“Money is what money does”. Explain.
Money was devised initially as a medium of exchange and a measure of value. However, it acquired over time some other functions also. The following couplet brings out the major functions of money.
Money is a matter of functions four: A medium, a measure, a standard, a store.
As this couplet reveals, money performs four major functions: (i) as a medium of exchange, (ii) as a measure of value, (iii) as a standard of deferred payment, and (iv) as a store of value. These functions of money are discussed below.
1. Medium of Exchange- Money functions as a medium of exchange between any two goods. This is the most important and unique function of money. The importance of this function lies in that it has solved one of the biggest problems of the barter system. In the barter system, for exchange to take place, there must be ‘double coincidence of wants.’ Double coincidence of wants exists when, between any two persons, one is willing to accept what the other person is willing to give in exchange. Until this condition is fulfilled, exchange cannot take place. For example, a weaver cannot exchange his cloth for shoes unless the shoemaker wants cloth. In a modern market economy, the problem of ‘double coincidence of wants’ is solved by money. Since money is acceptable to all, the weaver can sell his cloth to any willing person (say, to a farmer) for money and buy the shoes in exchange for that money. This system works efficiently because money can buy anything, it has purchasing power and is acceptable to all.
The uniqueness of the medium-of-exchange function of money comes from certain unique merits of money which are (a) general acceptability, (b) easy portability, (c) divisibility, (d) difficult to counterfeit, (e) value guaranteed by the government, and (f) legal enforceability as mode of compensation.
2. Measure of Value- The second basic function of money is that it works as the measure of value of goods and services or money of account. All values are measured in terms of money. As a measure of value, money works as a common denominator and as a unit of account. Today, unlike ‘barter system; the value of all the goods and services are expressed in terms of money. Money being a common denominator, the values of different goods can be added to find one value of all possessions of a person, of a firm and of a nation. In fact, money makes. computation of national income possible. In the absence of money, measuring value would be an extremely difficult proposition in a modern economy.
In modern times, a society produces, buys and sells and consumes goods and services in such a large number, variety and quantity that measuring and expressing values in terms of commodities, as in barter system would be a rather impossible task. Money has made the task easier. Not only each good and service has a price, but also one can find and compare the relative prices in terms of money.
3. Money as a Store of Value- The third basic function of money is that it serves the purpose of storing value for future use. The need to store value must have arisen for such reasons as (i) there is a time gap between earning and consumption. (ii) need for storing value for future use arises due to uncertainties of life, and (iii) accumulative nature of the people: The advent of money has provided a means to store value for future use. Even the most perishable goods can be converted into money, provided there is a market for them, and value stored in terms of money. If prices do not increase over a long period, value can be stored for long without any significant loss in value.
4. Money as a Standard of Deferred Payments : Borrow today and repay tomorrow or buy today and pay later has been an old practice. This is a deferred payment system. One necessary condition of deferred payment is that the value returned after a time gap must be the same. During the barter days, it might be a difficult problem to judge whether the value returned after a lapse of time was the same. For example, whether a quintal of wheat borrowed today and returned one year later had the same value was a difficult question. The deferred payment system expanded to purchase of raw materials, payment of wages, salaries and pensions, payment by wholesalers to producers and by retailers to wholesalers and consumers to retailers. In the absence of money, the economic system would have not grown to today’s level and would have been extremely chaotic. The advent of money has solved the problem of deferred payment by its such unique merits as (i) it is generally acceptable (ii) it is legally enforceable, and (iii) it has a relatively more stable value than other commodities.
