MONEY & IT’S FACTORS

IN MODERN ECONOMIC
SYSTEM

Submitted By
Code: 1721 ID No: B190403055
Batch: 15th Social Work Department
Course: Fundamentals of Economics (1103)
2nd semester Assignment

Submitted to: Partha Mohanta

Assistant Professor
Department of Social Work
Jagannath University, Dhaka
partha_086@yahoo.com
 MONEY
•Definition:
• Money is any item or verifiable record that is
generally accepted as payment for goods and
services and repayment of debts, such as taxes,
in a particular country or socio-economic
context. The main functions of money are
distinguished as: a medium of exchange, a unit
of account, a store of value and sometimes,
a standard of deferred payment. Any item or
verifiable record that fulfils these functions can
be considered as money.
• Money is historically an emergent market
phenomenon establishing a commodity money,
but nearly all contemporary money systems are
based on fiat money. Fiat money, like any check
or note of debt, is without use value as a
physical commodity. It derives its value by being
declared by a government to be legal tender; that
is, it must be accepted as a form of payment
within the boundaries of the country, for "all
debts, public and private". Counterfeit
money can cause good money to lose its value.
 According to Prof. Walker, “Money is what money
does”. It is associated with the functions performed/roles
played by money.

 Crowther. Anything that is generally acceptable as a

means of exchange (i.e., as a means of settling debts) and
that at the same time, acts as a measure and as a store of
value.”

 According to Karl Marx, theory of money is a

straightforward application of the labour theory of value.
As value is but the embodiment of socially necessary
labour, commodities exchange with each other in
proportion to the labour quanta they contain. This is true
for the exchange of iron against wheat, as it is true for
the exchange of iron against gold or silver.

 According To Aristotle, money as a common

measure of everything, makes things commensurable
and makes it possible to equalize them. He states that it
is in the form of money, a substance that has a telos
(purpose), that individuals have devised a unit that
supplies a measure on the basis of which just exchange
can take place. Aristotle thus maintains that everything
can be expressed in the universal equivalent of money.
He explains that money was introduced to satisfy the
requirement that all items exchanged must be
comparable in some way.
Origin: The invention of money took
place before the beginning of written
history. Consequently, any story of how
money first developed is mostly based on
conjecture and logical inference.
The significant evidence establishes many
things were bartered in ancient markets
that could be described as a medium of
exchange. These included livestock and
grain–things directly useful in themselves
– but also merely attractive items such
as cowrie shells or beads were exchanged
for more useful commodities. However,
such exchanges would be better
described as barter, and the common
bartering of a particular commodity
(especially when the commodity items
are not fungible) does not technically
make that commodity "money" or a
"commodity money" like the shekel –
which was both a coin representing a
specific weight of barley, and the weight
of that sack of barley.
• In Politics Book (c. 350 BC) the Greek philosopher
Aristotle contemplated the nature of money. He considered
that every object has two uses: the original purpose for
which the object was designed, and as an item to sell or
barter. The assignment of monetary value to an otherwise
insignificant object such as a coin or promissory note arises
as people acquired a psychological capacity to place trust in
each other and in external authority within barter exchange.
Finding people to barter with is a time-consuming process;
Austrian economist Carl Menger hypothesized that this
reason was a driving force in the creation of monetary
systems – people seeking a way to stop wasting their time
looking for someone to barter with.

• In his book Debt: The First 5,000 Years, anthropologist

David Graeber argues against the suggestion that money
was invented to replace barter. The problem with this
version of history, he suggests, is the lack of any supporting
evidence. His research indicates that gift economies were
common, at least at the beginnings of the first agrarian
societies, when humans used elaborate credit systems.
Graeber proposes that money as a unit of account was
invented the moment when the unquantifiable obligation "I
owe you one" transformed into the quantifiable notion of "I
owe you one unit of something". In this view, money
emerged first as credit and only later acquired the functions
of a medium of exchange and a store of value. Graeber's
criticism partly relies on and follows that made by A.
Mitchell Innes in his 1913 article "What is money?". Innes
refutes the barter theory of money, by examining historic
evidence and showing that early coins never were of
consistent value nor of more or less consistent metal
content. Therefore, he concludes that sales is not exchange
of goods for some universal commodity, but an exchange
for credit. He argues that "credit and credit alone is money".
Pre-History of Money:
Classification of Money:

Actual
Money of
Paper
Account

Optional Metallic
Money

Formal/Legal Convertible

Standard Token
Money Of Account: Money of Account
is “that in which Debts and Prices and General
Purchasing Power are expressed”. It is that form of
money in which the accounts are maintained and
the value is measured. According to Keynes, money
of account is the description or title, while actual
money is the thing which answers the description.
Actual Money: Actual money is that which
actually circulates in the economy. It is used as a
medium of exchange for goods and services in a
country. For example, paper notes of different
denominations and coins in actual circulation in
India constitute the actual money. Money of account
is that form of money in terms of which the accounts
of a country are maintained and transactions made.
PAPER MONEY: Paper money is a country's
official, paper currency that is circulated for the
transactions involved in acquiring goods and
services. The printing of paper money is typically
regulated by a country's central bank or treasury in
order to keep the flow of funds in line
with monetary Policy.
Metallic money: Made of some metal. With
the drawback of commodity money and with
economic advancement of people, metals came to
used as money. This existed during the town
economy stage or during the pre-machine age. In the
beginning iron, copper, tin, bronze, nickel, lead, gold,
silver etc were used. The final choice however was in
favour of gold and silver due to their scarcity. Initially
pieces of gold and silver of different sizes and shapes
were used.
 CONVERTIBLE

