function of money
He has has divided the function of money into three categories where as professor Chandler has considered the main function of money to is transaction of goods and services. On the other hand there is an English poem in a vouge about the function of money , money is matter of four functions: a medium , a measurement a store a standard.
But in practice the function of money are wide ranging considering the convenience of study function of money can be classified as follows:
1) primary functions:- (a) medium of exchange (b). Measure of value
2) secondary functions:-(a). Standard of deferred payment (b). Store of value (c). Transfer of value
3) contingent functions:-(a) distribution of income (b).giving a general form to capital
(C). Basis of credit. (D). Maximum satisfaction.
4) other functions:-(a). Liquidity (b) bearer of options (c). Guarantor of solvency.
A.Primary function of money:-
primary function of money are those functions which are applicable in any country in every time and every circumstances. Following two functions come in this category.
(a). Medium of exchange.
Once upon a time barter system of exchange was in practice.Many difficulties had to be faced those days. Measuring the value of goods and the need of double coincidence of wants were big difficulties.
Exchange has become very easy with the invention of money.today any goods or services can be sold in exchange of money and the commodities and services can be purchased with money. Thus, money is convenient means of exchange.
(b) measure of value:-
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It was a problem with the barter system that many units of a commodity should be given in exchange for a certain units of a commodity. Now, every commodity and every services can be measured in money. Being a medium of exchange money is also a medium of measure of value. it means that money is the only unit of measurement of exchange ratio between two commodities.
But it is also important to note that value of money changes from time to time. Consequently, gross measurement of money is still troublesome. cloth is measured in metre and the length of metre is fixed and rice is measured in kilogram and kilogram is a fixed quantity. But the value of money is not still and its keep changing. This creates difficulties in the economy of a country.
(B) Secondary function.
Secondary function which helps in the primary function of money are called secondary function following functions come in this category:
(a) standard of deferred payments
The present era is the era of credit. Credit plays an important role in the progress of any business. credit is a system in which goods and services are exchanged or money is borrowed on the promise of future payments. The use of money has made the credit system quite easy. In barter system future payments were made in commodities only. The lack of durability in goods post many problems in future payments. money is more durable in comparison to commodities and so it becomes the basis of future payments.
(b) store of value:-
Nobody knows what the future stores for him or her. So people want to do saving considering the needs to meet the expenses in disease , marriage ,old age etc. in the days of barter system it was not possible to store commodities for a long period , but the invention of money has is the process of storing of money and wealth. Banking system also operates using this characteristics of money. this feature of money promotes the tendency of saving which leads to capital formation and activity is the economic development of a country.
(c). Transfer of value:-
Transfer of value plays in important role in the process of economic development of a country. Today the scope of exchange is very vast. People are getting success in selling their immovables at a place and purchasing part off. Economic pase has increased due to this function of money.
(C). Contigent functions
Kinley has stated that money performs contingent functions besides primary and secondary functions some of such functions are:-
(a) distribution of income:-
The work of production has become white and complex in the present era. Various sources contribute in the work of production are paid for their contribution after selling the produced goods and getting money. The job of production is possible only due to this rule of money. Thus, money is the basis of social distribution of income.
(b) basis of credit:-
Credit instrument are increasingly being used these days. Checks Bank drafts bill of exchange hundi etc. are commonly used for payments. But money is hidden in these credit instruments. Banks issues draughts are allowed the use of cheque against liquid money only. Thus, money does the work of credit.
(C). Maximum satisfaction
Every consumer wants to get maximum satisfaction. To achieve satisfactions, he wants to spend his income to meet various needs in such a way that he can get equal marginal utility from every commodity. This is possible only through the use of money.
(d) giving a general form to capital
Money has the maximum liquidity among all forms of capital. That is why a capital in the form of money can be brought into any use . Due to liquidity of money, capital can be drawn from the less productive areas into more productive areas.
(D) Otlher functions of money:-
Becide the functions started above , money does some other functions as well. A few of these are as follows:-
(a) bearer of option :-
We know that money has purchasing power. This purchasing power is of both___ present and future. people store money to meet future needs and use that money in future according to their own wishes.
(b) liquidity:-
Money gives more liquidity to assets. Due to liquidity, money can be used for any purpose.
(c) Guarantor of solvency :-
every person of firm keep sufficient money in reserve to maintain the ability of solvency. If they don't have their sufficient money for repayment of loans, those lose their ability of solvency and they are declared to be insolvent. Thus, p money works as a indicator of guarantee of ability of solvency.
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