Money

Money is any object that is generally accepted as payment for goods and services and repayment of
debts in a given country or socio-economic context. it is one of the most basic and significant inventions
of mankind.
Define Money :-
The main functions of money are distinguished as a medium of exchange; a unit of account; a store of
value; and, occasionally, a standard of deferred payment.

The direct exchange of economic goods and services with other goods and services is called the barter
system.

When goods and services of equal value are exchanged between two or more parties without using any
What is meant by form of monetary exchange, this transaction is called the Barter System.
barter system?
Although it is one of the oldest types of commerce, it is still used among individuals as well as
companies to procure goods and services when there is not enough cash or money to buy things.

One of the most important factors of the barter system is having equal value of the goods and services
that are to be exchanged.
 Features of barter system
1. It is a very simple system for the exchange of goods.

2. There is no possibility of over or under-production because need-based goods are produced for
each other.

3. There is no problem of concentration of economic power into the hands of a few rich persons.

4. It is the most convenient method for international trade. There is no possibility of a foreign
exchange crisis or adverse balance of payments etc. on an international level.

5. It helps in expressing relative prices i.e., the price of one commodity in terms of another
commodity.
 What are its drawbacks or shortcomings?
1. Absence of common measure of value:- The absence of a common measure of value in the barter system
creates a great problem because a lot of time is wasted striking a bargain between buyer and seller of different
commodities. Money provides a common measure of value to all goods and services.

2. Double coincidence of wants:- Barter is only possible if there is a double coincidence of wants. It means that
two persons who want to exchange two goods between each other, must be in need of goods of each other.

However, it becomes difficult to find such people every time. But Money separates the act of buyer and seller in
different markets and solves this problem.

3. Lack of divisibility:- In the absence of a common medium of exchange, a problem arises when a big indivisible
commodity is to be exchanged for a smaller commodity. Money has solved this problem conveniently by
producing different buyers and sellers of each good.

4. Problem of storing wealth:- Under a barter system, there is the absence of a proper and convenient means of
storing wealth or value because of the perishable nature of goods or the high storage cost of goods. With the
help of money, we can store wealth for an infinite period of time.
 What are its drawbacks or shortcomings?
5. Lack of Standard of Deferred Payment:- Under the barter system, contracts involving future payments or
credit transactions cannot take place with ease because of the following reasons:

(a) The borrower may not be able to arrange goods of the exactly same quality at the time of repayment.

(b) There may be conflicts regarding which specific commodity is to be used for repayment.

(c) The commodity, to be repaid, may lose or gain its value at the time of repayment.

So, it is very difficult to make deferred payments in the form of goods.

• temporary postponement of the payment of an

outstanding bill or debt, usually involving repayment by
installments.
Deferred Payment
• a sum of money paid under a deferred payment
arrangement.
 Definition of money
• Money is anything which is generally accepted as a medium of exchange, measure of value, store
of value and means for standard of deferred payment.

• The term 'money' is used to cover all such things like coins, currency notes, cheques etc., which are
used to conduct business transactions and settlement of business claims.

• It must be noted that 'Money' can be any commodity chosen by common consent, as an
instrument of exchange of goods and services.

Money has been defined differently by different economists. In simple words, money is anything which
performs the following four main functions:

(i) Medium of Exchange: Money, as a medium of exchange, means that it can be used to make
payments for all transactions of goods and services.

(ii) Measure of Value: Money as a measure of value means that money works as a common
denomination, in which values of all goods and services are expressed.
 Definition of money
(iii) Store of Value: Money as a store of value means that money can be used to transfer purchasing
power from the present to the future.

(iv) Standard of Deferred Payments: Money as a standard of deferred payments means that money acts
as a 'standard' for payments, which are to be made in the future.

Legal Definition of Money

Legal Tender Money Non-Legal Tender Money (Optional Money)

Limited Legal Money Unlimited Legal Money

(i) Legal Tender Money: Money which can be legally used to make payment of debts or other
obligations is termed as legal tender money. A creditor is obliged by law to receive such money in
payment of debt due to him.

Legal tender money is of two kinds:

(a) Limited Legal Tender: It refers to that form of legal tender money, which can be paid in discharge of a
debt up to a certain limit. Beyond this limit, a person may refuse to accept the payment and no legal
action can be taken against him. In India, coins are limited legal tender. For example, as per the Coinage
Act, of 2011, coins shall be legal tender in case of coins of any denomination not lower than one rupee,
for any sum not exceeding 1,000.

(b) Unlimited Legal Tender: It refers to that form of legal tender money, which can be paid in the
discharge of a debt of any amount. Legal action can be taken against a person who refuses to accept this
money. In India, paper notes are unlimited legal tender.

(ii) Non-Legal Tender Money or Optional Money: It refers to that form of money, which is generally
accepted, but legally, one is not bound to accept it. For example, cheques, bank drafts, bills of exchange,
etc. do not have legal backing and their acceptance is totally optional.
 Evolution of Money
1. Animal Money: In primitive agricultural communities, domestic animals were used as money. Cattles were considered as
the common instrument of exchange. In ancient India, according to 'Arthueda, go-dhan' (Cow-wealth) was accepted as a form
of money.

