The nature and significance of money
Few individuals in our complex and interdependent economic world could deny the importance of money .Money is indispensable to our system of production ,distribution ,exchange and consumption .In the functional sense ,money is anything that is acceptable and is used in the purchase of goods and services and in the discharge of debts . Money may also be defined as evidence of a future claim on society’s
goods and services .People with 100 dollars are entitled to call on society at any time to provide them with the things they want up to the amount of 100 dollars .Society has agreed to owe these individuals ,and it gives them money as evidence .As long as they hold the money ,society is in their debt.When they spend the money ,society discharge it’s obligations
to these paticularly individuals by providing them with the things they demand .But note that society still owes as much as before ,for someone else now hold the money that constitutes the claim on society .At first glance ,this second definition may appear confusing .It seems paradoxical to think of money as evidence of a continuous debt .Remember ,though that each time money changes hands ,there is also an economic good surrendered to or a service performed .Anyone who holds money but prefers to hold goods may easily secure the goods and let someone else hold the money .Unless the money becomes useless ,as has happened occasionally in times of severe inflation ,it will always constitute an
effective claim on goods or an effective means of discharging a debt owed by the holder of the money .
The two definition of money :anything generally used and accepted in the purchase of goods and services and the discharge of debts on an evidence of debt owed by society are supplementary rather than alternative .The second definition is useful in understanding the basic nature of money .But it is the first definition which helps determine the line between money and “near money”.For instance ,when one is studying the
effects of changes in the money supply ,one must know what is to be counted as money .
Society needs money for several purposes .No matter what types of money a country uses ,the money must perform certain functions .That is ,it must provide a standard of walue ,a medium of exchange ,a store of value ,and a standard of deferred payments .
Standard of value
Quite obviously ,an important function of money is that it serves as a standard ,or common denominator ,of value .The higher the money ,the lower the value of each piece of money.When prices double ,the value of money is half what it was before .The general and continuous rising of prices of goods and factors of production without any concomitant increase in quality is called inflation,the continuous falling in prices is called deflation .Inflation decreases and deflation increases the value of
any savings held in the form of money .
In spite of its variability ,money as a standard of value is indispensable .We are to accustomed to this convenience that we take it for granted .Yet without it,modern civilization could not have developed ,nor could it be maintained .Specialization requires exchange ,and exchange ,while not impossible without the use of money ,is made easier by its use as a common demominator .
We express the value of all economic goods in terms of money and call these money values “prices
It is important to remember ,however ,that money is unlike other standards insofar as its value may continually vary as its purchasing power changes .
In spite of its variability ,money as a standard of value is indispensable .We are so accustomed to this convenience that we take it for granted .Yet without it ,modern civilization could not have developed ,nor could it be maintained .Specialazation requires exchange ,and exchange ,while not impossible without the use of money ,is made easier by its use as a common denominator . The development of a common standard of value represents a tremendous economic advance .The only way values can be estimated otherwise is to decide how much each good is worth in terms of all other goods available .