Brief notes on the concept of Static and Dynamic Functions of Money

Paul Einzing has classified the functions of money into two broad categories, i.e., static and dynamic functions:

1. Static Functions:

In the static functions, money acts as a passive or technical tool to ensure a smooth working of the economic system. It does not have a causative influence on the economic activities.

The traditional functions of money, i.e., medium of exchange, measure of value, standard of deferred payments and store of value, all are the static or technical functions of money.

Paul Einzing adds one more technical function, i.e., money as a medium of price mechanism. Prices are the value of goods and services, expressed in money terms.

Money is a medium through which the price mechanism operates in order to establish a balance between demand and supply in the market, and, thereby, to reconcile the interests of the producers and consumers.

2. Dynamic Functions:

The dynamic functions are those by which money actively influences the economic system through its impact on price level, interest rates, volume of production, distribution of wealth and income etc.

In its dynamic role, money tends to influence the economic trends. Important dynamic functions of money are described below:

(i) Effect on Price Level:

Money has great influence on the economic activity through a rise or fall in the price level (or a fall or rise in the value of money.)

According to one explanation, inflation or a general rise in price level is caused by an increase in the amount of money in circulation; and deflation or a general fall in price level is due to decrease in money supply.

(ii) Effect on Interest Rate:

Money has great influence on the economic system by changing interest rates. Change in the money supply is partially responsible for the fluctuations in the interest rates. Interest rate falls with an increase in money supply and rises with a decrease in money supply.

(iii) Effect on Utilisation of Resources:

Proper application of monetary system can bring about an efficient and full utilisation of natural and human resources of the country and of its technological process. This, in turn, increases the national product and improves the standard of living of the people.

(iv) Effect on Government Expenditure:

The monetary system has also influenced the expenditure of the modern governments. Through deficit financing, the present governments are able to spend much more than what they receive by way of taxation or other sources of revenue.

This enables the government to undertake a number of economic, social and defence activities in the country.