2. Commodity Money: In the earliest period of human civilization, any commodity that was generally demanded and chosen
by common consent, was used as money. Goods like furs, skins, salt, rice, wheat, utensils, weapons, etc. were commonly used
as money. Such exchange of goods for goods was known as 'Barter Exchange'.

Commodity Money: In a later stage money took the form of commodity money. A number of commodities like wheat, leather,
brass, sheep, goats, slaves etc. were used as money.

3. Metallic Money: With the progress of human civilization, commodity money changed into metallic money. Metals like gold,
silver, copper, etc were used as they could be easily handled and their quantity can be easily ascertained. It was the main form
of money throughout the major portion of recorded history.

4. Paper Money: It was found inconvenient as well as dangerous to carry gold and silver coins from place to place. So, the
invention of paper money marked a very important stage in the development of money.

Paper money is regulated and controlled by the Central Bank of the country (RBI in India). At present, a very large part of
money consists mainly of currency notes or paper money issued by the central bank.
 Evolution of Money
5. Credit Money: The emergence of credit money took place almost side by side with that of paper money. People keep a part
of their cash as deposits with banks, which they can withdraw at their convenience through cheques.

The cheque (known as credit money or bank money), itself, is not money, but it performs the same functions as money.

6. Plastic Money: The latest type of money is plastic money in the form of Credit cards and Debit cards. They aim at removing
the need for carrying cash to make transactions.

7. Near Money: There are other assets also, which cannot be regarded as money, but one claims to be money. Such assets are
called near money. Examples of near money are bank money, treasury bills, bills of exchange, bonds, and government
securities. Such money has lesser liquidity but a large business is performed through this money.

8. Narrow Money:- Its refers to physical money, such as coins and currency, demand deposits, and other liquid assets, that are
easily accessible to central banks. Narrow money is a subset of broad money that includes long-term deposits and other
deposit-based accounts.

9. Broad money:- Its includes currency, deposits with an agreed maturity of up to two years, deposits redeemable at notice of
up to three months and repurchase agreements, money market fund shares/units, and debt securities up to two years.
 Bank Money
Bank money refers to demand deposits created by commercial banks. These deposits are repayable
by the banks on demand.

The depositors are given a cheque facility to withdraw money from their accounts or to make
payments. It must be noted that bank money is a Non-Legal Tender Money or Optional Money.

Money Supply
Money Supply refers to the total volume of money held by the public at a particular point of time in an
economy. Features of money supply

1. It includes 'Money held by the Public only. The term 'public' signifies the money-using sector, i.e. individuals
and business firms. It does not include the Money-Creating Sector (or Producers/ Suppliers of Money), i.e.
Government and Banking System as cash balances held by them do not come into actual circulation in the
country.

2. It is a 'Stock Concept', i.e. it is concerned with a particular point of time.

 Components of Money Supply
1. Currency with Public: It consists of paper notes and coins held by the public. It is the most liquid of all assets and includes coins of
denominations of 10, 5, 2, 1, etc., and paper notes of denominations like 2,000, 500, 200, 100, etc.

Currency Money is also termed as 'Fiat Money'. Fiat Money is defined as money which is under the fiat or order from the government
to act as money, i.e. under law, it must be accepted for all debts.

It is also termed as 'Legal Tender Money' as it can be legally used to make payment of debts or other obligations.

2. Demand Deposits with Banks: It refers to demand deposits (or Bank Money) of the public with commercial banks. Demand deposits
are deposits, which can be enchased by issuing cheques at any time by the account holders.

• A demand deposit is treated as equal to currency held as it is readily accepted as a means of payment.

• Only Net Demand Deposits are included: It must be noted that demand deposits are taken on a net basis, i.e. inter-bank deposits
are excluded. Interbank deposits are deposits held by banks on behalf of other banks. Such deposits do not form a part of the money
supply, as they do not belong to the public.

Gross Demand Deposits include inter-bank deposits (or inter-banking claims), while Net demand deposits do not include it. It must
be noted that only Net Demand Deposits are taken as part of the Money Supply.

• Term Deposits are not included: While calculating M, the measurement of money supply, only demand deposits are considered as a
part of the money supply and not the Term Deposits. (Demand Deposits = Saving Account Deposits + Current Account Deposits)
M1:- its is the first and basic M2:- it is a broader concept M3:- this concept is broader M4:- this measure includes
measure of money supply. of money supply as as compared to M1. in total deposits with post
M1 is most liquid measure compared to M1. in addition addition to M1, it also office saving bank in
of money supply as all its to M1, it also includes includes net time deposits addition to M3.
components are easily used savings deposits with post
as a medium of exchange. office saving bank.
High Powered Money is money produced by the RBI
and the government. It consists of two things: (i)
Currency held by the public; and (ii) Cash reserves
with the banks.

'Money (M)'Vs 'High Powered Money (H)'

'Money' consists of currency and demand deposits,

while 'High Powered Money' consists of currency and
cash reserves with banks. It means, 'Currency held by
the public' is common in both of them. The only
difference is that 'Money' includes demand deposits
of banks, while 'High Powered Money' includes cash
reserves with the banks.

• 'H' is high-powered as compared to 'M' because cash

reserves (part of H) serve as the actual base for the
generation of demand deposits.