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BCom 3rd Year Definition Functions Financial Money Study Material notes in hindi

BCom 3rd Year Definition Functions Financial Money Study Material notes in hindi

BCom 3rd Year Definition Functions Financial Money Study Material notes in hindi : Definition of Money   Definitions Based on the nature of money Definitions Based on View Points of Economists Function of money Exercise Questions  Long Answer Questions Short Answer Questions Objective Type Questions Choose the Correct Questions Following Statement True and False :

BCom 3rd Year Definition Functions Financial Money Study Material notes in hindi
BCom 3rd Year Definition Functions Financial Money Study Material notes in hindi

BCom 3rd Year Corporate Accounting Underwriting Study Material Notes in hindi

DEFINITION AND FUNCTIONS OF MONEY

ORIGIN OF MONEY

There is no evidence about the first emergence of money; particularly the time and place concerned. People had very few wants in the beginning of human civilization. There was no need of money as they could meet their needs themselves. As the civilization prospered; people’s needs multiplied, and consequently interdependence for goods and services increased. Hence, the barter system came into existence to fulfill the initial needs of exchange. But a number of difficulties were observed in this system by the passage of time; for instance – lack of double coincidence of wants, lack of common measure of value, lack of divisibility of commodities, lack of store of value, difficulty in deferred payment, lack of transfer of value etc. In a civilized society, a need was felt that there should be such a system that could save all from these difficulties. Money came into existence in these circumstances.

The term ‘Money’ is derived from the Latin term “Moneta”. It is said that “Moneta” is the other name of Goddess Juno. In the ancient Italy this Goddess was called “The Goddess of Heaven”. Metallic money was coined in the temple of this goddess. As this money was produced in the temple of “The Goddess of Heaven”, one who got it felt the joy of Heaven. So, it is considered that the term ‘Money’ is derived from the term “Moneta”.

On the other hand, some scholars consider the term ‘Pecunia’ as the root of the term ‘Money’. The term ‘Pecunia’ has origined from the term ‘Pecus’ which literally means ‘Live-stock”. This can be held logical as in ancient days livestock and goods were used as money.

Whatsoever have been the ways of origin of money, it is an ultimate truth that ‘money’ is one of the three greatest inventions of the world. It is worth mentioning here that ‘fire’, ‘wheel’ and ‘money’ are considered to be the three greatest inventions of the world. Money is also used in the sense of ‘seal’ or ‘sign’ in Hindi.

DEFINITION OF MONEY

There is much difference in opinions of scholars regarding the definition of money. Someone has based the definition of money on the universal acceptance; whereas someone else has taken its function as the central issue in the definition 00, for the convenience of study, definitions of money can be classified as follows on the basis of their nature.

Definition Functions Financial Money

Definitions of Money

Definitions on the basis of nature                           Definitions on the basis of expansion

Descriptive Definitions                                              Definitions with narrow point of views

Definitions based on common acceptance             Definitions with broad point of views

Legal Definitions                                                            Proper Rational Definitions

DEFINITIONS BASED ON THE NATURE OF MONEY

Definitions on the basis of nature of money can be classified into following three groups :

I Descriptive or Functional Definitions : This category includes definitions of those scholars who stated functions of money in their definitions. Some important definitions of this category are given below:

(1) According to Crowther. “Money is anything that is commonly used and generally accepted as means of exchange and at the same time acts as measure and store of value.”

(2) According to Prof. Thomas, “It is a means to an end not for its own sake but as a means of obtaining other’s articles or commanding the service of others”.

(3) According to Coulborn, “Money may be defined as the means of valuation and payment.”

(4) According to Nogaro, “Money is a commodity which serves as an intermediary in exchange and as a common measure of value.”

(5) According to Hartle Withers, “Money is what money does.”

(6) According to Whitelesy, “If a particular unit is commonly employed to state values, exchange goods and services or perform other money functions, than it is money whatever its legal or physical characteristics.”

Although the above definitions are practical, they describe money in place of defining it. There is radical difference in description’ and definition’. These definitions don’t claim any universal acceptance or recognition of governments. So even if these definitions are accepted in practice, they can’t be given recognition.

II Definitions Based on Common Acceptance :

It is an essential characteristics of money that it is commonly accepted by the common people in return for the goods and services. So, some scholars have defined money on the basis of acceptance. Some important definitions of this category are given here:

(1) According to Marshal, “Money includes all those things which are at given time or place generally current without doubt or special enquiry as a means of purchasing commodities or services and of defraying expenses.”

(2) According to Robertson, “Money is anything which is widely acceptable in discharge of obligation.”

(3) According to Seligman, “Money is one thing that possesses general acceptability.”

(4) According to Ely, “Anything that passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debts.”

(5) According to Prof. Keynes, “Money itself is that by delivery of which debt contracts and price contracts are discharged and in the shape of which a store of general purchasing power is held.”

