ECM 401

L1-Money: Meaning, Functions and Role

MEANING OF MONEY:

Money has been defined differently by different economists. Some, like F.A. Walker,
define it in terms of its functions, while others like G.D.H. Cole, J.M. Keynes, Seligman
and D.H. Robertson lay stress on the ‘general acceptability’ aspect of money.

According to Prof. D.H. Robertson, “anything which is widely accepted in

payment for goods or in discharge of other kinds of business obligation,
is called money.” Seligman defines money as “one thing that possesses general
acceptability.” Prof. Ely says: “Money is anything that passes freely from hand to hand
as a medium of exchange and is generally received in final discharge of
debts.”

Prof. A. Walker says “Money is that money does.” But these

definitions are defective because they do not lay proper emphasis on all
the essential functions of money. Prof. Crowther’s definition of money is
considered better as it takes into account all the important functions of
money. He defines money as “anything that is generally acceptable as a
means of exchange (i.e., as a means of setting debts) and at the same lime,
acts as a measure and a store of value.”

It is a fact that although money was the first economic object to attract
men’s thoughtful attention…there is at the present day not even an
approximate agreement as to what ought to be designated by the
world…the business world makes use of the term in several senses; while
amongst economists there are almost as many different conceptions as
there are writers on the subject.’

FUNCTIONS OF MONEY:
Money is a matter of functions four, a medium, a measure, a standard, a
store.

Money in a modern economy performs important functions

which have been classified by Kinley as follows:
(a) Primary functions also called fundamental and original functions like
the medium of exchange and measure of value.
(b) Secondary functions like standard of deferred payments, store of value
and transfer of value.

(c) Contingent functions like distribution of income, measurement and

maximisation of utility etc.

a) PRIMARY FUNCTIONS

1. Money as the Medium of Exchange:

Money came into use to remove the inconveniences of barter as
money has separated the act of purchase from sale. Medium of
exchange is the basic or primary function of money. People exchange
goods and services through the medium of money. Money acts as a
medium of exchange or as a medium of payments. Money by itself
has no utility (except perhaps to the miser). It is only an
intermediary.

The use of money facilitates exchange, exchange promotes

specialisation Increases productivity and efficiency A good monetary
system is, therefore, of immense utility to human society. Money is
also called a bearer of options or generalised purchasing power
because it provides freedom of choice to buy things he wants most
from those who offer best bargain.

2. Money as a Unit of Account or Measure of Value:

Money serves as a unit of account or a measure of value. Money is the

measuring rod, i.e., it is the units in terms of which the values of other
goods and services are measured in money terms and expressed
accordingly Different goods produced in the country are measured in
different units like cloth m metres, milk in litres and sugar in
kilograms.

Without a common unit, exchange of goods becomes very difficult

Values of all goods and services can be expressed easily in a single
unit called money Again without a measure of value, there can be no
pricing process. Without a pricing process organised marketing and
production is not possible. Thus, the use of money as a measure of
value is the basis of specialised production.

The measuring rod of money is also indispensable to all forms of

economic planning. Consumers compare the values of alternative
purchases m terms of money Producers also compare the values of
alternative purchases m terms of money. Producers compare the
relative costliness of the factors of production in terms of money and
also plan their output on the basis of the money yield. It is, therefore,
highly important that the value of money should be stable.

3. Money as the Standard of Deferred Payments:

Deferred payments are payments which are made some time in the
future. Debts are usually expressed in terms of the money of account.
Loans are taken and repaid in terms of money.

The use of money as the standard of deterred or delayed payments

immensely simplifies borrowing and lending operations because
money generally maintains a constant value through time. Thus,
money facilitates the formation of capital markets and the work of
financial intermediaries like Stock Exchange, Investment Trust and
Banks. Money is the link which connects the values of today with
those of the future.

4. Money as a Store of Value:

Wealth can be stored in terms of money for future. It serves as a store
value of goods in liquid form. By spending it, we can get any
commodity in future. Keynes places great emphasis on this function
of money. Holding money is equivalent to keeping a reserve of liquid
assets because it can be easily converted into other things.

People therefore normally wish to keep a part of their wealth in the

form of money because savings in terms of goods is very difficult.
This desire is known as liquidity preference. Clearly money is the best
form of store of value. Wheat or any other product which will
command a value cannot be stored for a long period.

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”.

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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.
Term Paper # 2. 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. So, for the
convenience of study, definitions of money can be classified as
follows on the basis of their nature.

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.”

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(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:

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It is an essential characteristic 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.”

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(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 power—

something 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.

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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:
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I. Definitions with Narrow Points of View:

The definition given by Robertson 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.

II. 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.

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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.

The 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 of exchange; measuring value; final repayment of loans
and accumulating values.”

