MONEY AND BANKING
DEFINATION OF MONEY
Before the inception of money, there prevailed barter system. This is the system where goods are exchanged with goods directly. But this system could not function properly because of the following problems.
- Lack of double coincidence of wants,
- Lack of common measure of value,
- Lack of store value,
- Lack of standard of deferred payments and
- Lack of common counting system. Therefore, barter system was abandoned and money system came forward. The evolution of money is concerned with commodity money, metallic money, paper money, and plastic money. We give a brief idea regarding definition of money. Money is anything which is commonly used and generally accepted as a medium of exchange standard measure of value, store of value and standard of deferred payments.
FUNCTION OF MONEY
We told earlier that barter system is furnished with a lot of problems. Accordingly, the barter system had to be abandoned and money came into practice in one way or in other way. Thus, money, what’s over its from is, performing the following functions.
MONEY AS A MEDIUM OF EXCHANGE
Barter system was furnished with the situation of non-existence of double coincide of wants. The trade under barter system could only take place if there existed coincidence between wants. For example, if a person is suffering from toothache and himself is cook; he would certainly be in search of dentist who would be extremely cumbersome. However, it is the invention of money which has solved this problem. As goods and services can be purchased with money; and the goods and services can be sold against money. In other words, it is the money which as facilitated the exchange of goods and services. Thus, it is the money which has promoted exchange, division of labor and specialization. It is the specialization which leads to create efficiency amongst factors of production. In the presence of money people can purchase those goods which they can not product. In this way, the goods can be produced by large scale. As had there been not money, who would purchase the vehicles produced by “Mitsubishi and General Motors”. Accordingly, in nutshell all the convoluted issues with respect to utilization, creation, dissemination and distribution of assets are unraveled through “Cash”.
But it must be remembered that only that things can serve as a medium of exchange which has the quality of general acceptability. “As” during world war II in prisoners of war camps the cigarette played the role of money. But it was not its permanent role; as it lacked general acceptability. Accordingly, it can not be accorded as money. As prof.SIgwick writes Money is what it does, not what it is:
MONEY AS A MEASURE OF VALUE
Under barter system the values of goods and services were represented into goods and services. In such situation the values of goods were not properly estimated. Moreover, to express so many goods in so many other goods was a tedious job. As under deal framework if any individual goes to some departmental store and he finds such like circumstance. The estimation of one shirt is 2 bowties; the estimation of one shaving cream is 4 sharp edges; and the estimation of one cleanser is 2 tissues such all will be troublesome. Such system of exchange will be a paradoxical one. Moreover, the balance sheet or book keeping of the departmental store will also be very much complicated and intricate. But it is the money which has solved such like problems. As the values of goods and services are expressed in money. Again in the presence of money, the shown in money. The national income, exports and imports can be expressed in money form. Again a household can prepare the budget of his expenditures and income with help of money.
But the critics are the opinion that if money is accorded as yardstick it often goes on the shrink. It means that value of money goes on to change. As prices rise, value of money falls. Thus, the commodity whose own goes on the change, how it can measure the values of other goods. All this discussion shows that money is like a measure which can be employed to measure the values of goods and services. Thus, money can be used to measure the value as the meters, inches and yards are employed to measure the length, height and width etc.
MONEY AS STORE OF VALUE
Before the introduction of money society saved in real terms, I.e the savings of the people consisted of grams, cattle and vegetable etc. But in such situation society had to face the following costs like:
- The grains may get infected, and the cattle may suffer from diseases.
- One has to forego the opportunity cost wealth in the form of interest if one is keeping the commodity money.
Thus, the invention of money has put to an end the both types of costs. Now the people can make their savings in monetary terms. It means that in money economy people can save out their incomes and spend them whenever they like, in the future. This role of money pertains to future medium of exchange. Thus, it is said that money is like a bridge between present and future. But some people object over this role of money. They say that this role of money will be possible if prices remain stable in a country. But now a day’s govt.have to face budget deficits and to promote industrialization easy monetary policy is pursued. Accordingly, in such situation, inflation is sure to occur. This is the reason that during the period of rising prices people are not prepared to keep the money in cash; rather they like to convert it into property, gold, silver and bonds etc. Thus because of such reason the role of money as store of value becomes dubious