Aligarh Muslim University

Centre Malappuram, kerala

Session (2019-2020)
Assignment report as General
Class Test-2

Submitted to- Submitted by-

Dr.Safdar Ali. Vaibhav Teotia
(Asst.prof). 18ballb03
Question:- What do you understand by the term
‘money’.State the reason why it comes into existence.
Explain the different functions of money.

. Answer .

Introduction:
Money is one of the greatest inventions of mankind. It developed through several centuries and
passed through several phases.In the period of human civilisation, every men for self
sufficient. He hunted animals, he made his own dwelling and he prepared his own clothing.
But as his wants Increase, it was not possible for him to produce everything he wanted. It
become necessary for him to produce some goods in greater quantity then he could consume
himself so that he could exchange the surplus with another person for something that he
needed. This was the beginning of the barter system of exchange of goods for the goods. In
this method of direct exchange there were many difficulties and inconveniences.

Reason for the invention of money-

The barter system was compatible early in a primitive economy, where everyone were much
the same kind of clothes, ate the same kind of food and engaged in similar activities. But when
people grew in the scale of civilization, words multiplied and a certain degree of division of
labour was achieved, the difficulties of barter system became highly pronounced the need for
some other medium of exchange which could eliminate those difficulties and would facilitate
transactions become apparent. This led to the invention of money.

Definition of money:
Money is usually defined as anything which is generally acceptable as payment for goods and
services or discharge of debt.The definition is generally accepted.This definition emphasises

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the confidence element in the concept of money.Money is what people believe others will
accept as payment.

Money is defined by different economists in different ways some definition are too extensive
while others are too narrow.While economist like professor Walker have defined it in terms of
its function, Others like Robertson and Sligmen Have led emphasis on its basic
characteristics , namely, general acceptability.

According to professor Walker, money's what money does. That is to say, whatever falls the
purpose of money is to be considered as money. According to this view functions of money is
more-important than that of it concrete form.This definition is not very satisfactory because
money performs many functions which are also performed by other commodities, so that from
this point of view separation of money becomes extremely difficult.

According to D.H. Robertson, money is anything which is widely accepted in-payment for
good or in discharge of other kinds of business obligations

G.D.H cole has defined money as anything which is habitual and widely used as a means
of payment and is generally acceptable in the settlement of debts.

According to Kent, money is anything which is commonly used and generally accepted as
a medium of Of exchange or as a standard value.

Seligmen has defined money as one thing that possesses general acceptability.

These definition are too narrow. These lay emphasis only on one or the other functions of
money.The definition given by Robertson and seligman lay stress on general acceptability.In
the same way, the definition given by cole lays stress on a standard for deferred-payment while
Kent emphasises two functions of money medium of exchange and standard of value

Thus, we Arrive at the conclusion that all definitions are incomplete and unsatisfactory. A
suitable definition of money must note only emphasise the important functions of money but
also its basic characteristics namely, general acceptability. Looking from this criterion, we
find that crowther’s definition is the most suitable definition. He defines money as
“anything that is generally acceptable as a means of exchange and that at the same time,
act as a measure and as a store of value”. This definition covers all the three important
functions of money and also stresses its basic characteristics namely , general acceptability.

Functions of money:
Money performs several important functions it serves as medium of exchange, a unit of
account, a store of value under standard of deferred payments. In addition, money

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performs certain other functions also. We shall follow professor kinley’s division of
function to make a detailed study of all the functions of money.

Professor Kinley has classified the functions of money into three groups:-

1) Primary functions
2) Secondary functions
3) Contingent functions

1.primary functions:- In this category are included those most important

functions of money which it must perform in an economic system under all circumstances.
These are-: (1) medium of exchange or means of payment and( 2)measure of value or unit of
account.

A.Medium of Exchange -: The most important function of money is that it serves as a

medium of exchange or means of payment. For most purchase or sale,money is accepted
medium through which the buyer pays the seller. When purchasing good X, one pays coins
rather than goods Y , when selling good, one receives rupees and coins rather than good B. The
use of money does allows purchase and sales to be conducted independent of one another. The
purchase of one good does not require the simultaneous sale of another, as in the situation in
the barter system for stop hands, money facilitate the exchange of goods and services.

