Money And Its Functions (Banking

               Introduction To Banking 

       Money and its functions

 Money and its functions 

Money and its functions

l        Primary Function of Money

l        Secondary Functions of Money

l        Contingent Functions

What is money?

l        Money is anything that is generally acceptable in payment for goods and services or in the repayment of debts.

l        Anything that is regularly used in economic transactions or exchanges.

Functions of money

            Primary Functions of Money

1.         Money as a medium of exchange: Money acts as medium of exchange and helps in overcoming the difficulty of coincidence of wants of the barter economy.

l        The use of money as medium of exchange has permitted more specialization by lowering transactions cost and encouraging division of labor.

Money as unit of account: the value of goods and services can be expressed in terms of units of money. It is same as we measure weight in terms of pounds or distance in terms of kilometers, similarly the value of goods and services can be measured and compared in terms of money. Money is the yardstick that allows the individuals to measure the relative value of goods and services. E.g. a car for sale at five lakh AFS, a house fifty lakh AFS. The use of money as a unit of account greatly reduced transaction costs i.e. the time, effort and expenses that into the purchases or sale of goods. 

.           Money as Standard of deferred payment: in modern world, business is mostly conducted on the basis of credit. When goods are supplied to a buyer with a promise to pay in future, he  has double advantage. He sells the goods in market and make use of them. Secondly he is in a position to postpone making immediate purchases. The advantage of selling good on a seller or making the payments on a certain date in future by the buyer is only workable and acceptable in a money economy and least in a barter economy.

Money is the only unit of account which is easy to borrow and easy to lend. The function of money as standard of deferred payments is better served if the value of money more or less remains stable.

4.       Money as a store of value: Money also functions as store of value. It represents purchasing power overtime. Since money is the most liquid of all assets, so it is easier to store the value in the form of money.  In barter economy, when goods were used as money, there were problems in storing wealth in the form of cattle, grains etc. They used to deteriorate and were costly to handle. Money has removed this difficulty of store wealth.

Secondary Functions of Money:

Money has the potential to influence the economy. It influences the price level, interest rates, utilization of resources etc. Secondary Functions are:

1.Aid to specialization, production and trade: The use of money helped in removing the difficulties of barter. The market mechanism, production of commodities, specialization, expansion and division of trade etc have all been facilitated by the use of money.

2.Influence on income and consumption: The use money has a direct bearing on the levels of income and consumption in the country. All production takes place for the market and the factor payments (rent, wages, interest and profits) are made in money. The higher the production, the higher are the remunerations to the factors and vice versa.

3. Money is an instrument of making loans: People save money and deposits it in banks. The banks advance these businessmen and industrialists. Money is thus the instrument by which savings are transferred into investment.

4.Money as tool of monetary management: Money is an important tool of monetary management. If the money is effectively used, it helps in increasing output and employment. Money is also an important factor in determining the distribution of income and wealth among the members of the society. 

5.Instrument of economic policy: Money is an important instrument of economic policy of the govt. In order to achieve growth, reduce unemployment and maintain regular expansion of economic activity, money is the most powerful factor.

          Contingent Functions:

            These functions are derived from the primary and secondary functions. According to Kinley, the contingent functions are:

1.       Distribution of national income: Money facilitates the distribution of national income among the various factors of production. It also helps in bringing justice in distribution.

2.       Basis of Credit System: Banks create credit on the basis of their cash reserve. Any change in the volume of money is brought about mainly by an increase or decrease in money supply.

3.       Measure of marginal productivity: The marginal productivity of each factor of production is measured with the help of money. Money also helps in equalization of marginal utility in expenditures.

4.       Liquidity of Property: Money gives a liquid form to wealth. A property can be converted into liquid form with the use of money.