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What is Money | Definition, Functions and various kinds of Money

What is Money
What is Money

Definition of Money

Money is the legal tender and provides liquidity. All goods and services are measured in terms of money. According to Chicago Approach. “Any commodity which is accepted as a medium of exchange and store of value is called money.

Functions of Money

These are the following functions of money:

(i) Primary function- Primary function are of following types:

1. Money as a unit of account- The monetary unit serves as the unit in terms of which the value of all goods and services is measured and expressed. As soon as a monetary unit is developed, the value of each good or service can be expressed as a price by which we mean the number of monetary units for which it will exchange.

For example we say that the value of a certain bat is Rs. 200/-, that of a pen of a certain quality is Rs. 75/- and so on. Ours is certainly a pecuniary society in the sense that values typically are measured and expressed in monetary units.

This practice of measuring the value of goods and services in monetary units simplifies accounting. Assets of all kinds, liabilities of all kinds, income of all kinds and expenses of all kinds are stated How ever money in terms of common monetary units to be added or subtracted.

As a measure of value is not perfect. For its own value (in terms of goods and services) does not stay constant. It varies from time to time. This variability of value of money raises several important socio-economic problems.

2. Money as a Medium of Exchange- This function of money is served by anything that is generally accepted by people in exchange for goods and purchasing services. The fact that money is often referred to as generalized purchasing power emphasizes the freedom of choice that the use of money.

The owners of offers goods or services need not secure their supplies from the people to whom to buy they trade those goods or services, they can use their money to buy the things they want most from the people who offer the best bargain and at the time they consider the most advantageous.

(ii) Secondary functions- Secondary function are of following types:

1. Money as a Standard of Deferred Payments- money also serves as a standard or unit in terms of which deferred or future payments are stated. This applies to payments of interest, rents, salaries, pension etc.

Loans, interest, rents and wages etc. stipulated in kind are not unknown. However large. fluctuation in value of money make money not-only a poor measure of value but also a poor standard of deferred payment.

This is because the value of money is not something intrinsic to it but a social phenomenon. This makes monetary management for stable value of money socially very important.

2. Money as a Store of value- Money also serves as a store of value. This function is derived from the use of money, as a medium of exchange in a two-fold manner. First use of money as a medium of exchange decomposes a single barter transaction into two separate transactions of purchase and sale.

This will require that the medium of exchange also serves as a store of value. Money incidentally is not the only store of value, we have other assets of all kinds which also serve as store of value and compete with money in this capacity. But money alone is a perfectly liquid store of value.

Various Kinds of Money

Kinds of Money

(1) Various things have served as money at different times in different countries. Salt and cattle for example, were used as money in ancient Rome, tobacco was used as money in the early American colonies However in due course of time most of the countries found that metallic coins such as iron copper, silver, gold etc. were more suited to serve as money.

They served well because they possessed the desirable characteristics of money They were easy to carry, they could be easily divided into smaller values and they could be easily recognized.

In modern times money is mostly non commodity money such as paper money, credit money and plastic. They have no other value than their monetary value.

(2) At present in India money consists of coins, paper money, deposit or credit money, plastic money coins are an example of metallic money.

They are not full bodied, but only token money because the intrinsic value of token. coins is less than their face value. Currency notes are merely pieces of paper that have no intrinsic value of their own. They are not convertible into anything of value at a fixed rate.

The issuing authority does not stand ready to buy them back against gold or silver at a pre-determined pace. Thus all paper currency is inconvertible.

(3) Deposit money is different from coins or currency notes. It cannot be passed on from hand to hand for a transfer of purchasing power. Deposits are only entries in the ledgers of banks to the credit of their holders.

We are treating only demand deposits of banks on which chequeens can be drawn as money. These deposits can be transferred through cheques. Only when the ownership of these deposits has been so transferred is the medium of exchange or the means of payment function of these deposits completed.

All the three components of present day money have one common feature that is that money circulates as money on the basis of trust commanded by its issuers.

The members of the public accept it in payment because they are confident that they can similarly pay it further in settlement of transactions of all kinds.

There is one more plus point of the modern day money that it releases precious metal embodied in coins under full bodied metallic standards for non-monetary uses.

Another useful distinction between different kinds of money is from the stand point of law. Coins and currency notes are granted legal tender power by the government.

It is that money very high every individual is bound to accept in exchange for goods and services and in the discharge of debts. This is not true of demand deposits of banks.

They are accepted as money on trust. They are not legal tender. A payee can legally refuse to accept payment in demand deposits through a cheque and insist on cash payment.

This is because there is no guarantee that the cheque will be honored at the issuer’s bank. Legal tender money may be limited or unlimited legal tender Small coins are usually limited legal tender.

That is they are legal tender for. payments up to only a certain maximum amount. Beyond this amount, for a single payment, they cease to be a legal tender.

In India small coins including one rupee coins and notes are limited equal tender. All other currency are unlimited legal tender.

(4) Apart from the above three ‘kinds of money there is another one which is very popular in the west and now is being increasingly used in India plastic money in the form of credit cards, Debit cards, Smart cards, Prepaid mobile SIM card, ATM cards etc.

(5) Credit card is a convenient medium of exchange which its holders to buy goods and services from member establishments without using money. The card holder is required to pay neither an interest to the bank nor a higher price for goods purchased; he pays only a fee to the bank for the facility.

The cost of arrangement is met from the increased sales which result from the use of credit cards. the card issuing bank pays to the seller as soon as goods are sold but charges the buyers after 30 to 45 days.

The bank also bears the risk that the credit card holder might default. For all this bank gets commission from the seller which is about 2.5% to 5% of the value of goods solid.

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