Barter System and Its Drawbacks:

• In the Barter System, goods were exchanged directly, but it had several limitations:
  

  1. Double Coincidence of Wants: Both parties needed to want what the other offered, leading to frequent mismatches.
     

  2. Lack of Common Measure: There was no standard unit to compare the value of different goods.
     

  3. Storage Challenges: Storing perishable goods and bulky items was problematic.
     

  4. Indivisibility: Some goods were difficult to divide, making trade inconvenient.
     

  5. Deferred Payments: Barter made it hard to make payments in the future, particularly with perishable goods.
     

These limitations prompted the development and adoption of money, providing a common measure of value, divisibility, and the ability to make deferred payments.

Definition of Money:

(1) Prof. Crowther's Definition:
“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.”

• Money facilitates the exchange of goods and services: It allows people to trade what they have for what they want.

  • For example: if you want to buy a bicycle, you can use money to exchange it for cash, which the seller can then use for their own needs.
    

• Measure of Value: Money provides a common standard for measuring the value of different goods and services.

  • For example: if you know the price of a loaf of bread is $2 and a gallon of milk is $3, you can easily compare their values and decide how to spend your money efficiently.
    

• Store of Value: Money can be saved for future use. For instance, if you save $100 in a bank account, it retains its value over time.

  • For example: if you save $100 in a bank account, it retains its value over time, allowing you to buy goods and services in the future.

(2) Prof. Walker's Definition:
“Money is what money does.”

• This definition emphasizes the functional aspect of money. Money's role is to serve as a medium of exchange.

  • For example: if you pay for your groceries with cash or a credit card, money is acting as a medium to complete the transaction.
    

• Money is also a unit of account, allowing you to express prices, income, and wealth in a common denomination.

  • For example: when you see a price tag on a product, it's expressed in the currency of your country, making it easy to understand its value.
    

• Money is a store of value because it can be saved or invested.

  • For example: when you deposit money in a savings account or invest in stocks, you are using money as a way to store and grow your wealth.

Evolution of Money:

Money is not the result of sudden change but has evolved over time to meet the needs of human civilization. The concept of money has gone through several stages of evolution, adapting to different historical periods. Below are the types of money that exemplify this evolutionary process:

1. Animal Money:

• In the protohistoric period, people used animals like cows, sheep, and goats as a form of money.

• They had limitations due to their indivisible nature. This limitation eventually led to the development of commodity money.
  

2. Commodity Money:

• Commodity money refers to the use of various commodities as a medium of exchange.

• These commodities were chosen based on local climatic conditions and cultural preferences. Examples include animal skins, grains, feathers, and rare items.

• They had issues related to storage and durability, which led to the transition to metallic money.
  

3. Metallic Money:

• Metallic money introduced the use of durable metals like gold, silver, copper, aluminum, and nickel as a medium of exchange.

• Precious metals like gold and silver, in particular, gained prominence due to their scarcity and intrinsic value.

• However, the lack of uniformity in metallic pieces and other practical issues prompted the development of standardized metallic coins.

4. Metallic Coins:

• In ancient times, rulers used small metal pieces with their seals. Over time, governments took control to ensure uniformity. Two types of metallic coins emerged:

  a) Standard or Full-Bodied Coins:

  • Face value equals intrinsic value.

  • Made from precious metals like gold and silver.

  • Used during the British colonial era.

  b) Token Coins:

  • Face value is higher than intrinsic value.

  • Made from cheaper metals like aluminum and nickel.

  • Used for smaller transactions.

  • All current coins in India are token coins.

5. Paper Money:

• Replaced metallic money.

• Central Bank monopolized currency note issuance.

• Includes paper currency issued by the Government and Central Bank.

• One rupee notes and coins issued by the Government; higher denominations by the Central Bank (RBI).

• This led to the emergence of bank money due to inconvenience and risk associated with handling.

6. Bank Money or Credit Money:

• Comprises cash deposits, with withdrawable and transferable features.

• Transferred through instruments like checks and demand drafts.

• Vital for economic development.

• Gave rise to the importance of cashless transactions in the global economy.

7. Plastic Money:

• Offers transaction convenience.

• Includes debit and credit cards.

• Technological advancements further introduced electronic money.

8. Electronic Money (E-money):

• Represents monetary value stored and transferred electronically.

• Utilized through various digital devices such as mobile phones, tablets, smart cards, and computers.

• Central Bank backs electronic money.

• Facilitates global purchases and transactions.

• Digital wallets, another form of electronic money, are widely used.
  

Qualities of Money:

1. General Acceptability: Money should be widely accepted for transactions, making it a universal medium of exchange.
   

2. Divisibility: Money should be easily divisible into smaller units to facilitate various transaction sizes.
   

3. Durability: Money, like currency notes and coins, should be able to withstand regular use without deteriorating quickly.
   

4. Recognizability: Money must be easily recognizable with distinct characteristics to avoid confusion during transactions.
   

5. Portability: Money should be lightweight and easy to transport from one place to another without inconvenience.
   

6. Homogeneity: Money of the same denomination should have consistent features, ensuring uniformity.
   

7. Stability: Money should maintain a stable monetary value to serve as a reliable measure of value for exchanging goods and services.
   

Functions of Money:

(A) Primary Functions:

1. Medium of Exchange: Money serves as a universal medium for buying and selling goods and services, making transactions more efficient. Any commodity can be exchanged for money.
   

2. Measure of Value or Unit of Account: Money is used to assign a specific value or price to commodities and services. It provides a common measure to compare the prices of various goods and services. Different countries use their own currencies to express value.

(B) Secondary Functions:

1. Standard of Deferred Payments: Money simplifies borrowing and lending by allowing for easy repayment. Payments to be made in the future, known as deferred payments, are made more convenient with money as a standard measure.
   

2. Store of Value: Money not only satisfies current needs but also acts as a store of value for future use. Savings are accumulated and kept in the form of money, providing a link between the present and the future.
   

3. Transfer of Value: Money enables the transfer of value between individuals and locations. Assets like real estate, land, or businesses can be bought and sold using money, allowing for easy value transfer.

(C) Contingent Functions:

1. Measurement of National Income: Money is used to express national income in monetary terms, helping in the distribution of income among factors of production such as rent, wages, interest, and profits.
   

2. Basis of Credit: Commercial banks create credit money based on primary deposits, using money as a liquid base for extending credit to borrowers.
   

3. Imparts Liquidity to Wealth: Money is considered the most liquid asset because it can be easily converted into other assets like gold, government bonds, or securities, and vice versa.
   

4. Estimation of Macroeconomic Variables: Macroeconomic indicators like Gross National Product (GNP), total savings, and total investment are estimated in monetary terms, making them more understandable. Money also facilitates government tax collection and budget preparation.

Important questions:

1. Pros and cons of electronic money.

2. Why do governments and central banks have the authority to issue currency, and how is the value of a nation's currency determined?

3. What are the advantages and disadvantages of moving toward a cashless society, and how does this transformation impact traditional banking systems and financial security?

4. Why is black money considered a hindrance to economic development, and what measures can governments take to control it?

5. What distinguishes "standard or full-bodied coins" from "token coins," and how were they used in the past?