Origin, Functions, Nature, Evolution and Classification of Money

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Home Page > Finance > Currency Trading > Origin, Functions, Nature, Evolution and Classification of Money

Origin, Functions, Nature, Evolution and Classification of Money

Posted: Nov 30, 2010 |Comments: 0
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Origin of Money The existence of money is the pre-condition of the functioning of the modern economy. Man, of the beginning of the civilization, had a few wants; he wanted to live in a hut, protect himself from wild animals and maintain his physical strength by consuming some food. For protection he required some stones which he had to gather; the need of food compelled him to go up the tree or hunt in the forest or do fishing, and the necessity of shelter compelled him to develop some still in the art of building and decorating of hut. In the most primitive stage, he used to do all his work himself. Family or group life was not developed at all; fire was not invented; agriculture was not started. Man was a Jack of all trades. He excelled in none; he did not have many wants and therefore he could satisfy them without great efforts. These extreme primitive conditions did not last long. The primitive men slowly began to feel the need of civilization. They developed family-ties and began to live in a group. They learned how to divide their work; strong men to work as watchmen, lean men to go for hunting and the fat men for fishing. If fat men were put as watchmen, they could not remain awake and even if they could, they could not run after wild animals. So division of labor became essential and inevitable. Once the division of labor was adopted, its advantages immediately became visible and people wanted to adopt it still further. Women were then asked to take care of children and house and men would go out for hunting or fishing. Exchange of service started through the group organization; and the exchange of goods was just the next step. Commodities began to be exchanged for commodities and the system of barter came into existence. This was the first step of advance over the most primitive conditions in which man was Jack of all trades. In the barter system there are mainly three difficulties which will restrict the scope of economic development. They are as follows: • Need for coincidence of wants. • Difficulty of assessing values. • Difficulty of making credit arrangements. This may be realized immediately, if we imagine that we live in a moneyless economy. We will find, then, that without a monetary unit we will have to express the value of a commodity in units of other commodities which are to be exchanged. If we want a barter of about 100 commodities, the exchange values we will have to encounter, will be bout 4950 which obviously become unmanageable. Immediately we will try to find out money of account or a yardstick with which value of every commodity is to be measured. Out of the 100 commodities, one may be selected as a standard commodity, and thereby we may face only 99 prices and not 4950 as before. The money of account or unit in which the value is to be measured is most essential if we wish to develop division of labor, specialization etc, in our economy. The difficulty of assessing values will be removed. Functions of Money Thus, money has two main functions; one, to act as a means of payment or medium of exchange and two, to work as a unit of account or standard for measure. The former is concrete, while the latter is abstract. Both of these functions have time element when they work over a period of time and therefore there are two more subsidiary functions they perform. When money acts as a medium of exchange between two points of time or between present and future, we say that it acts as a store of value. It generally assumes the imperishable form and can therefore be used to accumulate title to wealth. We may choose to keep money as a store of value, for various reasons such as to meet out contingencies, or unforeseen needs or when there is uncertainty about the future course of prices etc. It also acts as a standard unit of reckoning. This is also known as a standard of deferred payments. When money acts as a unit of account between two dates or two points of time, it acts as a unit of reckoning.   Nature of Money We should note here two main attributes of money. When it acts as a unit of account, it should have perfect stability. The yardstick should not change from time to time. The price expressed in units of money should remain the same again in the same units of money over a period of time. Although value of money changes because when money acts as a means of exchange, it is exchanged for other commodities, and the amount of other commodities purchased for a given amount of money may vary over a period of time. Since money maintains its price one may think that it also maintains its value. There may be a money illusion. As a matter of fact, value may increase or decrease, but not its ‘price’. Evolution of Money Really speaking, the development of money was rather slow. In all, we have three main types of money, namely, commodity money, paper money and bank money. All of these different types of money indicate the different stages of the development of money. Commodity of Money At first, the difficulties of barter were removed by the use of commodity money. Various commodities have worked as money such as, cattle, sheep, ox, goat, cow, feathers of rare birds, sea-shells, slaves, rocks, cigarettes, etc. But whenever a civilization has reached a certain level and the division of labor has gone beyond a rather rudimentary stage, people have generally chosen some metal such as iron, nickel, copper, gold or silver, as money. People used to choose metal because it can serve as good money. There are certain qualities which are necessary for good money. They are: • Divisibility • Portability • Homogeneity • Durability • Stability in value • Cognisability All these qualities must be there in the case of good money. Therefore, people everywhere preferred metal as money. When the use of money was not so very extensive, copper could do the job; but when the number of transactions increased, gradually, silver was used as a main metal for money. Even then, the number of transactions continued to increase and was so large that it became difficult to carry silver from place to place. Gold was then used as a main metal for money, and coins of small denominations were prepared either of copper or of silver. Thus it can be seen that the commodity moneys are of two types, metallic and non-metallic. Non-metallic commodity moneys were used on large scale in the early days of our civilization, while metallic moneys were used in the later stage of civilization. Although after the 2nd world war cigarette moneys were used in some European countries, one can say that non-metallic moneys are not at all in use at present in almost all civilized countries. They may be in existence in some backward communities in Africa or South America at present. Metallic moneys at one stage were used as full bodied money, that is, the full value was equal to the intrisic value of the metal. But now they are only used as subsidiary coins or as token money. Paper Money Paper money can be divided into two parts, namely, convertible paper money and inconvertible paper money. The use of paper money has been made very popular by the government and hence it is limited to the extent of the boundaries of the state. Therefore, paper money is said to be convertible if it can be exchanged for some other commodity such as gold at the rate fixed beforehand. We want gold when we want to send money abroad for the payment of goods and services imported from abroad. And that is why we want to guarantee of converting notes into gold from the government. When no such guarantee is given by the institution which issues paper money it is said to be inconvertible. Bank money There are certain disadvantages of the direct use of paper money. Some other illegal agency may start printing paper notes. If these paper notes are lost, they cannot be recovered. It is not also very safe to carry them from one place to another. Therefore, it has been found very convenient to settle accounts by credit instruments. Of these, the most familiar to us is the cheque which is not a paper money but as order to banker by a person who has funds in the custody of the bank to pay a stated sum to a third party whose name has been indicated on it. This cheque is sometimes crossed with a view to safeguard against its wrong payment. When it is crossed, the bank is obliged to pay money in some one’s account; it cannot pay money in cash to any person. From legal point of view, it becomes an evidence of payment of money; it acts as a paper money. The payment of any odd sum can be made through it. There is no danger of loss of money. If we lose the cheque-book, nothing is lost as such. It is a much safer way of dealing in money. Thus, from these functions, it is clear that a good money will have several qualities namely, divisibility, portability, homogeneity, durability, stability and cognisability. In the beginning, we had commodity money, but later on, we had bank money and paper money. At present, all the three types of money are in existence, and essentially bank money is predominant.

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