Definitions Based on Viewpoints of Economists:

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

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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.

Term Paper # 3. 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 whereas 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.

(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
moneys. 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 immovable 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 contribute 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.

Term Paper # 4. Nature of Money:

It is just a nature of money that serves as means, not as ends.
People had been fulfilling their needs through the barter system
since ancient times. Invention of money has made this exchange
convenient. Today, money plays a crucial role in trade of goods and
services, but still it is nothing in itself.

Generally these are misconceptions in the mind of people that

having money means having everything. For example, people
usually think that if one has eyes, one can see everything. But if
somebody is asked in a dark room about the things he is able to see
he would answer that he is not able to see anything. It means eyes
can see only with the help of light. So, money doesn’t have any value
of its own.

Human beings desire to get money as it satisfies various needs. So,

it is proved that money is only a means not an end. According to
Prof. Pigou, “Money is a garment draped around the body of
economic life.” That means money is only a cover (garment), but
the main work is done by commodities or services. In other words,
money is just a veil, hiding economic strengths.

Term Paper # 5. Importance of Money:

Importance of Money in Modern Economy:
Money plays very important role in the economic life. In today’s
world everything whether production, consumption, distribution,
saving, investment, employment is influenced by money. According
to Prof. Marshall, “Money is a centre around which economic
science clusters.”

In fact, he is an owner or a labourer; a teacher or a student; or it is

science or literature; employment or saving money is important for
everybody and everywhere. Considering the importance of money,
Crowther has said, “Money is a basic invention among all the
inventions by human beings.”

Money has the following importance in the modern

economy:
(1) Basis of Production:
All those sources (or resources) which are used in production are
purchased using money. For example, raw materials, machines,
labour etc. are obtained after spending money. Again produced
goods are sold for money. Without money, raw materials, machines,
labour etc., cannot be purchased nor can they be sold. So, money is
the basis of production.

(2) Basis of Credit:

It is the era of credit. Credit is also the basis of banking system.
Deferred payments are also made using money. If there is no
money, the credit system will end.

(3) Capital Formation:

Money helps in capital formation. Everybody earns for livelihood.
He also saves some part of his earning for future. When this saving
is deposited in any financial institution, it is called investment. This
investment is on the basis of capital formation and this capital
formation leads to trade and industry development in the economy.

(4) International Co-Operation:

International co-operation in the field of finance, commerce, credit
etc. brings economic development. The uses of money also bring
closeness among different countries of the world. This strengthens
political and cultural relationship. Thus, money plays an important
role in promoting international co-operation.

(5) Unit of Account:

Money is a medium to measure the value of any commodity. Thus,
it does the function of a unit of book and account. The barter system
which existed before the invention of money had no unit of account.

(6) Mobility of Capital:

As a liquid asset, money has the quality of mobility. It can be easily
carried from one place to another. A person settling in a place
different from his present settlement cannot carry his building or
any other immovable assets, but he can sell these assets to acquire
money and use that money to purchase the desired assets at the new
place.

(7) Mirror of National Progress:

Money market is well developed today. It not only helps in
monetary exchange, but also gives so many different indications. A
country that has stability in the value of money or least fluctuation
is considered to be a developing country. On the contrary, a country
is considered to be economically weak if its money has a normal
tendency to fall in its value. Thus, money works as the mirror of
national progress.

(8) Knowledge about Per Capita Income:

The level of standard of living of citizens of a country is measured
on the basis of their per capita income. Now, the per capita income
can be measured only in money. It also helps in measuring the
prosperity of the country.

(9) Foundation of Capitalism:

It is the era of capitalism. Money is a vital need in such an economy.
Financial institutions have taken birth only after the invention of
money. It has also led to the availability of capital. So, money is the
basis of capitalism.

(10) Freedom from Evils of Barter System:

Barter System gave rise to many difficulties. For example—lack of
double coincidence of wants, difficulties in division of goods,
difficulties in measuring the value, difficulties in deferred payment,
difficulties in storage etc. But money made all exchange easy.

Importance of Money in Planned Economy:

‘Planned Economy’ means predicting the needs of the country for a
certain period by the agencies of the country. It is specially taken
care in a planned economy that the stability of the value of money is
maintained. The reason is simple—if the value of the money drops
the investment in planning goes up. In this condition, extra money
will be needed to complete the planning. With this, it is also tried
that the foreign exchange rate should be stable.

The planned economy can be of two types—’Socialist Economy’ and

‘Mixed Economy’. ‘Socialist Economy’ is the form of economy in
which the wages, amount of production, varieties of production,
distribution system, prices etc. are controlled by the state. The
prime objective of economic activities is not earning profits. So,
money doesn’t have an important place in a mixed economy.

