Ch.2 - Money

What is the use of money?

Various goods and services are bought and sold with the help of money, to satisfy human wants.

Difficulties in Barter System

1. Lack of Double Coincidence in Wants: For instance if Person A has cloth and wants rice and Person B has rice but does not want cloth then the exchange cannot take place.

2. Lack of Common Measure of Value: There was no standard unit of account to determine the value of the commodity. For instance, it was difficult to compare 2 ltrs of milk to 2 kgs of rice.

3. Difficulties in storage of food: Perishable commodities such as milk, eggs, fruits and vegetables were difficult to store, also lack of space for heavy and bulky goods caused problems.

4. Indivisibilty of Certain Goods: It was difficult to fix proportion of one commodity in exchange for another commodity. For e.g. Person A wants to sell a goat for half a sack of wheat.

5. Problem in making deffered payments: Repayment of loans was difficult because many commodities were perishable and unable to store until future.

Definition of money according to Prof Crowther

“Money is anything that is generally acceptable as a means of exchange and at the same time acts as a measure and a store of value”

Definition of money according to Prof. Walker

“Money is what money does”

Types of Money

1. Animal Money: In protohistoric period. Sheep, goat, cows, etc.
   Problem: their indivisible nature, commodity money came into existence.

2. Commodity money: Commodities due to the climatic conditions and culture such as skins, grains, leathers, and feathers.
   Problem: lack of storage space

3. Metallic Money: Durable precious metals such as gold, silver, copper, etc.
   Problem: Scarcity of precious metals and lack of uniformity.

4. Metallic Coins: Ancient rulers afixed their own seals on coins. But, the government
   a) Standard or Full Bodied Coins: face value= intrinsic value
   b) Token coincs: face value>intrinsic value

5. Paper Money: Issued by RBI

6. Bank or Credit Money: Saved in bank, can be withdrawn.

7. Plastic Money: Credit, Debit Cards

8. Electronic Money: G-Pay

Types of Money Tenders

Legal Tender Money: Money backed by law and cannot be refused by anybody on any ground.

Non-Legal Tender Money: Money used in final payments and has no legal compulsion.

Qualities of Money

1. General Acceptability: Money should be easily accepted

2. Divisibility: Money should be easily divisible into smaller fractions

3. Durability: Money should be durable on account that it is being used or years.

4. Cognizability: Money should have some distinct marks in order to be easily recognisable.

5. Portability: Money should be easy to carry from one place to another.

6. Homogeneity: Money of a particular denomination must be identical in its feature

7. Stability: Money should have a stable monetary value.

Primary Functions of Money

1.Medium of Exchange: Any commodity can be purchased or sold for money.

2. Measure of Value: It enables to compare prices, even by different currencies.

Secondary Functions of Money

1. Standard of Deferred Payments: Money makes credit payments easier as compared to barter system.

2. Store of Value: Money satisfies value of the present and also makes provision for satisfaction of wants in the future.

3. Transfer of Value: Allows transfer from one person to another, like an asset such as building,shop, plot etc. can be sold and purchased at another place. 

Contingent Functions

1. Measure of National Income: Four factors of production is in terms of monetary rewards. e.g. rent, wages, interest, profits etc.
   

2. Basic Credit: Commercial Banks create credit money on the basis of primary deposits. Money provides a liquid base for creation of credit money.
   

3. Imparts liquidity to Wealth: Money can be easily converted into any asset and any asset can be converted into money. e.g. a person can purchase gold and if he wants he can sell it and purchase government bonds, securities etc.
   

4. Estimation of Macro Economic Variables: Macro Economic variables like Gross National Product (GNP), total savings, total investment etc. can be easily estimated in monetary terms. It also facilitates government tax collection, preparation of budget etc.

Black Money

Any money which is received in cash but not accounted for and on which tax is not paid to the government.