(6) According to G.D.H. Cole, “Money is simply purchasing powersomething which buys things, it is anything which is habitually and widely used as a means of payment and is generally acceptable in the settlement of debts.”

(7) According to R.P. Kent, “Money is anything which is commonly used and generally accepted as a medium of exchange or as a standard value.”

It is evident from all above definitions that a common acceptance is a chief characteristic of money. But just describing qualities can’t be a complete definition. On the basis of the above definitions credit instruments can’t be considered as money since they are not accepted everywhere.

III. Legal Definitions :

Definitions based on state principles have been kept under this category. According to this principle only such a thing can be money which has been declared legally by the government. This category includes ideas of Prof. Knapp from Germany and British Economist Hartle.

(1) According to Knapp, “Anything which is declared money by state becomes money.”

(2) Hartle has also initially accepted the definitions given by Knapp, but he has amended this definition saying, “Money should not be defined only in terms of recognition by the government, but also as a unit of settlement of transactions.”

DEFINITIONS GIVEN ON THE BASIS OF EXPANSION

There are three views regarding the meaning of money on the basis of expansion IV Definitions with narrow points of view : The definition given byRobertson is kept in this category. Robertson and his associates held that “A commodity which is used to denote anything which is widely accepted in payment of goods or in discharge of other business obligations.”

If this definition is analysed, gold is the only thing which is acceptable to all countries for replacement. In this condition, money formed from gold or silver alone can be included in the definition of money. So, most of the economists held the definition given by Robertson to be narrow.

I Definitions with broad points of view : Definition given by Hartle Withers can be included in this category. According to him, “Money is what money does.”

This definition is descriptive as well as universal. This definition can be termed as ‘everything in something’. According to this definition not only metals or currencies but also cheques, bill of exchanges, hundies and other credit instruments are included in money. But some economists consider that this definition is far more universal (broad) than what is needed. According to this definition credit instruments are also money, but nobody can be compelled to accept it for repayment.

III. Proper Definition :

On making a careful study of various definitions, we come to find that some economists have centered their attention on the acceptance of money, while some others have based their definitions on Functions what it does. If we have to know the form of money, it can be defined As Follows: “Money is something which is accepted freely and widely as a medium Exchange; measuring value: final repayment of loans and accumulating values,

Definition Functions Financial Money

DEFINITIONS BASED ON VIEWPOINTS OF ECONOMISTS

Harry G. Johnson has presented four viewpoints regarding the definition of money. These include:

(1) Traditional Approach: According to this viewpoint money is considered according to its function. So, all those things which act as money can be called money. On this basis, currencies and demand deposits are included in money. In this category Hartle Withers, Keynes, Kent, Crowther etc. get place for their definitions.

(2) Chicago Approach : Economist of Chicago University has made the definition of money universal by accepting the traditional approach and at the same time including fixed term deposits and savings accounts deposits of commercial banks. According to this approach :

Money = Currency + Demand Deposits + Fixed Deposits + Saving Bank Deposit.

(3) Gurley and Shaw Approach: This approach includes savings deposits with non-banking financial institutions, debenture and bonds to Chicago approach. So, according to this approach:

Money = Currency + Demand Deposits + Fixed Deposits + Saving Bank Deposits + Saving Deposits with Non-banking Financial Institutions, shares, debentures and bonds.

(4) Central Bank Approach: According to this approach all kinds of credits are included in money. That is why; in the monetary policies of the Central Bank the amount of gross credit is considered.

Redcliff has also said, “Money means credits forwarded by various sources.”

Considering all these approaches it is evident that ‘Proper Definition’ which has already been defined is the best.

Definition Functions Financial Money

FUNCTIONS OF MONEY

Just like the definition, the functions of money have also drawn the economists into confusion.

Prof. Kinley has divided the functions of money into three categories where as Prof. Chandler has considered the main function of money to ease transactions of goods and services. On the other hand there is an English poem in vogue about the function of money, “Money is a matter of four functions: a medium, a measure, a standard, a store.”

But in practice, the functions of money are wide ranging. Considering the convenience of study, functions of money can be classified as follows:

(A) Primary Functions Primary functions of money are those functions which are applicable in any country in every time and circumstances. Following two functions come in this category :

(1) Medium of Exchange : Once upon a time barter system of exchange was in practice. Many difficulties had to be faced those days. Measuring the value of goods and the need of double coincidence of wants were big difficulties. Exchange has become very easy with the invention of money. Today, any goods or services can be sold in exchange of money and the commodities and services can be purchased with money. Thus money is the convenient means of exchange.

Definition Functions Financial Money

(2) Measure of Value It was a problem with the barter system that how many units of a commodity should be given in exchange for a certain units of a certain commodity. Now, every commodity and every service can be measured in money. Being a medium of exchange, money is also a medium of measure of value. It means that money is the only unit of measurement of exchange ratio between two commodities.

But it is also important to note that value of money changes from time to time. Consequently, gross measurement of money is still troublesome. Cloth is measured in meter and the length of meter is fixed and rice is measured in kilogram and kilogram is a fixed quantity. But the value of money is not still and it keeps changing. This creates difficulties in the economy of a country.