Token

 Standard

Formal/ Legal:

.
Optional Money: Optional Money is that money
which is ordinarily accepted by the people for final
payments, but has no legal sanction behind it. Credit
instruments like cheques, bank drafts, bills of exchange,
promissory notes etc are optional money.
Functions of
Money in Modern
Economic System:

• Medium of exchange
Primary • Measure of value

• Store of value
• Transfer of value
Secondary • Standard of deferred of payments

• Distribution of national income

• Equaling of Marginal Utility
• Basis of Credit
Contingent • Liquidity to Wealth
 MEDIUM OF EXCHANGE: Money serves as a medium
of exchange and facilitates the buying and selling of
goods, thereby eliminating the need for double
coincidence of wants as under barter. A man who wants
to sell wheat in exchange for rice can sell it for money
and purchase rice.

MEASURE OF VALUE: Money has also removed the

difficulty of barter system by serving as a common
measure of value. The values of various commodities are
expressed in terms of money. Money as a measure of
value has made transactions simple and easy. It may be
understood that this function of money follows from the
first basic function (medium of exchange). It is because
money is used as a medium to exchange goods, that
each good gets a value in terms of money (called price).
As such, money also serves as a unit of account. In
India, the unit of account is the Rupee, in USA, the
Dollar; in USSR, the Rouble and the Yen in Japan.

Medium of Exchange
Measure of value
 SECONDARY FUNCTION
Store of value: People store money to provide
again the rainy day and to meet unforeseen contingencies.
According to Keynes, people also store money to take
advantage of the changes in the rate of interest. Money as
a store preserves value through time and space. Money as
a store of value through time means the shifting of
purchasing power from the present to the future and as
such it serves as an important link between the present
and the future.
Transfer of value: A value transfer system refers
to any system, mechanism, or network of people that
receives money for the purpose of making the funds or an
equivalent value payable to a third party in another
geographic location, whether or not in the same form. The
average size of the payment is an indicator of the system 's
use.
Standard of deferred of payments: Money
has always been used as a standard of deferred payment.
This function of money has attained more importance in
modern times with the extension of trade based on credit.
As a result of this function, it has become possible to
express future payments in terms of money. 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 bills become
due. Money as a standard of deferred payments is
performing useful function enabling the current and
present transactions to be discharged in future.
 Contingent
Distribution of national income: Money
facilitates the distribution of national income among
the various factors of production. Land, labour,
capital and organization all co-operate in an act of
production and the product is the result of their joint
efforts, which belongs to all of them. Money makes
the distribution of joint production, amongst various
factors easy and paves the way for economic
progress.

Equaling of Marginal Utility: A concept like

utility is measured in terms of money. A consumer as
well as a producer measures the utilities of different
goods and factors of production with the help of
money and try to get maximum satisfaction or
maximum returns.

Equaling of Marginal
Distribution of national income Utility
Basis of Credit: Credit is the basis of modern economic
progress. Money constitutes the basis of credit. Banks create
credit not out of thin air but with the help of money. money
supplied by commercial banks is called credit money. Commercial
banks create credit by advancing loans and purchasing securities.
They lend money to individuals and businesses out of deposits
accepted from the public.

 Liquidity to Wealth: Money gives liquidity to

various forms of wealth. A person by keeping his wealth in
the form of money renders it most liquid. Wealth can also
be looked at in terms of liquidity, which is the ease with
which an asset can be converted into cash. Cash is
considered to be perfectly liquid, whereas fixed assets like
machinery and premises are extremely illiquid.
For example, banks may call in loans or make fewer loans,
and in turn, firms may hold fewer stocks and prefer to hold
cash. To compound matters, anxious households may
save more of their income, and hold more cash, which
reduces spending on consumer goods, and further reduces
liquidity.

Basis of Credit Liquidity to Wealth

we find that money performs many functions—a
medium of exchange, a measure of value, a store of
value, a standard of deferred payments and serves
as a basis for credit and distribution of national
income. These functions of money are not all of the
same importance. Of all the functions, the most
important function of money is that it serves as a
medium of exchange and as such also becomes a
means of payment. Money in the form of a generally
acceptable commodity, in the process of exchange
between goods, at once, becomes a unit of account
and a measure of value. The following table clearly
shows the various functions of money.

Aristotle - Fifth section of the fifth book of

“The Nicomachean Ethics”
 David Graebar - “Debt” Book
 Economics Library Website
 Study Mode Research Website

THE END