Robert Oven has said, “The motive of profit is the prime cause of
class- distribution, class-struggle and exploitation in the society and
this motive of profit rises due to money. So money should be
eliminated”. Simply, Karl Marx has analysed the Theory of Surplus
value’ and considered money and cash payment system to be full of
drawbacks. According to him, “Money is the main cause of
exploitation.”

In his opinion, if money is eliminated, the barter system would

automatically come into action. Marx’s opinions about money were
decided to be given the practical form after the Bolsheviks came into
power in Russia in 1917. He felt that if there is a detailed direct
control and distribution of commodities by the government, the use
of money could be brought to one end.

But real situations and practical difficulties clarified it within a very

short time that these concepts were illusions. Lenin accepted that it
was a mistake of Bolsheviks to reject money. Trolsky, too, had
accepted the need of money saying that it is essential to speculate
the economic planning in commercial terms and for this there is a
need of powerful unit of money.

These days, Russia and China come in the category of socialist

countries. In these countries the prices are determined by the
government, but the prices of goods and rate of exchanges are
measured in money only. This proves that the income of money
can’t be denied even in a socialist economy.

The main causes behind this situation are:

(1) Difficulty in Making Payment:
In the absence of money, it would be very difficult to pay wages,
rents, salaries, dividend etc. If the payments have to be made in
goods there would be the need of setting a big network of supply of
different commodities under the government control. The number
of labourers in a country is very large. So, making payments in
goods is impossible.

(2) Difficulty in Money Measurement:

If there would be the barter system in place of money, it would be a
big question as to which substance would be the basis of value
measurement. If different substances are taken as basis of
measurement in different parts of the country, it would cause an
economic inequality. Now the important and decisive fact is that if
anything has to be used as the basis of value measurement, the best
option is money.

(3) Capital Formation:

Even in a capitalist economy, there is a need of huge capital for the
foundation of industries and capital formation is impossible without
money.

(4) Difficulty in Foreign Trade:

There was a time when international trade was carried by the
socialist countries on the basis of bilateral agreements. But it puts a
limitation to foreign trade. Now since trade has been globalised,
even the socialist countries consider money to be the best option for
making payments. Russia, one of the biggest among the socialist
countries, is also making payments in money.

As far as the importance of money in the mixed economy is

concerned, the first thing to know is that in a mixed economy some
production activities are carried by the government and some are in
the private hands. Money has the same place in a mixed economy.
Most of the countries follow mixed economy in the present era.

The condition is applied to the developed as well as developing or

semi-developed countries. The USA and England have mixed
economy. India has also adopted the mixed economy to promote the
rate of development. Here, the public sector is controlled by the
government but the private sector is also encouraged. Money plays
an important role in all these activities.

Term Paper # 6. Role of Money in Economic Life:

Money plays a very important role in human life. According to Prof.
Marshall, “Money is the pivot around which the whole
economic science clusters.” Similarly P. B. Trescott has said, “If
money is not the heart of our economic system, it can certainly be
considered as its blood stream.”
Money has the following importance in various aspects of
Economics:
(1) In the Field of Consumption:
Consumption has the highest place among all economic activities. If
there is no consumption the activities of production, demand,
supply etc. would come to an end. People use goods and services to
fulfill their various needs. Consumers seek maximum satisfaction
from their consumption. For this they want to spend their income in
various commodities so that they can able to get marginal utility.
The concept of Law of Equi-Marginal utility given by Gossen is
based on this hypothesis.

Money is the basis of the whole activity of consumption. Income is

the basis of consumption and it is indicated in money only. Again
the quantity of consumption of a certain goods is determined in
money only. Thus money is important with respect to consumption.

(2) In the Field of Production:

Land, capital, labour and organisation are sources of production.
These sources can be achieved only with the help of money. The cost
of production and selling price are determined in money only.
Money encourages savings and savings create capital formation.

The faster process of capital formation in the country is the cause

for the higher rate of production because capital plays an important
role in setting up of industries. Money is a liquid asset, so it can be
made active and hence more productive. The modern division of
labour and specialisation are based on money itself. All the factors
of production are paid in money only.

(3) In the Field of Exchange:

The production of a commodity is relevant only when it can be sold.
The selling price of a commodity depends on its cost of production.
In determining the cost of production, some direct expenditure as
well as indirect like depreciation, insurance etc., are included.

These expenditures are measured in money only and on the basis of

these expenditures the selling price of the commodity is
determined. Thus, money plays an important role in the field of
exchange. It also promotes international trade. Money is also the
basis of credit.

