Money: Basic connotation
Money is the most preferred liquid asset. It is the prime mover of an economic system; and money makes the modern economic life possible. Money is defined as anything which enables us to exchange any other thing for itself.
MONEY IS defined as a general medium of exchange. Some define it in terms of its general acceptability and others in terms of its being a general measure of value. Apart from vagueness from which most of the definitions suffer, they do not fully describe the legitimate subject matter of money. Some wrongly define it in terms of its derivative (or secondary) functions. The best way to define money is to relate it to its subject matter. We may, therefore, define money as anything which enables us to exchange any other thing for itself. There are three important implications of this definition which, apart from providing other advantages, enlarge the subject matter of money. These implications are given below:
- There are many moneys. If a commodity X enables anyone to exchange another commodity Y for itself, X has got the same right to be called money as a rupee note;
- The difference between barter and money economy ceases to be a difference of kind; it becomes a difference of degree only;
- Finally, money defined in this way starts to play the role of capital.
Functions of money
Money performs four functions. These are as follows:
Besides the advantages of money which stem from its four functions, there are a few other advantages, namely:
- It is a medium of exchange; this function is also known by various other names, some of which are: medium of payment, means of payment, medium of circulation;
- It is a unit of value; this function is also known by such other names as unit of account, standard of value, measure of value, common denominator of value etc;
- It is standard of deferred payments;
- It is a store of value.
In other words, ‘money is a matter of functions four, a medium, a value, a standard , a store’.
The first two functions are called primary functions and the last two are called the derivative or secondary functions (because they are derived from the primary functions). These four functions act as the four measures against the difficulties of barter system. Money performs these functions satisfactorily only when the value of money (or its purchasing power) keeps stable within reasonable limits. If the value of money fluctuates by big margins (as happens when there is severe inflation), the usefulness of money and its functions are reduced or even disappear.
The first two functions are called primary functions and the last two are called the derivative or secondary functions (because they are derived from the primary functions). These four functions act as the four measures against the difficulties of barter system. Money performs these functions satisfactorily only when the value of money (or its purchasing power) keeps stable within reasonable limits. If the value of money fluctuates by big margins (as happens when there is severe inflation), the usefulness of money and its functions are reduced or even disappear.
Besides the advantages of money which stem from its four functions, there are a few other advantages, namely:
- Money is the most preferred liquid asset;
- Money is the prime mover of an economic system; and
- Money makes the modern economic life possible.
Evolution of money
If one looks at the history of money, one will find that it is essentially topical and that money has undergone much evolution. In the beginning (around the middle of the 18th century) money was essentially full-bodied money (in the sense that its value as a commodity was as great as its value as money, ie, its face value was almost the same as its true value like coins of standard metals like gold, silver, and copper etc) and included commodities of various kinds and coins of various metals which has now given place to credit money (including paper and coins made of inferior metals and their alloys), and to notes and bank deposits. In the present world of banks, insurance companies, the credit system, money market, and stock exchanges, money is very much different from what it used to be.
Monetary policy
Monetary policy refers to the manner in which money should operate in an economy at any time. This manner depends upon the various features that constitute the economy. In other words, monetary policy is that part of the general economic policy that tries to regulate the amount (or the level) of money (or liquidity) in order to achieve the objectives of economic policy. There are five objectives of economic policy. These are:
If one looks at the history of money, one will find that it is essentially topical and that money has undergone much evolution. In the beginning (around the middle of the 18th century) money was essentially full-bodied money (in the sense that its value as a commodity was as great as its value as money, ie, its face value was almost the same as its true value like coins of standard metals like gold, silver, and copper etc) and included commodities of various kinds and coins of various metals which has now given place to credit money (including paper and coins made of inferior metals and their alloys), and to notes and bank deposits. In the present world of banks, insurance companies, the credit system, money market, and stock exchanges, money is very much different from what it used to be.
Monetary policy
Monetary policy refers to the manner in which money should operate in an economy at any time. This manner depends upon the various features that constitute the economy. In other words, monetary policy is that part of the general economic policy that tries to regulate the amount (or the level) of money (or liquidity) in order to achieve the objectives of economic policy. There are five objectives of economic policy. These are:
- to accelerate the rate of economic growth of the economy;
- to maximise the level of employment;
- to stabilise the internal value of currency, ie, to stabilise the internal price level;
- to maintain the external value of currency, ie, to maintain the stability of foreign exchange; and
- to achieve a better (in terms of equity) distribution of national income.
These objectives do not harmonise with each other. For example, the objective of maximisation of the level of employment leads to deficit financing which, in turn, leads to higher price level, which results into unstable price level. We have, therefore, to decide upon the extent to which one objective has to be sacrificed for another. We have to choose between the various combinations of these objectives. Monetary policy is directed to satisfy a particular combination of these objectives chosen by a particular economy. All the measures to achieve a given combination of economic objective belong to monetary policy as long as they act through monetary control. The essence of what has been said is that there should always be an optimal trade-off amongst the various objectives in order to make monetary policy effective.
Forms or kinds of money
Every classification requires some basis. The classification of money can be done on the following different bases:
Forms or kinds of money
Every classification requires some basis. The classification of money can be done on the following different bases:
- The physical characteristics of the material of which money is made;
- The nature of the agency which issues the money, such as the central bank;
- The relationship between the value of money on the basis as given by Chandler.
There are few other bases of classification given by Keynes and Robertson. Let us briefly look at the Chandler’s classification. According to it, money can either be full-bodied or representative full-bodied or credit money. Full-bodied money is that whose value as a commodity is as great as its value as money, ie, whose face value is almost the same as its true value. Representative full-bodied money is generally made of paper and is a kind of receipt from the issuer that on demand an equivalent amount in bullion will be refunded. Here, the face value of money is more than its true value. Credit money is any money other than representative full-bodied money whose face value is much more than its true value. Credit money is further divided into
- Credit money as issued by government;
- Credit money as issued by banks.
The first category has three different kinds: token coins; representative money; and circulating promissory notes.
Money has thus many facets, and it performs many functions to facilitate the working of an economic system.
Money has thus many facets, and it performs many functions to facilitate the working of an economic system.
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