Money Functions and Role

Let’s read this article on Money Functions and Role…Money- Nature, Functions and Role

Definition of money-

Money is a medium of exchange between buyers and sellers of goods and services. It is accepted as a means of payment during a transaction.  Professor Robertson defines money as “anything which is widely accepted in payment of goods or in discharge of other kinds of business obligations”.

Difficulties of barter system and invention of money-

A barter system is a method where a good is exchanged in terms of another good. But, there are various difficulties faced by the people in this method of exchange system such as-

  • Double coincidence of wants- Under the barter system exchange can take place only when the wants for buying and selling goods of different persons coincide. 
  • High search and transaction cost- It was consuming a lot of time in searching for someone who is ready to sell and buy at the desired level. It also incurred a high transportation cost.
  • Lack of standard unit of account- In the absence of a common unit of account, the number of exchange ratios between goods would be very large. For example, one cow for one quintal of wheat, one horse for two goats, and so on.
  • Results in loss of value- Due to difficulty in storage of Perishable commodities for a longer time. There is a loss of value in that commodity.
  • Lack of information- Under a barter system traders required a good deal of information for exchange of goods for which people must spend a good deal of time resources to obtain such information. The chances of misguiding information were more frequent.

Evolution of money-

  1. Commodity money- In the beginning commodities were selected as a medium of exchange. Bows, seashells, arrows, furs and skin, etc. were adopted as money in the early stages of development. During hunting age, pastoral animals such as sheep, goats, and cows were also used as a medium of exchange.
  2. Metallic money- Kings marked their stamp on metallic money for generating trust among their people. Merchants were using it for trade purposes. Advantages of metallic money includes easy storage, no loss in its value like commodity money etc. But scarcity of metals was a major concern.
  3. Paper money- Paper money took the form of bank notes. It is issued by the Central Bank of a country. During mercantilism era paper money was backed by an equal amount of precious metals of gold and silver, known as representative paper money. The currency notes that are issued by the Reserve Bank of India are fiat paper money, i.e. thay are issued by the order of the government. As they are legal tender they are generally acceptable in exchange for goods and services and for the payment of debt. 
  4. Bank money or Deposit money– Bank money includes demand draft, overdraft, cheque, payment through  debit and credit cards, etc. Through this system a person can take loans, deposit money, send or transfer money to other person.
  5. Cryptocurrency- This is a virtual or digital form of money which is created by using blockchain technology. 

Functions of money-

Main functions of money are as follows-

  • Medium of exchange- The most important function of money is that it served as a medium of exchange. It enabled a buyer and a seller for easy and convenient transactions by avoiding double coincidence of wants of Barter system.
  • Measure of value- Another important function of money is that it serves as a common measure of value or a unit of account. Under barter system there was no common measure of value for different goods. Money has solved this problem. Now everyone can measure any goods and services in terms of money.
  • Store of value- It is easy to store money in the form of wealth for a longer period of time. There is no loss of value like in case of perishable commodities of barter system.
  • Transfer payment- Now a days money is used as a transfer payment for the workers’ family living in distant areas. It is also used in the form of remittances by the workers working in foreign countries.
  • Deferred Payment- Deferred payment means those payments which are to be made in the future like puchasinf of a car at the coast of Equated Monthly Installment (EMI).

Role of money-

Money plays a crucial role in economic development of a country such as-

  • Money promotes saving and investment- Households parks their surplus money in their bank to earn better returns in the form of interest. Banks uses their money and gives loans to industrialists and businessman for their capital requirement and factory expansion. In this way it helps in promoting saving and investment in an economy.
  • Money promotes division of labour and productivity- Money is of great importance as it promotes division of labour and productivity. Because of availability of variety of goods and services, labours are specialised in their work and help in enhancing the output production and GDP growth.
  • Money facilitates exchange and promotes trade- It is because of the universal acceptance of money, countries are trading with each other in their respective currencies. Thus money facilitated trade practises by removing the difficulties of barter system.
  • Money helps in satisfying the wants of people- With the help of money consumers and producers are able to satisfy their wants for goods and services. To the consumers money represents a general purchasing power. They can buy anything with the money at any place and time. This wants and demand by the consumers helps producer to enhance their production according to the market demand.

Conclusion of Money Functions and Role- 

Money plaus a significant role in present world. It makes our day to day transactions easy by removing the difficulties of Barter System.

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