Theory of Money
Money plays an important role in each and every activity of human beings. It is most
important invention of man so far. The history of money is one of epitome among the
history of human civilization. It is very difficult to imagine a society or a world without
money. Some will say “money makes many things.” In some context Marshall says that
“Money is the pivot which the economic science clusters”.
In the early stages of human civilization, the wants of men were simple. People were
self sufficient, however the human wants became multiple and the wants of man began
to increase. Since each family could not produce all the commodities so exchanges of
goods against goods were necessary. This system of exchanging goods against goods is
known as barter system, different goods were exchanged for one another directly. This
use to result in lot of problems and inconvinence.
Difficulties of Barter system;-
1. problem of storage
2. lack of common measure of value
3. problem of division
4. problem of borrowing and lending
Definitions of money
We use money everyday, we have been using money since long time then also it is very
difficult to define money in one single sentence. The concept of money has been defined
by different economists
According to crowther “Anything that is generally acceptable as a means of exchange”
According to F.A.Walker “money is what money does”
From the above definitions it is cleared that anything which is accepted by all as a means
of exchange and which carries the function as the medium of exchange is money.
Usually, money is defined on the basis of functions it performs.
Characteristics of money
Money as a medium of exchange has confined with certain special characteristic features
they are
1. it should be accepted by all
2. it must posses durability
3. the material used in money should be easily carried by all
4. the money material should by capable of being divided into smaller parts without
losing its value stored
5. money is used as store of value therefore, it should not be easily perishable
6. Money should be scare in relation to its demand. Plentiful supply of money
creates many problems.
Functions of money
Money serves as a great source for the development of industry and commerce in the
economy. As a medium of exchange money performs many functions. They can be
grouped into three kinds
1. primary functions
2. secondary functions
3. contingent functions
Primary functions
The primary functions of money are its basic functions which the performs as such the
fundamental functions of money are as follows
1. Medium of exchange
The first and foremost function of money is it is the medium of exchange. Money can be
used to purchase the goods and services. It has the quality of general acceptability; every
commodity can be bought and sold with the help of money.
2. Measure of value
The second important function of money is that it measures the values of all goods and
services. Money is, thus looked upon as a collective measure of values, since all values
are expressed in terms of money it can be easily recognized the values of each goods and
services.
2. Secondary functions
The secondary functions of money are called derived functions because these functions
are derived from the primary functions
1. store value
Money is used as a store value. As money cannot be destroyed and its value is
completely stable it can be stored for any number of days
2. standard of deferred payments
3. money acts as the standard of deferred payments. In modern society the use of
money is greatly faco;oitates
944883694
IES/ISS Exam, 07 July 2008 22 Nov 2008
15 07 Jun 2008 03 Days
2008 (Monday) (Saturday)
£220 OR US$450 OR Euros 370 paid in full on enrolment4
