Q1. What is money? What are its functions? OR Define money.

Explain its main

functions.
ANS: In the early stage of human history, the organizational set-up was very simple.
People were mainly engaged in searching for basic goods or necessity of life such as food,
clothing and shelter. The society was self-sufficient and independent. Gradually due to
commercialization of economy and change in the managerial approach there was need for
money. This is because the society believed in barter system in the early period but due to
complexities of the economy, barter system was unable to solve the problem of exchange.
There was need for third commodity which can solve the problem of barter system.
Money was therefore introduced to solve the problems of modern dynamic world. In the
modern economy money not only includes currency, coins and noted but also bank
money in the form of cheques, bills of exchange etc.
Some of the definitions of Money are as under.
According to Francis Walker, Money is what money does. This means that
money performs the function of exchange. Money is the commodity chosen by consent to
be a measure of value and any such commodity which performs the function of money
such as bills of exchange; credit cards are also called money.
According to Crowther, Money is anything generally acceptable as the means of
exchange and at the same time acts as a measure and store of value.
According to Keynes, money is that commodity by delivery of which the debt
contracts are discharged and in the safe of which a store of general purchasing power is
held.
According to Prof. Alfred Marshall, The instrument that is accepted without
much doubt or close examination as the means of purchase and sale of goods and services
is called money.
According to A.C.Pigou, In order for anything to be classed as money, It must be
accepted fairly widely as an instrument of exchange.
According to Prof. Halm, The word money has been used to designate the
medium of exchange or as a standard of value.
Functions of Money:
A: Primary Functions: These functions are also referred as the original functions of
money. Some of the primary functions are:
1. Money is a medium of exchange:
Money is generally accepted in exchange of any goods or services. In modern economy
the price of any commodity is generally accepted in the terms of money. In modern
economy money is received when sales is done while money is spent when purchases are
made. This explains that for any exchange of goods and services money is necessary. The
modern economies make use of money and all commodities have different units of
measurement and are usually exchanged with the common commodity called money.
2. Money is a measure of value:
The second function of money is that it measures the values of all goods and services. All
the values of goods are expressed in terms of money. This makes it easier to determine
the rate of exchange between various types of goods. Therefore, money is described as
measuring rod with which the values of goods can easily be determined.
B: Secondary functions: Money also performs certain secondary functions
such as:
1. Money is a standard of deferred payments:
 Deferred payments mean the payments to be made at some future date. Lending as well
as borrowing is done in terms of money and thus, it acts as the standard of deferred
payments. Money is more suitable than any other goods. The banking industry worked on
the principle of deferred payment.

FUNCTIONS OF MONEY

PRIMARY FUNCTIONS SECONDARY CONTINGENT OTHER FUNCTIONS

OF MONEY FUNCTIONS OF FUNCTIONS OF OF MONEY
MONEY MONEY

.Money is a
medium of . Standard of . Money is the basis . Money helps to
exchange deferred of credit maintain repayment
payment capacity
. Money as a . Money facilitates
measure of . Store of value distribution of social . Money represents
value . Transfer of income generalized
Value purchasing power
. Measurement of
National Income . Money gives
. Money increases liquidity to capital
the productivity of
capital

. Money represents
the general
purchasing power

2. Money is a store of value/Purchasing power:

In the barter system savings is discouraged because in the absence of money savings
could be done only in terms of commodities. Therefore in case of perishable goods
savings is not possible but with the introduction of money in the market, it can be stored
and used at some future date.
3. Money is the means of transferring purchasing power:
Money is accepted by all institutions and people all over the country. Money can be
transferred from one person to another and from one place to another. Money makes it
possible to transfer the value with the help of banking system through cheques, draft with
high degree of security.
C: Contingent Functions:
These functions of money are the extension of primary and secondary functions of money.
Some of the functions are as below:
a. Money is the basis of credit:
The importance of credit has increased in the recent times. The use of cheques, bills of
exchange has increased in the recent times. This has encouraged credit creation in the
economy.
b. Money facilitates distribution of social income:
Production is made possible only with the help of four factors of production namely land,
labour, capital and entrepreneur. The factors should be rewarded with incomes in the
form of rent, wages, interest and profit. The share of factor is decided with the help of
money.
c. Measurement of National Income:
The national income of the country is usually measured by calculating the money value
of goods and services flowing in the economy for a specific period usually a year.
National income indicates economic growth and development of the country.

d. Money increases the productivity of capital:

Money is the most liquid of all economic assets because of this liquidity money can be
transferred to more productive uses from less productive uses.
e. Money represents the general purchasing power:
The purchasing power is the capacity to buy things which is expressed in the terms of
money. The real income can be obtained by comparing money income with the general
price level. The real income expresses the purchasing power.
D: Other Functions:
a. Money helps to maintain repayment capacity:
Money is acceptable by all. The firms keep some amount of liquid cash as its assets. This
helps the firms to maintain re-payment capacity.
b. Money represents generalized purchasing power:
Money can be stored and it is not necessary that the money has to be used for the same
purpose for what it is stored. For e.g. firms maintain depreciation allowance but uses the
money the way it likes.
c. Money gives liquidity to capital:
Money being most liquid it can be put to any use and in any manner. The firms can keep
liquid capital so that it can be invested by the firms whenever and wherever it likes.