Money
Introduction
Money is one of the most important inventions in human history. It has changed how people trade and meet their needs. Before money, people used the barter system, where goods were exchanged directly. Money replaced this system to make trade easier. Today, the modern economy depends heavily on money.
Barter System
The barter system is the exchange of goods or services without using money. For example, trading rice for cloth.
Difficulties in Barter System
The barter system had many problems:
- Problem of Double Coincidence of Wants: Both parties must want what the other offers. For example, if Person A has cloth and wants rice, but Person B has rice and wants shoes, trade cannot happen.
- Lack of Common Measure of Value: There was no standard to measure the value of goods. For example, comparing the value of 2 liters of milk to 2 kg of rice was difficult.
- Difficulties in Storage: Perishable goods like milk, eggs, or vegetables could not be stored for long. Storing bulky goods also required space.
- Indivisibility of Goods: Some goods, like animals or houses, could not be divided into smaller parts for trade. For example, if someone wanted half a sack of wheat for a goat, dividing the goat was impossible.
- Problem of Deferred Payments: Repaying loans in goods was difficult, especially if the goods were perishable.
Definitions of Money
- 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.”
- Prof. Walker: “Money is what money does.”
Evolution of Money
Money evolved over time to meet changing needs and advancements in society. The types of money are:
- Animal Money: In ancient times, animals like cows, sheep, or goats were used as money. They were hard to divide, so commodity money replaced them.
- Commodity Money: Items like grains, shells, feathers, salt, or stones were used based on local culture and climate. Storage issues led to metallic money.
- Metallic Money: Durable metals like gold, silver, copper, or nickel were used. Scarcity and lack of uniformity led to metallic coins.
- Metallic Coins: Small metal pieces with a ruler’s seal were used. Later, governments standardized coins.
- Standard/Full-Bodied Coins: Made of precious metals (e.g., gold, silver) with face value equal to intrinsic value.
- Token Coins: Made of cheaper metals (e.g., aluminum, nickel) with face value higher than intrinsic value. All coins in India today are token coins.
- Paper Money: Paper currency replaced metallic money for convenience. In India, one-rupee notes and coins are issued by the government, while higher denominations are issued by the Reserve Bank of India (RBI).
- Bank Money/Credit Money: Bank deposits that can be withdrawn or transferred using cheques or demand drafts. These are not actual money but credit instruments.
- Plastic Money: Debit and credit cards used for cashless transactions due to technological advancements.
- Electronic Money: Monetary value stored and transferred electronically via mobile phones, computers, or smart cards. Examples include digital wallets.
Types of Money
- Legal Tender Money: Money backed by law that cannot be refused in transactions (e.g., coins and currency notes in India).
- Non-Legal Tender Money: Money like cheques or bills of exchange that can be refused. Also called optional money.
Qualities of Money
Good money should have these qualities:
- General Acceptability: Must be accepted by everyone for trade.
- Divisibility: Should be divisible into smaller units for small transactions.
- Durability: Should last long despite repeated use.
- Cognizability: Should be easily recognizable to avoid confusion.
- Portability: Should be easy to carry.
- Homogeneity: Same denomination should be identical in features.
- Stability: Should have stable value over time.
Functions of Money
Money performs several functions, divided into primary, secondary, and contingent functions.
A) Primary Functions
- Medium of Exchange: Money is used to buy and sell goods and services, eliminating barter system issues.
- Measure of Value/Unit of Account: Money expresses the price of goods and services, making it easy to compare values. Different countries use different currencies (e.g., Rupee in India, Dollar in the USA).
B) Secondary Functions
- Standard of Deferred Payments: Money makes borrowing and lending easier by allowing payments to be made in the future.
- Store of Value: Money can be saved to meet future needs. It connects the present to the future (J.M. Keynes).
- Transfer of Value: Money allows assets (e.g., land, buildings) to be sold in one place and purchased elsewhere.
C) Contingent Functions
- Measurement of National Income: National income and its distribution (rent, wages, interest, profits) are expressed in money terms.
- Basis of Credit: Banks create credit money based on deposits, with money as the liquid base.
- Imparts Liquidity to Wealth: Money is the most liquid asset, easily convertible to other assets (e.g., gold, bonds).
- Estimation of Macroeconomic Variables: Variables like GNP, savings, and investments are measured in money terms, aiding government planning.
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