(B) Secondary Functions: Functions which help in the primary functions of money are called secondary functions. Following functions come in this category :

(1) Standard for Deferred Payments : The present era is the era of credit. Credit plays an important role in the progress of any business. Credit is a system in which goods and services are exchanged or money is borrowed on the promise of future payments. The use of money has made the credit system quite easy. In barter system future payments were made in commodities only. The lack of durability in the goods posed many problems in future payments. Money is more durable in comparison to commodities and so it becomes the basis of future payments.

(2 Store of Value: Nobody knows what the future stores for him/her. So people want to do saving considering the needs to meet the expenses in diseases, marriage, old age etc. In the days of Barter System it was not possible to store commodities for a long period, But the invention of money has eased the process of storing money or wealth. Banking system also operates using this characteristic of money. This feature of money promotes the tendency of saving which leads to capital formation and activates the economic development of a country,

(3) Transfer of Value: Transfer of value plays an important role in the process of economic development of a country. Today, the scope of exchange is very vast. People are getting success in selling their immovables at a place and purchasing far off. Economic pace has increased due to this function of money.

(C) Contingent Functions : Kinley has stated that money performs contingent functions besides primary and secondary functions. Some of such functions are:

(1) Distribution of Income : The work of production has become wide and complex in the present era. Various sources contibute in the work of production. sources of production are paid for their contribution after selling the produced

goods and getting money. The job of production is possible only due to this role of money. Thus, money is the basis of social distribution of income.

(2) Giving a General Form to Capital Money has the maximum liquidity among all forms of capital. That is why a capital in the form of money can be brought into any use. Due to liquidity of money, capital can be drawn from the less productive areas into more productive areas.

(3)Basis of Credit Credit instruments are increasingly being used these days. Cheques, bank drafts, bill of exchange, hundi etc. are commonly used for payments. But money is hidden in these credit instruments. Banks issue drafts or allow the use of cheques against liquid money only. Thus, money does the work of credit.

(4) Maximum Satisfaction : Every consumer wants to get maximum satisfaction. To achieve maximum satisfaction, he wants to spend his income to meet various needs in such a way that he can get equal marginal utility from every commodity. This is possible only through the use of money.

Other Functions.

Besides the functions started above, money does some other functions as well. A few of these are :

(1) Liquidity: Money gives liquidity to assets. Due to liquidity, money can be used for any purpose.

(2) Bearer of Option : We know that money has purchasing power. This purchasing power is of both kinds—present and future. People store money to meet future needs and use that money in future according to their own wishes.

(3) Guarantor of Solvency: Every person or firm keeps sufficient money in reserve to maintain the ability of solvency. If they don’t have sufficient money for repayment of loans, they lose their ability of solvency and they are declared to be insolvent. Thus, money works as an indicator of guarantee of ability of solvency.

Definition Functions Financial Money

EXERCISE QUESTIONS

Long Answer Type Questions

1 Define money and discuss its functions.

2. “Money is what money does.” Explain this statement.

3. What is money? What are its functions ?

Short Answer Type Questions

1. Why is money called the basis of credit ?

2. What are the primary functions of money?

3. Explain the functions of money in the form of chart.

4. Give a definition of money on the basis of common acceptance.

Definition Functions Financial Money

III. Objective Type Questions

Choose the correct option

1 “Money is what money does.” This definition is given by :

(a) Marshall

(b) Crowther

(c) Kent

(d) Hartle Withers

2. Who gave the definition : “Anything which is declared money by state becomes money.”?

(a) Knapp

(b) Ely

(c) Keynes

(d) Seligman

Definition and Functions of Money

3. “Money is a standard for deferred payments.” This function of money comes in the category of:

(a) Primary Functions

(b) Secondary Functions

(c) Contingent Functions

(d) Other Functions

4. Which of these is a primary function of money?

(a) Distribution of income

(b) Transfer of value

(c) Medium of exchange

(d) Store of value

5. Into how many categories have the definitions of money been categorized according to economists?

(a) 3

(b) 2

(c) 5

(d) 4

6. Which of these is not a contingent function of money ?

(a) Maximum satisfaction

(b) Basis of credit

(c) Guarantor of solvency

(d) Distribution of income

[Ans.: 1. (d), 2. (a), 3. (b), 4. (c), 5. (d), 6. (c).]

Definition Functions Financial Money

State whether the following statements are True or False :

1 According to Knapp, “Anything which is declared money by state becomes money.”

2. “Standard for deffered payments” are the functions of money.

3. Money gives liquidity to assets.

4. Money has purchasing power.

5. Exchange has become very difficult with the use of money.

6.Money is a basis of credit.

7.According to Hartle Withers, “Money is what money does.”

[Ans. : 1. True, 2. False, 3. True, 4. True, 5. False, 6. True, 7. True.

Definition Functions Financial Money

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