(4) In the Field of Distribution:

Once the production is completed, rent to the landowner, interest to
the capital provider, wages for labourer, profit to the entrepreneur
etc. have to be distributed i.e., paid in money. The returns for all
these are not possible without money. Thus money has a special
place in the just distribution of the required national income.

(5) In the Field of Public Finance:

The government plays an important role in the nation’s progress.
The government meets the expenditures in the interest of public
with public income. The area of public expenditure is very large in
any country. Its prediction and expenditure both can be fulfilled by
money only. The collections of various kinds of taxes levied by the
government are not possible without money. Thus, money has an
important place in the field of finance as well.

Term Paper # 7. Circular Flow of Money:

There is a circular flow of money in economy. Money that a
consumer uses to purchase goods and services reaches to the
producer via mediators. Again, from the producer money goes to
the consumers by the medium of wages, salaries, rents, profits etc.
This cycle moves on.

If a part of wages, salaries, profits etc., goes to the government in

the form of taxes, they are spent on the planning of economic
welfare. This way money comes back to the consumers.

The above diagram shows clearly that service of production flows

from households to industries and business houses where as
monetary incomes flow in the opposite direction. Similarly
monetary expenses flow from households to workshops and from
workshops, goods and services flow towards the households.

On the other hand, services of production are purchased with

money and goods as well as services are sold from workshops. As
there is circular flow of money in the economy, an economic balance
is maintained but a disturbance in the flow of money system leads
to economic imbalance.
Out of the investment made in factories and industries if wages,
salaries, income, rent etc. which go to the consumers are supposed
to be Y and a part of it which the consumer spends is considered to
be C (consumption) and the remaining that he saves is considered
to be S (savings), we get an equation Y = C + S. Again, if this saving
is turned into investment, the equation would be Y = C + I. This
sequence in the economy is called the circular flow.

Term Paper # 8. Evils of Money:

Considering the above mentioned importance of money, it can be
said that money is the basis of modern economy and it is a boon for
human life. But sometimes it becomes a curse for the society as it
gives rise to evil practices. Money is also the cause of many evil
practices. So keeping in view the evils of money, it has been
said, “Money is a good servant but a bad master.”
Evils of money can be classified as follows:

A. Economic Evils:
Economically, money has the following evils:
(1) Inflation and Deflation:
A big problem with money is that its value fluctuates. In this
condition, the prices of commodities increase when the value of
money reduces. Value of money is inversely proportional to price of
commodity i.e. when the value of money increases then the price of
the commodity decreases and vice versa. This leads to inflation and
deflations. Both of these conditions are not good for the economy.
(2) Unequal Distribution of Income and Wealth:
Inflation and deflation brings profit for a section of the society and
loss for other at the same time. Consequently, there is an unequal
distribution of income and wealth.

(3) Class Struggle:

Everybody aspires to get money. The rich exploits the poor to get
more and more money. As a result, the rich get richer and the poor
get poorer. This leads to class struggle in the society. Money is the
root of struggle between capital and labour.

(4) Trade Cycles:

Economy addresses ‘booms’ and ‘depressions’ due to inflation and
deflation of money. This affects income, employment, prices,
savings and investments. Sometimes, this effect is positive and
sometimes negative. When the trade cycle is negative, there are
many fluctuations in the economy.

(5) Over-Capitalization:
With a rise in the flow of money in the economy, there is an increase
in savings and investments. A big part of investment is in the
industrial fields. If there are over-investments the return on
investment decreases is also a problem of over-production. Over-
production, too, leads to depression.

(6) Encouragement to Loan Tendency:

Individuals, society and nations try to show themselves prosperous.
Money encourages loan tendency. People try to show themselves
rich or prosperous even by taking loans. It is implied to every
country.

B. Social Evils:
Money has following social evils:
(1) Social Respect:
It is commonly seen that somebody is considered respectable if he
has a lot of money. Due to abundance of money, many of their
drawbacks remain hidden. Due to this reason, intellect, labour,
honesty etc., don’t get proper place in the society. This reduces
social values.
(2) Tendency of Exploitation:
It is commonly seen that a prostitute is condemned for her work,
but there are many other contemptible work in the form of various
kinds of exploitation in the society. People don’t hesitate to exploit
their subordinate in order to get more and more money. Very often
voices are raised against exploitation by many organisations.

(3) Enmity:
In most cases, the root cause of enmity is money. There is a
common visibility by enmity among brothers or relatives due to
money. So, money reduces social peace and affection.

C. Moral Evils:
Money is also the mother of moral evils. It encourages theft,
robbery, loot, murder, corruption, prostitution etc.

Conclusion:
On the bases of the above evils of money, it appears in the first
glance that money is the root of all evilness, But it is not so in
reality. If people control the use of money, it is a boon. That is why
it is said, “Money is a good servant, but a bad master.”