Qualities of good money

With the ongoing fraudulent issues associated with counterfeit money, it is important to be familiar with the qualities of good money.To be able to perform the functions of money well, the money material must possess the following qualities:

1] Acceptability – Good money is accepted by all because it serves as a medium of exchange. The material of which money is made should be acceptable to all without any hesitation. In this connection, metallic money – gold and silver are considered as good money material because they are readily acceptable to the general public due to its utility and value. The holder can use it as money or metal. He does not lose value in both.ie Apart from being used as money, these metals can also be put to other uses (e.g., making ornaments.)

The essential quality of good money is that it should be acceptable to all, without any hesitation in the exchange for goods and services. Also it should have a long history of acceptance, which is why we don’t use molybdenum or rhodium.

2] Durability – Money must be durable/long lasting . It should not lose its value with passage of time. This simply refers to the physical wear and use of money over a period of time. If some money is easily destroyed or damaged it is likely that it is fraudulent and therefore cannot be trusted. Money material must last for a long time without losing its value. Ice and fruits cannot become good money because they lose their value with the passage of time. Ice melts and fruits wheat, corn, rice etc perish. Metals are most durable compared to other forms of money. Gold and silver do not wear out quickly, in case of money made from a paper source some wear and tear must be expected. However they can be treated as durable due to replacement by the bank.

3] Portability – The commodity chosen as money should be easily transportable without any depreciation. Good money must be portable easily. It should have more value in small quantity On this ground, various animals cannot be used as money.

The commodity chosen as money should be easily transportable without any depreciation. ie should be easily transferable from one place to another for doing business and making payment. The paper money is easier to carry because it has less weight than metallic money. people can carry it around with them on a daily basis. This also allows for the ease of transaction.

4].Scarcity – The scarcity is the quality of good money material. Good money is always scarce. Money must be limited in supply as compare to demand for it. It should be scarce enough to be valuable/ to retain its worth. The more money that is in circulation the less it is valued by the economy. Which is why we don’t use aluminium or iron.or common goods  such as sand or pebbles on a beach. This quality induces the people to have more and more money for meeting their basic necessities of life.

5] Divisibility – Good money is that which could be easily sub-divided for the purchase of smaller units of the commodities, without losing any value. People will only need as much money as is necessary for their purchases, therefore it is necessary for money to be easily broken down for different types of transactions. Cow, for example, cannot function as good money because it cannot be divided without losing its value; a fraction of cow is quite different entity than a whole cow. The metallic money and paper money is divisible and therefore has public confidence

6].Cognizability – Good money is easily recognized either by sound, sight or touch. If it is not easily recognisable, it would be difficult for the individuals to determine whether they are dealing with money or some inferior asset.

Money is subject to the type of currency that is in circulation within a specific place, so if it is easily recognized it is likely to be genuine. The printing of notes is secret. The imitation is not possible, because the process of colouring and the quality of paper are always in the hands of central bank. The general public is familiar with the various kinds of notes and recognise it easily.

7] Malleability – A good money material must be malleable ie  capable of being melted and put to different forms/new money. A metal is melted and then coins are minted. Gold, silver, copper, etc., have this quality they can be moulded and stamped and  proper designs are made on it. The money material, which can be melted, is fit for making coins. The malleable materials have impression on its face and back for recognition.

8]. Homogeneity / Uniformity – Good money must be of standardized/identical nature. The quality and quantity of its material should not undergo great change.

Money should be homogeneous. Its units should be identical; they should be of equal quality and physically indistinguishable.

The unit of money of the same denomination of currency must have the same purchasing power otherwise there will be confusion in buying and selling of goods and services. The colour and size of money material help the people to deal in the market and also allows for money to be counted and measured accurately.

If money is not homogeneous, the individuals will not be certain of what they are receiving when they make transactions.

9] Elasticity -The good material has the quality of elasticity. The business needs change from season to season. The supply money should be elastic. If demand of money increases its supply may be increased easily. Paper money possesses the quality of elasticity.

10]Stability of value – The value of money should remain stable and should not change for a long period of time. If the value of money is not stable, it will not be able to function as a measure of value, as a store of value and as a standard of deferred payment. A change in its value brings change in the prices of goods and services. The public confidence is developed if value of money is stable. The money having ever-changing value is not liked by the people

11] Storability – A good money material is that which can be store able without any depreciation. If money material is perishable then it can not serve as a good money material as it will lose its value. A good money material is storable for meeting the future demand. The minimum space and lowest storing expenses are necessary for keeping the money material. Paper money and metallic coins have this quality of storability.

12] Economical – It is important quality of good money that it should be made economically, unnecessary expenditure may not be wasted on its preparation. If there is heavy cost on issuing more money that is not good money. Good money is that has low cost and more supply. The cost of printing currency notes and minting coins must be lower. Paper money has this quality of economy.

13] Effective Supervision – The good money is one that can be effectively supervised by a central monetary authority. It is of such a nature that central authority is able to keep records of the amount of money in circulation and the pattern of its distribution.

14] Government Support: The good money material must be supported by the government. The people accept even fiat money (money issued without keeping any metallic reserves) due to the government support. The government’s backing to money creates a sense of confidence.

Conclusion - So far not a single commodity has been discovered which possess all the attributes given above in their entirety. The precious metals, gold and silver by and large, possess the above mentioned qualities of good money material. It is because of this reason, that these metals have been used as money for a considerably long period of time. These have been discarded in the past in favour of paper currency and bank money. Now the notion of money has changed. The modern governments go through trial and error procedures before adopting a common medium of exchange. The main considerations for selecting a money material are general acceptability and cost of producing money. That commodity is chosen to serve as money which will be widely used by the people and which offers the least costly benefits of a common medium of exchange. Any how we can say that anything which command confidence of the people and is accepted as a medium of exchange is called money.
In the words of, Prof Paul Samuelson, “Money is a medium of exchange enabling us to transact our national income and product without resource to hopelessly inefficient barter”.

Posted in General Economics