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Money and Banking

Qualities of Good Money

Money performs several primary, secondary, and contingent functions. However, in order to perform these functions, it must possess certain qualities. In this article, we will talk about the qualities of good money.

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Qualities of Good Money

Here are some important qualities of good money:

qualities of good money

                                                                                                                                                  

General Acceptability

An important quality of money is its acceptance. Good money requires acceptance to all without any hesitation. Since the law declares Money as the legal tender, it has an inherent quality of general acceptability.

Portability

Apart from its acceptance, good money also requires portability. If people can carry or transfer money from one place to another, then it is good money.

Durability

Acceptance and portability aside, the material used to make money must last for a long time without losing its value. For example, ice and fruits are not good money since they lose their value quickly with the passage of time. After all, ice melts and fruits perish. Therefore, durability is an essential quality of good money.

Divisibility

Talking about the qualities of good money, it is important to remember the divisibility of money. If someone wants to buy a smaller unit of a commodity, then divisibility of money can make it possible. For example, cows cannot function as good money. This is because you cannot divide a cow without making it lose its value.

Homogeneity

Look at two 100 rupee notes. They look and feel identical, right? They also have the same value. In fact, nobody can distinguish between two currency notes right out of the mint.

This is an important quality of good money – homogeneity. If money is not homogeneous, then transactions will become uncertain as people would be unsure of what they are receiving.

Cognizability

The ability to recognize money is critically important. Today, we can look at a currency note and tell its value. If money is not cognizable, then people can find it difficult to determine if they are dealing with money or some inferior asset.

Stability

Of all the qualities of good money, stability is probably the most essential one. The value of money cannot change for a long period of time and hence remain stable. If the value of money keeps changing, then it will fail to function as a measure of value and as a standard of deferred payment.

New Monetary and Liquidity Aggregates

For the purpose of policy-making, we can define money as the set of liquid financial assets, the variation in the stock of which can have an impact on the aggregate economic activity. Statistically, money can include certain liquid liabilities of a particular set of financial intermediaries or other issuers. Like most countries, India also has various monetary and liquidity aggregates as listed below:

Monetary Aggregates New Monetary Aggregates Liquidity Aggregates
M1 = Currency with the public + Demand deposits with the banking system + Other deposits with the RBI NM1 = Currency with the public + Demand deposits with the banking system + Other deposits with the RBI (unchanged) L1 = NM3 + All deposits with the post office savings banks (excluding National Savings Certificates)
M2 = M1 +  savings deposits of post office savings banks NM2 = NM1 +  time liability portion of savings deposits with banks + Certificates of Deposits (CDs) issued by banks + Term deposits maturing within one year L2 = L1 +  Term deposits with term lending institutions +  Term borrowing of Financial Institutions (FIs) + CDs issued by FIs
M3 = M1 + Time deposits of banks NM3 = NM2 +  Term deposits over one-year maturity +  Call/term borrowings of banks L3 = L2 +  Public deposits of non-banking financial companies (NBFCs)
M4 = M3 +  All deposits with post office
savings banks (excluding
National Savings Certificates)
NM4 = Abolished

Solved Question

Q1. List the qualities of good money.

Answer:

The qualities of good money are:

  • General acceptability
  • Portability
  • Durability
  • Divisibility
  • Homogeneity
  • Cognizability
  • Stability

 

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