Question

In a novel by Douglas Adams people in primitive societies were trying to set up an efficient economy and needed some form of money. They decided to use tree leaves. What problem do you think they faced after? Why? Explain through the concept of functions and forms of money.

Answer 1

In order to analyse the problematics in using tree leaves as a form of money in an efficient society, we need to understand the definition of money first. Then we will see its forms and functions.

Formal Definitions of money: various formal definitions to define or describe money are explained here:

1. Legal definition: Money is what the law say it is. people may refuse to accept the things that are legally defined as money. they may even refuse to sell goods and services to those who offer legal tender in payment. this may invite punishment under the law. Further, things that are not legally defined as money may come to be generally acceptable in payment, which may become a major part of circulating medium, e.g. example commercial bank deposits

2. Functional definitions: Walker has defined it in terms of its functions According to him “money is what money does”. this functional definition is too simple vague and extensive in the sense that it does not explain what money actually is or does. instead of defining what money is he makes the reader to understand money by referring to the functions which money performs. according to Robertson. “money is anything which is widely accepted in payment for goods or in discharge of other kind of business obligations”. this definition although exhaustive is one sided in the sense that it stresses only on one aspect of money namely its wide acceptability to settle transactions . general acceptability is though one of the essential characteristics of money but it is not the only quality that makes money proper. Seligman has also defined money stressing on this quality as “one thing that possesses general acceptability”. The definitions given by Cole and Kent also lay stress on the general acceptability characteristic of money besides some functions of money. the definition given by Cole stresses on the function of the standard of deferred payments. he defines money as “anything that is habitually and widely used as a means of payments and is generally acceptable in the settlement of debts”. according to Kent, money is “anything which is commonly used and generally accepted as a medium of exchange or as a standard of value”. this definition of Kent emphasizes two functions of money, medium of exchange and standard of value.

3.Behavioral definitions: None of these definitions is complete and satisfactory. a comprehensive definition of money must emphasize not only the important functions of money but also its basic characteristic that is general acceptability. from this criterion, the definition of Crowther is the most suitable. he defines money as “anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and as a store of value”. this definition covers all the three important functions of money and also stresses its basic characteristic namely, general acceptability.

Now given these definitions we will analyze the problems of using tree leaves as money through its functions.

The central function of money is “medium of exchange”. Here the tree leaves can fulfill this function. It can be used as a medium of exchange but the only condition is who controls the supply of tree leaves. If it is specially controlled/ cultivated under certain responsible authority. Then in that case it can sustain this function of money. But if the leaves are from local tress, grown everywhere, then in that case it cannot fulfill this definition and function of money.

The second criterion where the tree leaves fail as a form of money is “money as a measure of value”. We all have seen in paper currency, different denominations are available and hence it acts as a standard or measure of value. Tree leaves fail strictly in this domain as they are not available in any form of denominations.

The third criterion where the tree leaves fail as a form of money is “money as a store of value”. Money is a way of transferring purchasing power from the present to the future. People hold money as they can trade the money for goods and services at some time in future. In the absence of this function, people would have to maintain huge stocks of goods for use in future. Since tree leaves are perishable, it cannot be used as a store of value. Hence fails this criterion as well.

The fourth criterion where tree leaves partially fail as a from of money is “money as used in transfer of value”. It passes this test if it fulfills the first criterion of medium of exchange otherwise it again fails here. Because money helps us to transfer values from one person to another and from one place to another up to any amount due to its general acceptability.

Just to summarize the main problems associated with tree leaves as a form of money is because it does not possess the essential characteristics of money i.e. divisibility, durability, portability, scarcity, homogeneity etc.