Kinley has classified the important functions of money as follows:
1. Primary functions,
2. Secondary functions and
ADVERTISEMENTS:
3. Contingent functions.
Primary functions are known as original functions. They are medium exchange and measure of value. Secondary functions include standard of deferred payments, store of value and transfer of value. Contingent functions cover distribution of income, measurement and maximisation of utility.
Image Source: centuryproductsllc.com
1. Primary Functions:
(A) Medium of Exchange:
ADVERTISEMENTS:
We have seen the difficulties of barter system of exchange. In the modern society with multiplicity of human wants double coincidence of wants is difficult to achieve. Under barter system, exchange takes place when wants of two persons coincide. It means, exchange of goods must be settled simultaneously.
We can take an example to explain the working of double coincidence of wants. For example Rama wants to exchange rice for cloth. So he has to search for a weaver say Hari who is interested to exchange his cloth for rice. If this happens, the exchange becomes easier. Rama will give his rice to Hari and in exchange Hari will offer his cloth to Rama.
Here the wants of both coincide and exchange becomes easier. The matter becomes complicated when Rama wants cloth offering rice but Hari wants vegetables in exchange of his cloth. Here the wants of Rama and 1 lari do not coincide. Exchange through barter system is not possible.
To avoid such a difficulty a common medium of exchange was sought. This led to the invention of money so as to enable and facilitate exchange without any wastage of time. Money finally came with the advent of time.
ADVERTISEMENTS:
The difficulty of double coincidence of wants removed. Money acted as a common medium of exchange. Then commodities were exchanged for money and with money one can go for anything he requires”.
The exchange became indirect. It is known as C-M-C system of exchange (it means commodities will be offered for money and then with that money one can fetch commodities he requires). Similarly, money acting as a medium of exchange could facilitate the exchange of services also.
(B) Measure of Value:
Usually it is told that money can measure the value of anything and everything. But, under barter system there was no common measure of value. A fundamental problem arises pertaining to exchange of one good for another good.
How much of rice is to be offered to fetch a goat in exchange? It is difficult to settle the exchange between rice and goat. Further, now-a-days we come across several goods differing from each other in value, size, quality, colour, design etc. Can barter system survive and can it settle exchange?
The answer is clearly ‘no’. Money has been designed to serve as a common measure of value. The values of various commodities are expressed in terms of money. So each good gets a value in terms of money and we call it price.
Similarly the value services of teachers, doctors, layers etc. can also be expressed in terms of money and accordingly we can pay a price for their services. Money acts as a measuring rod like the meter that measures length or the kilogram that measures weight. We can give some examples in this connection.
Suppose 1 kg wheat = Rs. 10/-, 1 Pencil = Rs. 2/-. So by offering 1 kg of wheat we can get 5 pencils. Here the rate of exchange between wheat and pencil is settled in terms of money. So money is treated as a common measure of value. As such, money also serves as a unit of account.
Unit of account is one through which prices, income, wealth, debts and other payment obligations are expressed. In India, the unit of account is the ‘Rupee’, in USA the ‘Dollar’, in Japan the ‘Yen’ etc. Let us make one point clear here that the value of money changes with the change in prices.
2. Secondary Functions:
(A) Standard of Deferred Payments:
We knew that money serves as a medium of exchange. It facilitates current buying and selling of goods and services. Transactions are of two types, namely, cash transaction and credit transaction.
As a medium of exchange, money facilitates cash transaction of goods and services. This medium of exchange function of money has attained more importance with the extension of trade based on credit.
Deferred payments imply future payments. When we do not pay in terms of cash for any kind of buying and selling immediately but promise to pay in future, we call it credit transaction. It means payments are deferred to a future date.
A borrower who borrows a certain sum in the present undertakes to pay the same in future. Similarly, a person who purchases on credit agrees to pay in future when his date becomes due.
So money enables both current buying and selling with immediate cash payments and current and present transactions to be discharged in future.
In case of deferred payments, some problems may come in the way. The value of money may change leading to a rise or fall. This may be due to fall and rise in the price level.
Creditors gain when there is a rise in the value of money (or fall in the price level) and creditors loose when there is a fall in the value of money (or rise in the price level).
(B) Store of Value:
Classical economists recognised only the primary functions of money. J. M. Keynes recognised and laid stress on store of value function of money. People know that future is uncertain.
People keep a part of their present income to meet unforeseen future. It is widely recognised that it is convenient to store money than to store goods and commodities.
Storage of goods not only involves certain amount of costs but also involves loss of value. Further, perishable goods cannot be stored for a long period of time. There is also the danger of theft and fire.
