Introduction
Money is a means of payment for services and goods. Money can also be defined as anything that allows us to purchase goods and services (Stanford 2008, 189). Money serves number of functions like measure of value, means of exchange and store of value. These functions often contradict each other and these contradictions may lead to economic crisis.
Function of money
Money: In ancient times, barter system was used for payment of services and commodities. It was difficult to put exchange value on commodities or services rendered. Trading in barter system was highly inefficient, as seller had to find a buyer who could offer something that seller was ready to accept in exchange. Gold or silver was used as money. This was an improvement. Gold or silver were costly, not easily available and easy to carry. Their value remained more or less constant relative to other commodities over time. They could be stored. Though it was divisible, it could not be used on daily basis for purchase of low value items or as payment to services done by workers. Coin or tokens were used for small payments. Eventually paper money and electronically became standard form of money. Thus, money originally had physical form, has now been represented by symbols or numbers in bank account (Harvey 2014, 29). Money can take many forms. “Money is thus a social institution, (Stanford 2008, 192)” which has political and legal sanction . Money should have 6 characteristics. They are acceptability, durability, divisibility, portability, scarcity, and stability (Federal Reserve Bank of Philadelphia.2013, 6).
Money as a measure of value and a means of exchange and contradictions: Various goods and services are valued against money. Price of 1 lb. of potato is $1. Hourly rate of cleaning help in New York is $28. Money performs another important function as medium of exchange. A cleaning help receives payment in dollar in exchange of her/ his services. Producer of potato sells potato at supermarket and in exchange receives payment in dollars. A buyer purchases potato from supermarket and pays in dollars. Supermarket pays a part of its total earning to a cashier. The cashier buys foods from his salary. This way money circulation goes on.
All items we buy or sale has use value and exchange value. The use value and the exchange value are at variance and create condition for contradiction. There can be different use value of any item but the exchange value remains same. We can take example of a house. A house can be used as home for a family where they stay, dine, sleep, recreate and perform daily functions. A house can be historic monument or it can stand for status symbol. It can serve as office, lodge, hospital, and for many other uses. Determination of exchange value of a house in capitalistic economy is complicated. Tribal people living in vicinity of forest, build a house collecting logs and other provisions from the forest free of cost. The land is also free. They built their house themselves. This way houses are built in urban slums of many cities of developing countries. Their exchange value is limited.
In advanced capitalist economy, exchange value of a house is not based on cost of building the house. The cost comprises money spent on materials, labor and land. Two other components are added. The builder takes loan from bank to build the house and pays interest on the loan. The builder adds up profit margin. Thus, the builder expects to sell the house at exchange value that is cost of land, cost of building the house, interest payment and profit. Thus the builder’s aim is to recover exchange value not use value. Speculative market forces based on demand and supply determine the actual price of the house. The builder may make higher profit or may make losses (Harvey 2014, 15-17).
The state intervenes by taking initiatives to build houses for low-income population, thus, bridging the gap between use value and exchange value and controlling the stress. But there has been occasions when speculative forces has taken hold of the market resulting in financial crisis as happened in the United States in 2007-09.
Money as a store of value and contradiction: Common persons deposit surplus money in the bank and earn interest. The bank lends money to the company and earns higher profit. The company invests money on production of goods in order to make profit. In this way, the companies create money by initiating new production (Stanford 2008, 193). Money that measures value of commodities creates more value as interest money. Here money becomes a commodity and this creates a contradiction.
A commodity is sold not at its value but on market-determined price depending supply and demand. Capitalists, to maximize the profit, brand their products. This way they avoid competitions and create a monopolistic market condition. This enables them to put a price on the commodity, which may be at divergent with the value. Money can be used to make more money that has no monetary value. The money invested in share market, creates wealth. These type of speculative activities are not productive. Busting of housing bubble during 2007-09 in the United States and related financial problems happened due to speculative investment in housing sector.
Human being has lust and greed. Accumulation of money gives social status and power. This leads to distortion of market forces of demand and supply that determines the exchange value of the commodities. Speculation in financial market leads to crashes. This adversely affects common persons and increases financial inequality. John Maynard Keynes wrote in 1930 during the period of ‘Great Depression’ that the capitalist system had brought in unprecedented financial prosperity to Europe. He hoped for a future when the accumulation of wealth will not denote social status. Value of money will be for leading a healthy life and for enjoyment not as lust of money. Few people will not change and will lust for wealth. However, rest of the people will not approve and encourage this practice (Keynes 1930, 6-7).
References
Federal Reserve Bank of Philadelphia.2013. Functions and Characteristics of Money: A Lesson to Accompany, 3(301). The Federal Reserve and You. http://www.philadelphiafed.org/education.
Harvey, David. 2014. Seventeen Contradictions and The End of Capitalism. London: Profile Books Ltd.
Keynes, John Maynard. 1930. Essays in Persuasion. New York: W.W.Norton & Co. 358- 373. http://www.econ.yale.edu/smith/econ116a/keynes1.pdf
Stanford, Jim. 2008. Economics for Everyone: A Short Guide to the Economics of Capitalism. London: Pluto Press.
