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Define money

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D.H. Robertson defines money as "Anything which is widely accepted in the payments for goods or in discharge of various other business obligations". Prof. Crowther defines money as "Anything that is generally acceptable as a means of exchange and which at the same time acts as a measure and store of value"

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What are the qualitities of good money

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They are as follows

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1) General acceptability

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It must be accepted by all without hesitation

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2) Divisibility

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It must be divisible into different denominations

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3) Durability

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It should last for a long period of time

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4) Cognizability

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Must be easily recognisable

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5) Portability

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Must be easy to carry

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6) Homogeneity

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It should be of the same size and quality

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7) stability

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The value must be stable

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What are the problems with barter system

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Barter system had many problems

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1) Lack of double coincidence of wants

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For Barter system to work A should want what B has and B should want what A has. This rarely happens.

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2) Lack of common measure of value

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For example It is difficult to compare 2 litres of milk with 2 kg of onions or 2 kg of rice

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3) Difficulty of storage of goods

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Perishable goods cannot be stored so they are difficult to use for barter

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4) Problem of indivisibility

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It is difficult to make fractional payments. Suppose one bag of rice = 1 plough. But if a person wants only half a bag of rice he cannot get half a plough.

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5) Problem of deferred payments

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It is difficult to make deferred payments as the goods used for barter may deteriorate.

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Evolution of Money

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This took part in various stages 1) Animals used as money 2) Commodity money like shells 3) Metallic money or coins 4) Paper money 5) Bank money 6) Plastic money

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Types of money

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Different types of money were used over time

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1) CATTLE OR LIVESTOCK

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The cattle or livestock a person had was considered the measure of his wealth

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2) COMMODITY MONEY

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Feathers, tusks, furs, shells have all been used as commodity money in various places.

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3) METALLIC MONEY

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Introduction of coins made of gold, silver etc. is an important stage in the evolution of money. Initially private bankers put their seal on coins but gradually it was taken over by the government. In India all coins and one rupee notes are issued by the Government of India Metallic coins are of 2 different types

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a) Standard or full bodied coins

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The face value is equal to the intrinsic value. They are generally made of silver and gold

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b) Token coins

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The face value is higher than the intrinsic value. They are made of cheaper metals like aluminium.

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4) PAPER MONEY

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This had it's origin in the form of deposit receipts issued by bankers. Eventually note issue was taken over by the Central Bank. In India the Reserve Bank of India issues all currency notes except one rupee notes.

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Advantages of paper money over coins

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There are many advantages

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iii) Wear and tear

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The coins made of precious metals gradually lost some weight due to wear and tear.

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i) Portability, economical, requires less storage space

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It is difficult to transport and store large amount of metallic money. Paper money is much cheaper to make.

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ii) Availability of precious metals

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The supply of silver and gold was not enough.

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Paper money can be classified as follows

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Three types

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1) Representative paper money

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The issuing authority keeps the full value of metallic reserves ( gold, silver) against the issue of currency notes it is called representative paper money

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2) Convertible paper money

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The issuing authority promises to convert paper money into standard money on demand. A fixed portion of the currency in circulation is kept as metallic reserves and the rest is covered by government securities

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3) Inconvertible paper money or "Fiat Money"

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This money is not entirely backed by metallic reserves or government securities. It is declared as legal tender by government order. No one can refuse to accept it.

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Disadvantages of paper money

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There are two

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1) Durability

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Less durable than coins

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2) Danger of over-issue

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Since "Fiat Money" is not backed by reserves, their is danger of over-issue which can lead to hyper-inflation.

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5) CREDIT MONEY

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This refers to bank deposits which can be transferred to another person by use of "cheques". When we give a cheque to another person his account is credited and our account is debited but no physical transfer of money takes place

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6) PLASTIC MONEY

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ATM Cards, Debit Cards and Credit Cards are increasingly used and are called plastic money.

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CLASSIFICATION OF MONEY

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On the basis of acceptability

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1) Legal tender money

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Money backed by law and which cannot be refused by anybody. Legal tender money is of two types

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a) Limited legal tender money

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Accepted as legal tender upto a certain amount

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b) Unlimited legal tender money

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Accepted as legal tender without any limit

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2) Non-legal tender money or Optional money

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Cheques, Bills of exchange are examples of optional money. If we want to buy something by cheque payment the goods will not be delivered until the cheque has been encashed. A shopkeeper can refuse to accept cheque payment if he does not know the customer.

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CLASSIFICATION OF MONEY

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On the basis of circulation

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1) Actual money

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All currency notes and all metallic coins

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2) Money of account

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The money in which the accounts of the country are maintained. e.g Rupee in India, Dollar in U.S.A. Dollars will be accepted as money in the USA but not in India.

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3) Near money

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Bills of exchange, Government Securities, Shares of Well Established companies can easily be converted into money so they are considered "Near Money"

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FUNCTIONS OF MONEY VERY IMPORTANT

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The functions of money can be divided into primary secondary and contingent functions.

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Primary functions

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1) money as a medium of exchange 2 ) Money as a measure of value or unit of account

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Secondary functions

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1)Standard of deferred payments 2)Store of value 3)Transfer of value

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Contingent functions. Contingent means incidental.

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Measurement division of national income. Basis of credit. Imparts liquidity to Wealth. 4) Equalisation of marginal utilities and marginal productivities with price. 5) Estimation of macro economic variables

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Medium of exchange

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The fundamental role of money this to serve as a medium of exchange. Money divides exchange transaction into two parts i.e. sale and purchase This function of money solved the biggest problem of the barter system i.e. Lack of double coincidence of wants

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Measure of value or unit of account

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Value of all goods and services is expressed in terms of money. this is called price. it helps us to compare the value of different commodities

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Standard of deferred payments

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In the modern economy many transactions take place without instant payments. Future payments are possible only because of money.

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Store of value

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Works as a store of value. Provision for satisfaction of future wants is important. Money is a means through which savings can be done easily for future wants.

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Transfer of value

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It is often necessary to transfer purchasing power from one place to another. Money makes this possible. Land can be sold in one place and the money used to purchase land in another place

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Measurement and division of national income

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Money Facilitates estimation of national income. Total production and factor prices are easily expressed in terms of money.

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Basis of credit

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Modern economy is based on credit. Money provides the liquid base of the banking system.

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Imparts liquidity to wealth.

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Money is the most liquid asset. Money can easily be converted into any asset and any asset can be converted into money

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Equalisation of marginal utilities and marginal productivities with price

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Consumers allocate their income on various goods in such a way that the price of each commodity is equal to its marginal utility. Producers maximise profits by equalising marginal productivity of a factor with its price

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Estimation of macroeconomic variables

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National income, National product, total savings, total investment etc can easily be estimated in terms of money.

Money. Chapter 10

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