B.Measure of value:- The second important function of money is that it can act as an
common measure or standard of value or the unit of account. As a unit of account, it measures
the value of different goods and services. In measuring distance, metre or foot is the unit of
account, in measuring weight the kilogram is the unit of account. Similarly, in measuring
value in exchange the rupee is our system serve as unit of account when we say a book is
worth rupees 37 we have a measure of value in terms of basic unit of account which is rupee.
By reducing the value of all goods and services to a single unit of account the process of
exchange is enormously simplified money this becomes are common denominator. Economist
call this aspect of money its unit of account function.

Although money almost always serves as unit of account there have been historical instances in
which it has not . In a hyperinflation, for example when prices are rising Sky high, business
units may keep their accounts in terms of a foreign currency with a value that is more stable
than that of local currency even though the local currency continues to circulate hey. For this
reason some economists preferred to think of unit of account function as a desirable, but not
necessary property of money. But for all practical purposes money function as unit of account.

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2.Secondary Functions -:
A.Standard of deferred payment-: Money also serves as a standard of deferred payments. It
is customary to measure the debt or the promises of future payments in terms of money rather
than a commodity or service. The reason being that money is expressible in definite and
standardised units and its value remains stable overtime.It is much more sensible to lend
rupees 1000 for 10 years then to lend a cow for 10 years.

B.Store of Value-: Money is a store of value, this means that it is a way to store wealth. It is
true that wealth can be stored even in form of other assets but it's holding in the form of money
is better than all the other alternative forms of wealth. The reason being that money has more
liquidity then any other form of assets . Liquidity means the ability of an asset to be exchanged
for something else of value without delay. Thus, money is a very convenient way to store
wealth for use whenever it is needed.

C.Transfer of value:- The third secondary function of money relates to its serving as a
medium of transfer of value. It help us to transfer value from one person to another or from one
place to another. Money can affect such transfers easily, quickly and efficiently.Do you think
that it is ever possible to take a house a compiled by your family from Delhi to Lucknow?
certainly note. But it is possible to sell off hey the house located in Delhi, get money in
exchange and construct a purchase a new house in Lucknow.It is clear, therefore, that money
helps in transferring wealth from one place to another.

3.Contingent functions:- In addition to the primary and secondary

functions money also perform certain contingent functions. These are as follows-:

A.Equalisation of marginal utilities of spending:- Everybody wants to maximize his

satisfaction. It is, therefore, necessary for him to spend his income in such a way that the
marginal utilities of the various commodities that he consumes are equal.for equalising these
marginal utilities, money plays an important Role, because the prices of all commodities are
expressed in money.

Just as money helps in equalising the marginal utilities, similarly, money helps in equalising
the marginal productivity of various factors of production. Every producer, as we already
know, aims at maximum production at minimum cost. This he can achieve only one he
combines various factors of production in such a manner as to equalise their respective
marginal productivities.Since money is the common rod of measurement, it helps the producer
in measuring the various productivities also.Thus, it is money which helps the producer in
equalising the marginal productivity es of various factors of production.

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B-Distribution of social incomes :- The distribution of social income that is national income
among the various factors of production was totally impossible under the barter system. It is
money that has facilitated the distribution of national income on sound-lines it is easy to know
the contribution of the various factors of production with help of money

C Basis of credit system.-: In modern times, the progress of business activity is fully linked
with the credit system of the country. But the entire strength of the credit system is based upon
money. It is the changes in the quantity of money that brings about the changes in supply of
credit in the country.

D.Liquidity or uniformity of wealth:- Money has more liquidity than other form of asset.It
can be easily transferred into any type of asset that a person wants to have. with the help of
money we can express asset of heterogeneous asides into an identical form

Conclusion: Money plays an important economic role in all society. it renders in

valuable economic services without which the development of modern industrialised societies
would hardly be possible. This is as true of centrally planned economies as debt of free
enterprise economies.