With the introduction of money, all such difficulties were removed. There are some advantages to store in the form of money for future. The advantages are:
1. Now-a-days, we use paper money. Paper money does not require much space to be stored;
2. By storing in the form of money, people can take advantage of the changes in the rate of interest;
3. Money as a store preserves value through time and space;
4. When we store in the form of money, we shift the purchasing power from the present to the future. So money acts as a link between the present and the future;
5. Money is an asset or form of wealth, and
6. Money is the most liquid of all assets. It means, money can be readily exchanged for goods and services without any difficulty.
So, money acts as a good store of value.
(C) Transfer of Value:
1. Money has general acceptability as a means of exchange. So it is easier to transfer money from one place to another.
2. At present, money is stored in the form of bank deposits. Depositor can transfer the amount of money deposited in his bank account to the account of another man. It means, it is easier to transfer value in the form of money.
3. Money is a means through which transfer of value from one place to another has been easier and quicker. So transfer of value in the form of money through space continues to be important. For example, a businessman of Orissa who sells his property and goes to Delhi and settles down there is a case of transfer of value through space.
4. Money is portable. It can be easily taken from one place to another place without any difficulty. On the other hand, it is difficult and costly too to carry goods and commodities from one place to another.
3. Contingent Functions:
With the passage of time, the functions of money got diversified. Besides, the primary and I secondary functions, professor D. Kinley lays stress on the contingent functions of money. Contingent functions of money include distribution of income, measurement and maximisation of utility, basis of credit, liquidity to wealth etc.
(A) Distribution of Income:
The contribution of all factors of Production like Land, Labour, Capital and Organization constitutes our national product. This product is the result of their joint efforts. So this product belongs to all of them.
This national product is also known as national income. So, this national income is to be distributed among the above stated factors of production. Money makes the distribution of this joint production among the various factors of production easy. The relative shares of factors are also calculated through money.
It means the share of labour in the national income, the share of capital in the national income and so on so forth. Labourers get wages, landlords get rent, capitalists get interest and the organizers get profit.
Without money it is impossible to settle the share of each factor of production from the national income. It is, in fact, very difficult to calculate the factor income without money.
(B) Measurement and Maximisation of Utility:
Utility is measured in terms of money. A consumer measures the utilities of different consumer goods with the help of money. Similarly, a producer measures the utilities of different factors of production with the help of money. A consumer tries to get maximum satisfaction by adjusting his expenditure on variety of commodities with the heap of money.
A producer maximises his returns by substituting one factor in the place of another for productivity gain. It is done through money by comparing the marginal productivity of each factor. To get maximum satisfaction from consumption, the consumer equalises the national utility of last unit of money spent on all the items.
(C) Basis of Credit:
Money constitutes the basis of credit. Banks create credit with the help of money. Any increase or decrease in money supply leads to a commensurate increase or decrease in the availability of credit money in the economy.
Credit instruments like bills of exchange, cheques etc cannot be put to use without the existence of money. Professor Halm remarks that money is an indispensable condition for development of a credit market.
(D) Liquidity to Wealth:
Money gives liquidity to various forms of wealth. So it is convenient to store wealth in the form of money because money is the most liquid of all assets. Money can be put to any use readily. As we know all capital is wealth.
Money is the most liquid form of capital. Capital in the form of told that money imparts mobility and liquidity to capital. Money helps in transforming other forms of capital into the most liquid form of wealth which have strong bearing on the process of development of a country.
Barring the above functions, money acts as an effective instrument in controlling demand and supply in the market. As we know, price in the market is determined by the interaction between demand and supply. When the value of a good is expressed in terms of money, it is called price.
There is no disagreement among economists that price in the market acts as a signal. It will indicate the divergence between demand and supply. It means, price can show excess demand or excess supply.
As we know price is the money value of a good. Analysing the price level, the policy makers can go for necessary corrections in the economic parameters.
From the above discussion, we learnt that money is equally important to those who have it and those who don’t.
However, evils of money are many.
1. We find ‘inequality in the distribution of income and wealth (which are the outcome of distribution of national income among factors of production through money) in the society. So invention of money is not an unmixed blessing.
2. Rise in the general price level or fall in the general price level is bad. This occurs due to faulty monetary policy of a country. As we know money is a good slave but a bad master. Money should be handled with care.
3. Instability in the value of money affects various sections of the society differently. Especially during the period of general rise in prices (that is inflation) or fall in the value of money, poor people are adversely affected (or hard hit).
4. Many social disadvantages are associated with the use of money. Money has been responsible for large-scale corruption. According to Ruskin, “the devil of money has come to possess our souls”.
Von Mises, remarked: “Money is regarded as the cause of theft and murder, of deception and betrayal.” J.M. Keynes says that the love of possession of money as “disgusting morbidity, one of those semi criminal, semi pathological propensities which one hands over with a shudder to the specialist in mental disease.”
However, money has been treated as a basic institution of the modern industrial economy. In spite of dangers of money we are aware of its enormously important role in our economic life.
