The Nature & Function

of Money
The simple definition of money
Any thing that is generally acceptable as a means of
exchange and that at the same time acts as a
measure and store of value is money.

Money is anything which is widely accepted in

payment for goods, services or discharge of other
kind of business obligations
 Approach

Money ……………… M

Currency…………….. C

Demand Deposits……DD

Time Deposits………. TD
M = C + DD + TD
A temporary abode of purchasing of
power by being held in the form of
currency
 Liquidity Approach
Gurley and Shaw given the liquidity approach
The assets which are close substitutes of money and
can be converted into money quickly have been
included in the character of money.
Thus money is equal to
Currency+Demand Deposit+Time Deposits+
Saving Bank Deposits+Shares+Bonds
 Near Money & Money Substitutes
The assets which can be easily and quickly
converted into money without loss are called
near money or money substitutes
These are the debts of financial institution or
federal government.
Saving Deposits-Shares-Claims-Treasury Bills-
Bill of Exchange
Are Near Money or Substitutes.
 Comparison
Money Near Money
Currency notes Bill of exchange
Coins Government
Demand Deposits Securities Saving
and time deposits
 Liquid Money
Money that is perfectly liquid
These are claims to money and may be readilly
converted into cash.
Government Deposit Certificates
Treasury Bond
Company Shares
 Yield
Interest Profit in shape of revenue to holder
It is an income earning assets.

Standard Unit
It is a standard unit of account where all
prices are standard in money terms.
It has no power to act as a Money.
 Importance in Economey
 Money bewitches People and people do almost
anything for money. Whereas money will do
almost anything for people.
 It is the money which feeds you, clothes you,
shelter you, amuses you, helps you in trade
and industry
 Money & Price Mechanism
All incomes and price measured.
Economics decision of what, where and hot to
produce are implemented through

Importance in Production
Procurement of Material
Combine different factors of production and make
payment against the factors
Cost of production, lending, borrowing, pricing,
profits,
Importance in Consumption
Importance in Trade
Importance in distribution
Saving and investment
Money and Public Finance
Social Importance
Political Progress
Index of Growth
 Origin and Growth
Money is develop of necessity.
It took long process of evolution since Adam and Eve
and reach to this modern complicated system.
Money is discover to remove difficulties of direct
exchange of goods for goods and to serve as a unit
of account an medium of exchange
Money early shape is cows, goats, fish, battle axes,
knives, arrows, furs, wheat these have storage,
durability, divisibility, malleability, homogently and
transportation problem
 The Next Step of Development
 Search for better form to ease difficulty of first stage
lead to discovery of precocious metals gold, silver &
copper.
 It has the difficulties of weight measures and value.

 Transportation of precious metal in shape of money

was dangerous.
 No guarantees of weight from competent authority

With the passage of time these full bodied coins also

proved a failure as good for medium of exchange
 Paper Money
 Origin of paper money can be traced to the receipt
of goldsmith which they issue to ther clients.
 Receipt that had the weight and the value of the
goods deposited by the clients with goldsmith who
duly endorse and authenticate.
 These receipts become the credit instruments and
were freely used for making payments.
 19th Century is the period when all the commercial
banks issued the notes which now called as the
paper money.
 Money Evolution Stages
Traditional Economy
2. Animal Money
3. Commodity Money
4. Metallic Money
Modern Economy
6. Paper Money
7. Credit Money
 Functions
Static Functions
 Money is Medium of Exchange
 Money represent general purchase power
 Accepted in exchange of goods and services
 It overcome the defects of barter system
 Serve the common measure of value.
 Yardstick of value and commodities
 Standard of deferred payment when business is
done on credit
 Money has the store value
 Money serve as the time transfer, place transfer and
person transfer of purchasing power.
 Money is the source of prosperity and crime

But what cannot be purchase and

sold through money is love,
emotion, brotherhood, natural
blessings, life, breathing.
 Dynamic functions of money
 Money has the potential to influence the economy
 It influence the price level, interest rates, profits,
utilization of resources
 Aid to specialization, production and trade
 Influence Income and Consumption
 Instrument of making loans and financing
 Tool of Monetary management
 Instrument of economic policy
 Contingent Function
 Distribution of National income
 Basis of Credit System

 Measures of Marginal productivity and

help in equalization of marginal utility in

expenditure
 Liquidity of property.
 Miscellaneous Functions
 Various option for bearer of money to use it.
 Judgment of repaying capacity by appraising
credit worthiness of a person or country can be
easily assessed with money.
 Determination of solvency by evaluated with
the help of measuring rod of money the
capacity to repay the debt or not through the
assets sale which are owned.
 Characteristics of Good Money
General Acceptability
A good money that is acceptable to all without any
hesitation in exchange for goods and services
Stability of Value
It should be stable in value
Transportability
Should be easily transported without any depreciation
and should have large value in small bulk
 Storeability
Money can be without depreciation and it is not
perishable that can loose the shape and face.

Divisibility
Money is capable of being re-united without losing
its value and can be divided into different values.

Homogeneity
It is in uniform quality and capable to
standardization