Contingent Functions of Money

Contingent Functions of Money

With the period of time, the functions of money got diversified. Besides, the primary and I secondary functions, professor D. Kinley lays stress on the contingent functions of money. Contingent functions of money include distribution of income, measurement and maximisation of utility, basis of credit, liquidity to wealth etc.

A) Measurement and Division of income, national income - The contribution of all factors of Production like Land, Labour, Capital and Organization constitutes our national product. This product is the result of their joint efforts. So this product belongs to all of them.This national product is also known as national income. So, this national income is to be distributed among the above stated factors of production. Money makes the distribution of this joint production among the various factors of production easy. The relative shares of factors are also calculated through money.It means the share of labour in the national income, the share of capital in the national income and so on so forth. Labourers get wages, landlords get rent, capitalists get interest and the organizers get profit.Without money it is impossible to settle the share of each factor of production from the national income. It is, in fact, very difficult to calculate the factor income without money.

B) Measurement and maximization of Utility - Utility is measured in terms of money. A consumer measures the utilities of different consumer goods with the help of money. Similarly, a producer measures the utilities of different factors of production with the help of money. A consumer tries to get maximum satisfaction by adjusting his expenditure on variety of commodities with the heap of money.A producer maximises his returns by substituting one factor in the place of another for productivity gain. It is done through money by comparing the marginal productivity of each factor. To get maximum satisfaction from consumption, the consumer equalises the national utility of last unit of money spent on all the items.

C) Basis of Credit - Money constitutes the basis of credit. Banks create credit with the help of money. Any increase or decrease in money supply leads to a commensurate increase or decrease in the availability of credit money in the economy.Credit instruments like bills of exchange, cheques etc cannot be put to use without the existence of money. Professor Halm remarks that money is an indispensable condition for development of a credit market.

D) Imparts Liquidity to Wealth - Money gives liquidity to various forms of wealth. So it is convenient to store wealth in the form of money because money is the most liquid of all assets. Money can be put to any use readily. As we know all capital is wealth.Money is the most liquid form of capital. Capital in the form of told that money imparts mobility and liquidity to capital. Money helps in transforming other forms of capital into the most liquid form of wealth which have strong bearing on the process of development of a country. Barring the above functions, money acts as an effective instrument in controlling demand and supply in the market. As we know, price in the market is determined by the interaction between demand and supply. When the value of a good is expressed in terms of money, it is called price.There is no disagreement among economists that price in the market acts as a signal. It will indicate the divergence between demand and supply. It means, price can show excess demand or excess supply.

E) Estimation of Macro Economic Variables - Macro Economic Variables like Gross National Product, total savings, total investment, etc. can be easily estimated in monetary terms. It also facilitates government tax collection, budget etc. Thus in modern monetized economy money has facilitated production, distribution, savings etc. It encourages international trade, transport, formation of capital markets and other financial institutions.

As we know price is the money value of a good. Analysing the price level, the policy makers can go for necessary corrections in the economic parameters.

From the above discussion, we learnt that money is equally important to those who have it and those who don’t.

However, evils of money are many.

1. We find ‘inequality in the distribution of income and wealth (which are the outcome of distribution of national income among factors of production through money) in the society. So invention of money is not an unmixed blessing.

2. Rise in the general price level or fall in the general price level is bad. This occurs due to faulty monetary policy of a country. As we know money is a good slave but a bad master. Money should be handled with care.

3. Instability in the value of money affects various sections of the society differently. Especially during the period of general rise in prices (that is inflation) or fall in the value of money, poor people are adversely affected (or hard hit).

4. Many social disadvantages are associated with the use of money. Money has been responsible for large-scale corruption. According to Ruskin, “the devil of money has come to possess our souls”.

Von Mises, remarked: “Money is regarded as the cause of theft and murder, of deception and betrayal.” J.M. Keynes says that the love of possession of money as “disgusting morbidity, one of those semi criminal, semi pathological propensities which one hands over with a shudder to the specialist in mental disease.”

However, money has been treated as a basic institution of the modern industrial economy. In spite of dangers of money we are aware of its enormously important role in our economic life.