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Importance of Money

Updated on January 6, 2012
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Importance of Money

Money is an essential and basic necessity in a modern economy. In the beginning of human existence, human needs were so simple that they could be satisfied by barter system , i.e., exchange of goods for goods. In baster system, an individual produces some goods in greater quantity than what he could consume and then exchanges the extra units with another individual for something he needed in return. Barter system suffered from lack of double coincidence of wants, lack of common measure of value, difficulty in stored of extra goods and indivisibility of goods. The main advantage of using money is that it decomposes a single barter transaction into two separate transaction of Sale and Purchase. People can hold their wealth in the form of money as a generalised purchasing power which can be utilised to buy goods and services as and when they desire. Money s a pivot around which the whole economy revolves. It alone has the power to buy things directly in the market. It does not require to be spent. All economic system-Capitalist, Socialist and Maixed-need money.

  1. Money may not produce anything, but without it, nothing can be produced.
  2. With the help of money, consumers make payment for goods and services.
  3. With the help of money, producers can but raw material, plant and machinery. They can settle their debts and pay corporate taxes.
  4. Money has contributed to economic growth all over the world because it has removed trade barriers.
  5. With the help of money, government realises all taxes, fees, fines, penalties and other sources of public revenue.

Thus, money can serve mankind if it is controlled and regulated. But if it goes out of control, it can lead to disastrous consequences. It is rightly said that "money is a good servant and a bad master".


It is very difficult to give a precise definition of money which will cover all its aspects. Many definitions have been suggested by various economista. Most of the definitions are based on different functions performed by money. Thus, it is impossible to give a comprehensive, accurate and universal definition of money. Some of the definitions of money are:

Stanley Withers: "MOney is what money does".

Seligman: "Money is one thing that possesses general accept ability".

Thus money may be defined as:

"Moneyis something which is freely used and generally accepted as a medium of exchange and/or as a unit of account."


Money has made economic life systematic and organised y performing various function. The following couplet brings out the major functions of money.

Money is a matter of function four:

A medium, a measure, a standard, a store.

  • Money is a medium of exchange.
  • Money is a measure of value.
  • Money is a standard of deferred payments.
  • Money is a store of value.

These functions are explained as follows:

  1. Medium of Exchange: This is the central function of money. For performing this function, money should have general acceptability. Money as a medium of exchange divides the exchange transactions into two parts, namely, sale and purchase. This function of money facilitates sale and purchase, independent of each other.
  2. Measure of value or Unit of value: Money serve as a unit of account. As Crother puts it, "Money acts as a standard measures of value to which all other things can be compared." Money measures the value of economic goods. Money works as a common denominator into which the values of all goods and services are expressed. When we express the value of a commodity in terms of money, it is called price and by knowing prices of the various commodities, it is easy to calculate exchange ratios between them.
  3. Standard of Deferred Payments: Credit has become the life and blood of a modern capitalist economy. In millions of transactions, instant payments are not made. The debtors make a promise that they will make payment on some future date. In those situations money acts as a standard of deferred payments. It has become possible because money has general acceptability, its value is stable, it is durable and homogeneous.
  4. Store of Value: Wealth can be conveniently stored in the form of money. Money can be stored without loss in value. Saving are secured and can be used whenever there is a need. In this way, money acts as a bridge between the present and the future. Money means Goods and services. Thus, money serves as a store of value.


At present, India is on paper currency standard. It is also called Managed Currency Standard. The standard money is the legal money in which its government discharges obligations. India's monetary authority is Reserve Bank of India (RBI) and it has adopted standard currency made of paper. Thus, India is on paper currency standard. RBI is responsible for putting them in criculation. India following Minimum Reserve System in note issuing. Paper currency is inconvertible, ie., it cannot be converted into the precious metal that is backing it.

Various types of definitions of money are:

  1. Legal Definition of Money: According to Law, 'Money is what the law says it is'. Money had legal tender power. That is, it can be used to discharge debts. Robertson-"Money is anything which is widely accepted in payment for goods, or in discharge of other kind of business obligations." It is also called flat money since it serves as money on the order of the government. Demand deposit of bank are fiduciary money.
  2. Functional Definition of money: A functional definition of money includes all things that perform the four function that money does-medium of exchange, measure of value, standard of deferred payment and a store of value.
  3. Narrow vs. broad Definition of Money: Narrow definition of money is based upon its medium of payment function. According to Crother, "Money is anything that is generally acceptable as a means of exchange." Board definition of money indicates time and saving deposits at banks and post office. As Milton Friedman puts it, "Money is anything that serves the function of providing a temporary abode for general purchasing power."


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    • profile image


      24 months ago

      Best Article for Monetary Economics

    • profile image

      Ruby chowdhury 

      7 years ago

      awesome ekta article, khub moja paisi. kaje lagbe. a aro mojar kichu article ase.


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