What is Money?
Money can be defined as any asset or commodity that is widely accepted for the exchange of goods and services. The word “Money” is derived from the Latin word “Moneta”.
According to Mankiw:
Money is the stock of assets that can be readily used to make transactions.
Parkins defined money as:
Money is any commodity or token that is generally accepted as a means of payment. (Parkin, Foundations of Macroeconomics)
Prof. John Hicks defines money as:
Money is defined by its functions, and anything is money which is used as money. Money is what money does.
State Bank of Pakistan defines money as.
Money is any asset or commodity that is readily accepted for making payments against the purchase of goods and services or settling debt obligations. Such as currency notes, coins and cheques drawn against bank deposits.
According to Crowther:
Money can be defined as anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and a store of value.
Barter System
Barter system is a system in which goods and services are directly exchanged for other goods and services without the use of money.
Difficulties of Bater System
1. Lack of double coincidence of wants
In a barter system, exchange can only take place if both parties want each other’s goods at the same time. If a person has wheat and wants rice, he must find someone who not only has rice but also wants wheat. This is difficult and time consuming.
2. Lack of common measure of value
There is no standard unit to measure the value of goods. It becomes difficult to determine the rate at which goods should be exchanged. For example, how much wheat should be exchanged for rice? There is no fixed standard to decide the exact proportion.
3. Indivisibility of certain goods
Due to indivisibility of certain goods in barter system the bargaining problem arises and no exchange takes place. For example, a person desires a horse for four sheep, but the other person wants to sell it for 5 sheep. If it would be possible to exchange a horse for four and a half sheep, there might be mutual satisfaction in exchange.
4. Difficulty in storing value.
Money is a store of value. We can stock and hold money for a long time relative to other goods or commodities. It means we can transfer purchasing power from present to future. It is impossible to store cattle, wheat and other grains for a long time.
5. Difficulty in making deferred payments.
It is difficult to make payments in the future such as repayment of loans because the value of goods may change over time. If someone borrows wheat and promises to return it after six months, the value or quality of wheat may change.
6. Difficulty in Transfer of Value
Barter makes large-scale trade and transportation difficult. For example, carrying 100 bags of wheat to another city for exchange is inconvenient and costly.
Evolution of Money
Evolution of money means that money we use today for transactions was not always in this form it passed through different stages from commodity money to plastic money. The type of money in every age depended on the nature of its livelihood. For example, in a hunting society people use skins of wild animals as money, in pastoral society livestock was used whereas in the agriculture society grains and food stuff was used as money.
1. Commodity Money
Commodity money was used in ancient times, especially in hunting and agricultural societies. People used items like animal skins, seashells, salt, and cattle as money. For example, Romans used salt, Indians used seashells, and Mongolians used squirrel skins as money. However, commodity money had several problems like:
- Indivisibility: Some commodities like cows could not be divided into smaller units, making small transactions difficult.
- Heterogeneity: Different regions used different commodities, which made trade between areas difficult.
- Perishability: Commodities could spoil or lose value over time, making saving and repayment of loans difficult.
2. Metallic Money
Due to perishability, indivisibility, heterogeneity, and difficulty in transfer people began using metals like gold, silver, and copper as a common medium of exchange instead of commodities. The metals were converted into predetermined weights. but it has also limitations such as unequal weights and inconsistent quality.
3. Coins as Money
With the development of metallic money, people began making coins from these metals such as gold, silver, and bronze. Gold coins had the highest value and were used to purchase expensive goods, while silver and bronze coins were used for smaller transactions. Due to its scarcity and high value, gold was widely accepted in different cities.
However, coins had certain drawbacks. They were heavy and difficult to carry, and there was always a risk of theft. In some cases, people melted coins and sold the metal in markets. To address these issues, gold and silver were sometimes combined in the same coin.
4. Paper Money
Paper Money was started because of Goldsmiths. At that time goldsmith were considered honest. People deposited their money and precious things to them. Goldsmith saved their money in safes and lockers. Goldsmiths gave receipts for these deposits. These receipts can be used as money and exchange of goods and services. This led to the development of bank notes.
5. Credit Money
After paper money cheques and drafts are used as money. These are like bank notes that are used to exchange goods and services. Cheques are issued by banks. Cheques and bank notes perform the same functions. But he difference is that cheque is used for a single transaction after that it expires. But bank notes can be used for multiple transactions.
6. Near Money
Near money refers to financial assets that are not directly used as money for making payments but can be quickly converted into cash with little loss of value. These assets are highly liquid and act as a close substitute for money, but they are not legal tender. Examples include treasury bills, bills of exchange, bonds, debentures, saving certificates etc.
Functions of Money
Primary Functions
Medium of exchange
The function of money that it is used to exchange goods and services and facilitate transactions is called medium of exchange function of money. When money is used as a medium of exchange it means that it is generally accepted by all people.
It is the primary function of money because it is due to function All other functions developed. With the use of money, the problem of barter system like double coincidence of wants has been solved because it does not require to find people that want each other’s good.
A Unit of Account
The function of money that it measures the worth or value of goods and services is called the unit of account function of money. Money act as a measuring rod. Just as there are many measures to express length, weight and area same as money measures the value of goods or services.
It is this function of money that we can measure all the economic variables such as GDP, investment, expenditure, income, exports, imports, capital stock etc. All these variables are measured in monetary units like rupees, dollars, pounds etc.
Secondary Functions
Standard of Deferred Payments
Money act as a standard of deferred payments, meaning it is used to settle debts and payments that are made in the future. Unlike barter, where repayment in perishable goods was difficult, money provides a durable and reliable unit for borrowing and lending.
However, changes in the value of money over time (inflation or deflation) can affect creditors and debtors. If the value of money rises, creditors gain and debtors lose; if it falls, debtors benefit and creditors lose.
A Store of Value
The function of money that can be kept for a long period of time without its waste and loss is known as store of value function of money. It allows people to save purchasing power for future use and can repay debt. People store money for three basic objectives:
- Transaction purposes
- Precautionary purposes
- Speculation purposes
Money as a store of value may also have disadvantages such as the value of money may increase of decrease over time due to inflation or deflation. Although money is an important store of value, it is not the only one. Other assets such as bonds, stocks, houses, land, and valuable goods can also store wealth and may even provide income like interest, profit, or rent.
However, these assets have some disadvantages compared to money. They may involve storage costs, can lose value over time, and are often less liquid, meaning they cannot always be quickly converted into money without loss.
Due to these functions of money, it is said that Money is the matter of functions four “A medium, a measure, a standard, a store”
Transfer of Value
Money act as a transfer of value between persons and places. An individual can sell fixed assets (like property) in one city and buys property in another city.
Classification of Money
Commodity Money
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