Macro economies - Features and Functions of Money and its Significance in Economy PDF

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CHAPTER - 1 [1] Introduction: Money is one of the greatest inventions of man and occupies an important place in the modern economic system. In fact, it is rather difficult to imagine the functioning of a modern economy without the use of money. Whatever may be the form of economy-capitalistic, socialistic, or a mixed economy, the role of money has been well recognised in every economic system. And that is why, modern economy has perhaps been rightly called as money economy, where in all exchanges take place through money, in fact, has entered all aspects of economic life in modern times so much so that the real distinction between means and ends as regards money has vanished. In the words of Dr. Marshall, money is the pivot around which the economic science clusters. Likewise, according to Prof. Crowther, "in the whole commercial side of man's social existence, money is an essential invention on which all the rest is based." There is no phase of human life which has not been affected by the monetary system and there is no aspect of life of the individual or society into which its influence does not reach. In modern times. an essential function of money is to regulate general economic activity and accomplish general social reforms, Money, in fact, acts today as a vehicle of social reform and a cure for economic maladies It acts as a link between the various activities in the economic system; its invention and use has made economic development possible and widened the horizons of economic transactions. In short, money acts as a key determinant of the modern economic system. It will, therefore, be interesting to trace in brief the origin and evolution of money as also to study its nature, functions and significance in modern economy. (2) The Origin and Evolution of Money: Etymologically, the word 'money' has been derived from the Latin word 'Moneta'- the name of Roman Goddess Juno in whose temple, coins were minted in 344 B.C. Money, however, is older than coinage because prior to the introduction of the coinage system different articles like cattle, pigs, teeth, cowrie shells, food grains, tea and tobacco, ivory and iron, gold and silver etc. have been used as money at different times and at different places. The origin of money as such is difficult to trace. It may, however, be said that the development of the institution of money is in a way, 'an epitome of the history of human civilisation" according to Lord Keynes the origin of money is deeply rooted in antiquity. In his well-known work, 'A Treatise on Money', he says, 'Money', like certain other essential elements in civilisation is a far more ancient institution than we were taught to believe some few years ago. Its origins are lost in the mists when the ice was melting, and may well stretch back into the paradisaic intervals of human history of the interglacial periods, when the weather was delightful and the mind free to be fertile of new ideas in the Islands of the Hesperides or Atlantics or some Eden of Central Asia'. The need for money arose out of the difficulties of the barter system of exchange which was prevalent in the primitive: economy. This was the simplest and direct method of exchange where in one commodity or service was exchanged for another commodity or service without the use of money. It continued as long as the requirements of human life were simple and extremely limited as also the area of

CHAPTER - 1 money by way of rent, wages, interest, profits, etc. 2. Money Equalises Marginal Utilities/ Productivities: Money helps both the consumers and the producers to maximise their satisfaction. The consumers can equalise the marginal utilities of different commodities purchased with the help of money and get maximum satisfaction. This follows from the law of equi-marginal utility. Likewise, a producer can equalise the marginal productivities of different factors of production in order to maximise his profits. All these are done on the basis of prevailing money prices in the market. In this way, money can ensure maximum satisfaction both to the consumers and the producers. 3. Money as a Basis of Credit System: Modern economy is credit economy. But the main basis of credit in the economy is the monetary system. The supply of credit is to be based on the supply of nominal money. Expansion or contraction of credit is the result of an increase or decrease in the supply of money. Money, thus, forms the basis of the credit system; without a monetary reserve, it is impossible to create credit. 4. Liquidity Function: Since, by definition, money is the most generally acceptable commodity, it is also the most liquid of all resources. It is superior to all assets in terms of liquidity. It is money which imparts liquidity to all types of wealth and distinguishes it from all other commodities. Money is cent percent liquid. (4.1] Static and Dynamic Functions of Money: Dr. Paul Einzig has classified functions of money into static and dynamic functions. The static functions of money are those which facilitate the working of the economy of a country. Thus, the traditional functions of money, namely, medium of exchange, measure of value, standard of deferred payments and store of value are regarded by Dr. Einzig as the static functions or technical functions of money, because without these functions, the economy of a country cannot work in practice. The dynamic functions of money, on the other hand, are those which cause movements in the level of economic activity in an economy through its influence on the price level, volume of production, consumption and the distribution of national income. Changes in the quantity of money bring about changes in the value of money (that is, price level and the rate of Interest which in turn affect the volume of investment, employment, income and saving in the economy. These dynamic functions of money have assumed considerable importance in the determination of economic trends in recent years. A clear appreciation of the dynamic functions of money enables the monetary authority to use money as an engine of economic and social progress. [5] Money as an Asset and the Concept of Near-Money:

We have seen above that money is the most liquid of all assets. It possesses the unique quality of perfect liquidity. No other form of wealth is perfectly liquid.

CHAPTER - 1 Compared to all other assets, money is perfectly marketable or transferable because it actually functions as a medium of exchange. In fact, money is directly expendable and universally acceptable commodity in the discharge of debts and obligations. Again, money possesses relative stability of value also, hence there is capital certainty in money. In short, money is readily expendable, while in the case of other assets, one has to first exchange a given asset for cash which involves a time-lag, cost and even capital uncertainty, Money is directly expendable and universally acceptable commodity in the settlement of obligations; besides money possesses relative stability of value. As a store of value, peoples' preference for money over other assets flows essentially from its liquidity and the uncertainty about the future value of non-money assets. In this context, Keynes very rightly observes that, " the importance of money essentially flows from its being a link between the present and future by acting as a store of value." (5.1] Money and Near- Money Assets: Money assets are those financial assets which are directly acceptable as a means payment like currency notes, coins, demand deposits of commercial banks, etc. However, there are some financial assets which are not money but are like money, for example, time deposits, treasury bills, bills of exchange, deposits of postal savings, units of the Unit Trust, Travellers' Cheques, national savings certificates, shares, bonds, debentures of joint stock companies, etc. These financial assets do not possess cent percent liquidity which money commands. They are, as such, known as near-money or quasi-money assets. Thus, near-money is an asset whose value is fixed in terms of money and which can be easily converted into money, yet it cannot be spent directly as a means of payment. It has to be first converted into money and then used as a means of payment. It should, however, be noted here that both money and hear money assets are claims but near-money assets are not money proper. Coms and currency notes are claims against the State while demand deposits are claims against the commercial banks Near-money is also a claim against some financial institution but money has a special advantage of its own, in that it is superior to all assets in terms of liquidity. (5.2) Distinction Between Money and Near-Money: We may distinguish money and near-money as follows. 1. Money performs the unique function of medium of exchange and general acceptability, while near money by itself is not a means of payment. it has first to be converted into money and then used as a means of payment 2 Money usually refers to coins, currency notes, demand deposits of bank etc, while near-money refers to financial assets like time deposits, bills of exchange, bonds, shares, postal savings deposits, travellers cheques, etc....