Contingent, Static and Dynamic Functions of Money

Money is any object or item which is generally accepted as a mode for payment of goods & services and repayment of loans or debts such as taxes, etc., in a particular nation or country. Money was invented to facilitate trade as the barter system was not able to express the value and prices of goods & services. The term money covers all things like currency notes, coins, cheques, etc., to carry out all economic transactions and settle the claims. As a currency, money circulates from country to country and person to person to facilitate trade. Different stages of money are Commodity Money, Metallic Money, Paper Money, Credit Money, and Plastic Money. 

According to D.H. Robertson, “Anything which is widely accepted in payment for goods or in discharge of other kinds of business obligation, is called money.”

Contingent Functions of Money

The contingent functions of money are as follows:

1. National Income Distribution

The total output of the country is produced by the factors of production (labour, land, capital, and enterprise); therefore, money helps in the ideal distribution of national income amongst different factors of production by creating factor incomes like interest, profit, wages, and rent.

2. Increased Satisfaction

Money maximizes the satisfaction of producers and consumers. A producer maximizes his satisfaction(profit) by equating the price of a factor with its marginal productivity. Similarly, a consumer maximizes his satisfaction by equating the price of a commodity(expressed in monetary terms) with its marginal utility. 

3. Credit Creation

Commercial banks create credit with the help of demand deposits, which was not possible before the invention of money. Money as a store value motivates people to save more in the banks in form of demand deposits.

4. Capital Productivity

Money helps in increasing capital productivity, as it is the most liquid asset that can be used in anything. The liquidity of money makes it easy and possible to transfer capital from less productive uses to more productive uses. 

5. Bearer of Options

Money provides purchasing power to the person holding it, also known as the bearer, and he can use it in many ways. The bearer can change his decision from time to time and place to place regarding the use of money depending on the situation, priority and urgency.

6. Solvency Guarantee

Money provides a guarantee of solvency for an institution or individual. If a person has more money than his liabilities, then he can not be declared bankrupt or insolvent. Due to this reason, firms keep large reserves to meet uncertain requirements.

Static and Dynamic Functions of Money

Both static and dynamic functions are required for the proper working of an economy. 

Static Functions

Static functions are those functions that facilitate the working of an economy, and in absence of these functions, an economy can not work properly. For example, functions of money as a store value, medium of exchange, a measure of value, and a standard of deferred payments are static functions.

Dynamic Functions

Dynamic functions are those functions that determine the economic trends and cause movement in the economic activities of a country. For example, the expansion of credit not only increases the price level, but also increases employment, level of income, and output in the economy. Money can put idle resources into productive channels to generate more output.