Essay on Money: Origin and Attributes | Economy

In this essay we will discuss about:- 1. Origin of Money 2. Elements usually included in the Supply of Money 3. Attributes.

Essay on the Origin of Money:

The origin of money, it has been said, lies in the inconveniences of the barter system. In primitive barter system goods were exchanged for goods and were not sold for money. Mutual exchange suffered most in this system. For example, a man having a cow is in need of 2 kg. salt. He will definitely be a loser if he gives away the cow. There is another difficulty. A man wants fish in lieu of potato, while another man has potato but he is need of rice. So, exchange cannot take place between the persons.

Such practical difficulties of the barter system have been removed with the invention of money, a common medium of exchange which is accepted by all. With the progress of civilisation, the need for storing wealth was also felt. The origin of money not only helped smooth exchange but gave the facility of storing value.

Historically, a particular commodity was selected to act as a means of payment. Salt, cow etc. acted as money in European countries. In India a very insignificant thing known as Kori was used as a medium of exchange. But commodity money could not last long. It was also difficult to store it for long period, although they helped current transactions relatively smooth than what it was in a barter system.

In the second phase commodity money was replaced by metal money. Gold, silver and copper — these three metals were used to make coins. Metallic money had two types of value — face value and intrinsic value to its legal value the latter referred to market price of metal.

Now with the increase in the price of metal in the market, intrinsic value of a coin exceeded its face value. So, it was more profitable to melt coins and to sell them as metal rather than to use them as medium of exchange. It was the basic reason why metallic currency could not last long.

At last came the paper standard — money made of paper. Obviously, their face value far exceeds the intrinsic value.

Paper standard is superior in many respects:

(a) Its cost of production is comparatively cheap,

(b) Its supply is flexible. The monetary authorities can easily increase its supply by keeping a minimum reserve of gold and foreign exchange,

(c) As it is not bulky, it is easy to carry from place to place,

(d) Intrinsic value being almost zero, the face value of money remains stable over a period of time.

Unlike a gold coin, a piece of paper money, if sold in the market, cannot fetch a higher price.

Elements Usually Included in the Supply of Money:

The value (purchasing power) of money and the cost of credit (interest rates) are determined by supply and demand in much the same manner that prices are determined for such goods as wheat, books or football tickets. The orthodox economists highlighted the supply or quantity of money as the prime mover of macro-economic variables such as price level, employment, output etc., ignoring its demand side.

The concept money, as we have said, can be viewed from two angles. In a narrow sense it implies only “high-powered money”, i.e., means of pay­ment having 100 per cent acceptability like legal tender currency and coins.

And in a wider context money is the liability issued by banks and non-bank financial intermediaries having different degrees of ‘moneyness’. Accord­ingly the concept of money supply is difficult to measure precisely.

Essay on the Attributes of Money:

Money is defined as anything which is generally acceptable and accepted in exchange for goods and services. In ancient times commodities were directly exchanged for goods and services. This was known as the barter system. But the barter system had certain inherent defects. Money was introduced just to remove the difficulties of barter and to facilitate exchange.

The commodities serving as money have varied from time to time and place to place. In India cows were widely used as money and the wealth of an individual was measured by the number of cows owned. Gold rings, iron swords, metal shells, copper crosses and axeheads have also been used as money at various times. In the modern world paper notes as also metal coins are widely used as medium of exchange.

To be considered as money a commodity should have the following qualities or attributes:

(a) Acceptability:

A commodity or a metal coin or a note is considered money only because it is widely accepted as money since they have intrinsic value. They were desirable for their own sake as well as for acquiring other goods, i.e., as a means of exchange. Today we use notes and coins which generally have no intrinsic value. But we know that other people will, in their turn, accept them from us in exchange for goods and services.

(b) Stability of value:

We should not be very eager to accept money if we except its value to fall by 35 to 40% by the end of the day. In fact, when this happens and people apprehend that high rates of inflation will erode the value of money, the monetary system may break down. This actually happened in Germany in 1923. In practice, however, prices rise by a small percentage every year. So no modern money has absolute stability of value.

(c) Durability, divisibility, portability:

One of the disadvantages of commodity, used as money, is that it is perishable. But money should be durable and not deteriorate over time. Moreover, it should be readily divisible so that small payments, involving, say, 10 p. or 5 p., can easily be made. It is also convenient if money can be easily carried from one place to another to make (or receive) payment. This property of portability is en­joyed by paper notes, having little weight.

(d) Uniformity:

Again money should be uniform in quality to prevent the bad money driving the good out of circulation. If one holds two coins, one of intrinsic value of 50 p. and one of no intrinsic value, then one is tempted to spend the latter and keep the former (or melt it and sell it as metal). This is the principle known as the Gresham’s Law.

(e) Liquidity:

Finally, money is said to be most liquid of all assets. The reason is simple. Money can always buy commodities but the converse is not true.

Conclusion:

Perhaps the fundamental purpose of money is to keep the economy operating, such as a lubricator that keeps an engine running. By fulfilling its basic functions money contributes to the efficient operation of an economy. Because these functions are so important the amount of money is also important. Too much money may cause inflation; too little may cause unemployment.

So, without an optimum quantity of money an economy will not operate efficiently. Money and interest rates also affect the volume of investment as also the rate of economic growth.