Origin and Development of Money

Money is considered as one of the greatest discoveries of mankind. Modern economy is itself is considered as money economy. It is difficult to think of life without money. The invention of money was gradual, before the invention of money, barter system of exchange was prevailed in the economy. Barter is the direct exchange of goods for goods. In the olden days economic life was very simple, human wants are very limited. With the passage of time, economic life become too complex and human wants are multiplied with unlimited wants. This makes barter system difficult and inefficient. The following are the major problems associated with barter system. i) ii) iii) iv) v) vi) Absence of double coincidence of wants Not a good medium of exchange Not a good store of value Lacks common measure of value Lacks standard of deferred payment Exchange of indivisible goods were difficult

These difficulties and inefficiencies of barter led to the invention of money. Now we can discuss what is money and its role and functions. Meaning and Definitions Economists have given different definitions for money. According to Crowder Money is anything that is generally acceptable as a means of exchange, that is as a means of settling debt and at the same time act as a measure and store of value. By Robertson Money is anything which is widely accepted in payment for goods or in discharge of other kind obligations. Since money is performing a variety of functions, Walker defines money as Money is what money does. The modern definition of money is a bit different, it depends on uses, functions and legal backing of money. Based on these we can discuss some more definitions. Narrow and Broad definition of money:-Narrow money is anything that is used as a medium of exchange like notes and coins. The broad money

involves anything which has the qualities of money like liquidity. It involves notes, coins, bank deposit, gold, shares etc. Functional definition of money:-According to this definition money is anything that performs the functions of money. Legal definition of money:-According to this definition, money is what the law says money is. We accept paper currency as money because the law says it is money. Paper currency is also known as fiat (order) money because it serves as money on the order of government. Functions and Role of Money Money serves its basic role as the great wheel of circulation, the great instrument of commerce and great vehicle of trade. Money plays a very important role. Its disappearance would cause disappearance of the economy itself. Money is a matter function four- a medium, a measure, a standard and a store. The functions of money is broadly classified in to primary, secondary and contingent functions. I Primary function There are two primary functions performed by money. They are (i) Medium of Exchange:- Money is used as a medium in the exchange of goods and services because money is generally accepted as a means of payment. The function of money as a medium of exchange facilitate the activity of buying and selling of goods and services, and it solves all the difficulties of barter system .There is no necessity for a double coincidence of wants in the money economy. In modern times goods and services are bought and sold with money. Thus money acts as a medium of exchange. (ii) Measure of Value:- Money measures the value of goods and services because money acts as a unit of account (measure of value). Money is the monetary unit because we can measure the value of any goods or service in terms of money. When we say the price of a commodity is 25, we are expressing its value in terms of money. Thus money acts as a measure of value. II Secondary function The secondary functions of money are the following

(i) Standard of Deferred Payment:- Deferred payment are those payment after a period of time. That is deferred payment means future payment. Money acts as a standard of deferred payment means that we are using money to settle future payment. Contracts involving future payment are conducted in money. If loans are given, the amount with interests can be repaid in future. This function stimulates all kinds of economic activities which depend on borrowed money. (ii) Store of Value:- Under barter system people found it difficult to store commodities because some goods are perishable and loss their value. Money acts as a good store of value. Money can be stored for future purposes. It can be stored to meet unpredictable emergencies and to settle debt. (iii) Transfer of Value:- Money is the most convenient form in which value can be transferred from one person to another and also from one place to another. The reason is that it is light weight, high value and less space consuming as compared to other goods. Also everyone readily accept money irrespective of place. For example, transferring thousands of kilograms of food grains would be time consuming, expensive and incur a lot of efforts and wastage. On the other hand transferring value of that much food grain in the form or money is less expensive and easy by a cheque or a bank draft. Thus by using money value is easily and quickly transferred. III Contingent Functions Apart from the primary and secondary functions money performs some contingent functions. Important contingent functions are the following. (i) Distribution of National Income:- Money facilitates the distribution of national income among the different factors of production, who produced the national income. Factor rewards- rent, wage, interest and profit are expressed in terms of money. (ii) Basis of Credit:- Modern economy and business are based on credit. Money constitutes the basis of credit. (iii) Measurement of Utility:- Consumers as well as producers measure the utility of goods or service or factors with the help of money. (iv) Liquidity:- Money is the most liquid asset in the world. By liquidity we mean the ease with.