Question

Give reasons or explain.
1) Money works as a store of value.
2) Any commodity cannot act as money.
3) Barter System had many difficulties.
4) Money is the basis of credit.

Answer 1

1) Money can be easily stored without any loss in its value. Thus, store of value as a function of money implies that money can easily be saved and used for future needs. Money’s function of storing value can be justified because of the following reasons:

i. Money is the most widely accepted medium of exchange.
ii. There is no loss in the value of money over time. Though there is a loss in the value of money due to inflation, it is negligible.
iii. Money can be stored conveniently and does not involve any cost.

2) Any commodity can’t act as money. For something to be used as money it must possess the following qualities.

i. General acceptability: Good money is the one which is readily accepted by all without any reluctance.
ii. Divisibility: Any commodity acts as good money if it can be divided into small units. For example, currency notes, gold, silver, and coins possess divisibility quality as it can be divided into different denominations.
iii. Durability: It should possess the quality of durability. That is, it should be long lasting. As currency coins are made up of metal, these are more durable compared to currency notes.
iv. Cognizbility: By cognizibility, we mean that good money is the one which is easily recognisable by all the members of the society and so no special efforts are required to recognise it.
v. Portability: It should be easy to carry from one place to other without any expenses and inconvenience.
vi. Homogeneity: Money of the same denomination should be homogenous in size and quality. For example, all 5 rupees coin should be of the same size, colour etc.
vii. Stability of value: Anything which is used as money should be stable in the sense that its value of money should not change frequently.

3) Barter system had many difficulties. The difficulties in barter system were :

i. Problem of double coincidence of wants: Double coincidence of wants implies that the needs of any two individuals should complement each other for the exchange to take place. However, in reality, it is very difficult to find an individual who possesses the goods and services that are needed by another individual at the same time in exchange of what he/she has.
ii. Lack of a common unit of value: Under the barter system of exchange, there was no common unit for measuring the value of one good in terms of another good for the purpose of exchange.
iii. Difficulty in wealth storage and transfer of value: Individuals tend to store a part of their wealth or earnings as savings to be used for future needs or as an investment. However, it is very difficult to store many types of commodities.
iv. Lack of standard of deferred payments: It was very difficult to make future payments and contractual payments such as salaries, loans, interest payments etc. For example, it was difficult to decide whether wages for labour are to be paid in terms of food grains or any other commodity.

4) The commercial banks create credit in the economy through deposits. Money facilitates the functioning of credit instruments such as cheques, promissory notes, bills of exchange, etc. Such credit instruments facilitate transfer of value from one person to another. In this way. money forms the basis of credit.