institutions, stock exchanges,
produce exchanges, international financial institutions, etc. which operate on the
basis of the money economy and they help in both national and international trade.
Further, trade relations among different countries have led to international
cooperation. As a result, the developed countries have been helping the growth of
underdeveloped countries by giving them loans and technical assistance. This has
been made possible because the value of foreign aid received and its repayment by
the developing countries is measured in money.

 In Solving the Central Problems of an Economy: Money helps in solving the
central problems of an economy; what to produce, for whom to produce, how to
produce and in what quantities. This is because on the basis of its functions money
facilitates the flow of goods and services among consumers, producers and the
government.
 To the Government: Money is of immense importance to the government. Money
facilitates the buying and collection of taxes, fines, fees and prices of services
rendered by the government to the people. It simplifies the floating and management
of public debt and government expenditure on development and non-developmental
activities. It would be impossible for modern governments to carry on their
functions without the use of money. Not only this, modern governments are welfare
states which aim at improving the standard of living of the people by removing
poverty, inequalities and unemployment, and achieving growth with stability. Money
helps in achieving these goals of economic policy through its various instruments.
 To the Society: Money confers many social advantages. It is on the basis of money
that the superstructure of credit is built in the society which simplifies consumption,
production, exchange and distribution. It promotes national unity when people use
the same currency in every nook and corner of the country. It acts as a lubricant for
the social life of the people, and oils the wheels of material progress. Money is at the
back of social prestige and political power.

Other Importance of Money in Modern Economy
 Basis of Market Mechanism
 Basis of Investment system
 Medium of wealth accumulation and collection
 Motivation to economic activities
 Helpful in transfer of wealth
 Helpful in capital formation
 Removal of defects of barter system
 Helpful in international payments
 Fulfillment of deficit budgeting
 Financial assistance to international financial institutions
 Index of Individual progress
 Social Importance of money
 Political Importance of Money
 Indicator of Economic Welfare

Function of money
 Primary
 Medium of exchange
 Measure of value
 Secondary
 Standard of different payment
 Store of value
 Transfer of value
 Contingent
 Distribution of national income
 Max satisfaction to consumer
 Basic of credit
 Max of producer
 Liquidity

Primary Functions of Money
 Medium of exchange – Money serves as a medium for sale and purchase of
goods and services. When people sell things they exchange goods for
money. When buyers buy things they exchange money for goods. It has
separated the acts of purchase and sell. It is a means to an end.
 Advantages
 It solves the problem of double co-incidence of wants.
 It facilitates trade and widens its area.
 It is essential for conducting transactions in a market economy.
 Represents generalized purchasing power, which gives greater freedom
of choice.
 Production is now market oriented rather than subsistence oriented.

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 Measure of value–It is also called unit of account function of money.
Money serves as a standard unit for quoting prices. Now each good is
valued in terms of money. Money is the basis of measuring, comparing
and expressing the value of all goods and services. For example - The
price of an airplane and the price of a safety pin are quoted in terms of
money. By serving as a measure of value money has made accounting
easy and simple.
 Advantages:
 It makes possible keeping of business accounts. It would be impossible
to keep
 Business accounts unless all business transactions are in terms of
money.
 It has established a pricing process, leading to organized market,
 It has lead to economic planning and specialized production.

Secondary Functions of Money
 Store of value (asset function of money) –People save a part of their
earnings for use in future. Money fulfils this need for the people.
Money as a store of value means that money is an asset that can be
stored for use in future. One can hold ones earnings till the time one
wants to spend it. This is the store of value function of money.
 Advantages
 It comes in convenient denominations, which range from Re. 1 to 1000.
Such an advantage is not found in case of goods and services.
 Money has easy portability and general acceptability.
 Money has liquidity so is easily exchanged for goods at all time.
 Money involves less storage costs compared to goods.
 Money is more stable whereas goods may depreciate in value.

 Standard of deferred payment– Money serves as the basis of payments
contracted to be made in future. Suppose you lend Rs. 10,000 at 10%
interest per annum for one year, it means the borrower promises to pay Rs.
11,000 after one year. Money serves as a standard of such future payments.
It becomes a standard measure to return value.
 Advantages:
 It facilitates borrowing and lending.
 It leads to creation of financial institutions which are the life line of
modern business.
 Lead to formation of capital markets by being a link which connects
value of today with those of the future.
 Transfer of value – Money also serves as a convenient mode of the transfer
of value. Goods are purchased from far off places for the satisfaction of
wants, because of its general acceptability & merits of liquidity, money can
be easily transferred from one place to another. It is because of the function
of money people give their surplus money as loan & earn interest on that.
This is important to quicker the process of growth across the entire region of
the country.

Contingent Functions of Money
 Distribution of National Income: It helps to distribute the NI among various factors of
production in the form money, wages, interest, rent, profit. Because of the measure of value
function of money it is possible to measure National Income therefore it is in terms of money
values that NI is distributed amongst factors of production.
 Maximum satisfaction to consumer: Expenditure in terms of money facilitates the
measurement of maximum satisfaction to the consumer and consumer maximizes his
satisfaction when the MU derived from different goods & services are equal to each other. A
consumer who aims at maximum satisfaction buys goods & services in such a way that the
price of each commodity is equal to its marginal utility.
 Maximum Profit to producer A producer can maximise his profit if he employees various
factor of production in such a way that the price of one unit of a factor is equal to the marginal
productivity of that factor per unit.
 Basis of Credit: Creation of credit was not possible till money was introduced as credit is the
most important features of modern business & the main supporting pillar of credit is money.
The supply of credit is link with supply of money. Money serves as the basis of credit.
 Liquidity: Money is the most liquid of all the assets. Money can easily be converted into
goods & services. It is because of liquidity the people demand for money. People prefer to hold
asset in the form of money because of three motives.
 Transaction Motive
 Precautionary Motive – to meet emergency requirements.
 Speculative Motive.

Money

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