CH.

4 Money
❖ Barter system
Direct exchange of commodity against another commodity without the use of
money is Barter System.
❖ C.C. Economy
An economy based on barter exchange i.e. exchange of commodity for
commodity or an economy based on commodity for commodity exchange is
called C.C. Economy.
❖ Drawbacks of barter system
a. Lack of double coincidence of wants
“Simultaneous fulfillment of mutual wants by buyers and sellers ” or in other
words what one person wants to sell and buy must coincide with what some
other person wants to sell or buy is known as double coincidence of wants
.This system can work only when both persons are ready to exchange goods.
b. Lack of standard for deferred payments
In barter exchange, future payments and credit transactions were not possible.
Borrowings and lending were a problem. Another problem was that the
borrowed amount could be returned only in terms of goods and services. And
at times, at the time of repayment, the quality of different units of goods also
may not be same.
c. Lack of common measure of value
There is no common unit (measure) of value. It is difficult to decide in what
ratios or proportions the goods are to be exchanged as unlimited number of
exchange ratios are possible.
d. Difficulty of storage and transfer of wealth
It is difficult to store wealth or generalised purchasing power for future use in
form of goods and services.
e. Lack of divisibility
Many goods are not divisible and hence difficult to exchange, for example,
the value of horse is 1000 kg wheat but the other person in the exchange
process has only 500 kg wheat. I such a situation the horse cannot be divided
into two pieces.

❖ Meaning of money
Money is anything which is generally acceptable as means of exchange and at
the same times acts as a measure of value and as a store of value.
According to Walker, “Money is what money does”. (functional definition)
 According to Crowther, “Money is anything i.e. generally acceptable as a
means of exchange at the same time act as a measure of value and store of value”
.
Legal definition of money-: Legally, money is anything proclaimed by the law as
a medium of exchange (paper notes and coins). Nobody can refuse its acceptance as
medium of exchange. It means people have to accept it legally for different
payments.
NOTE-:Currency is also called as fiat money because it commands ‘fiat’ (authority/
order) of Government .
o Fiat money / legal tender money
Money by order / authority of the government. It includes notes and coins .
o Fiduciary money / non-legal tender money/optional money
Money backed up by trust between the payer and the payee . for eg . cheques .
❖ Functions of money

A. Primary functions
• These are those functions which are common to all countries during all time
periods . These are also referred to as original functions of money .
• Following are the two main or primary functions of money .

1. Medium Of Exchange
• Money is acceptable as means of exchange . A person can sell his goods and
services in exchange for money and can use this money for buying the goods
and services that he needs . Thus money acts as a medium of exchange .
• The difficulty of the lack of double coincidence of wants has been removed
since invention of money
• Since money becomes the representative of general purchasing power or
money is generally acceptable , everyone accepts it in exchange for goods
 and services and utilises it for purchasing articles of his choice . Money thus
promotes specialisation , among individuals , firms and regions .
IMPLICATIONS
• Increase in GDP
• Freedom of choice
• Increase in level of production
• Increase in value addition
2. Measure Of Value (unit of account)
• Money works as a common denominator into which the value of all goods
and services are expressed . when we express the value of commodity in terms
of money , it is called price and by knowing the price of various commodities
, it is easy to calculate exchange ratios between them
• Money is measuring rod i.e. in terms of money , the values of other
commodities and services are measured , compared and expressed .
• All records are kept and maintained in terms of the money unit , for example
Rupee , Dollar , Pound etc.
IMPLICATIONS
• Accounting is easy
• Expansion of market
• NY and GDP can be calculated
B. Secondary functions
These are supplementary to the primary functions. These are derived from the
primary functions.

1. Standard of deferred payments

Deferred payments refer to those payments which are made in future . Money is
accepted as standard for deferred payments.
• Its value remains stable.
• It has the quality of general acceptability .
• It is more durable compared to other commodities .
• After the invention of money , now both borrowing and lending are done in
terms of money.
IMPLICATIONS
• Borrowing and lending is possible
• Increase in production
• Emergence of financial markets
2. Store of value
 • Money acts as a store of value . It is acceptable at any point of time . It is not
perishable so it can be used for future use .
• A store of value implies the shifting of purchasing power from the present to
future .
It enables the people to save the part of other current income and store it for
future use . Thus the money provides the link between the present and the
future
IMPLICATIONS
Source of investment
3. Transfer of value
Money helps us to transfer values from one person to another . Money serves as
the convenient mode of transfer of value because of it general acceptability and
the merit of liquidity .
IMPLICATIONS
• Increase in FDI
• Global economy has emerged
• Regional growth

C. Other Functions (contingent functions of money):

a. Basis of Credit Creation
b. Distribution of National Income
c. Increase in Liquidity of Capital
d. Maximum Satisfaction of the Consumer
e. Maximum Profit to the Producers

Classification of money

Metallic money Representative money Credit money

Full Token Paper money

Bodied Coin

1. Metallic money :
Money made from some metal. It can be classified into two:
 a. Full bodied money (coin) (standard money/commodity value of money)
That money whose value as commodity is equal to the value of money . Eg.
Gold coin of Rs. 1000 has sold of Rs, 1000 used in it .
b. Token money (coin )(credit money)
These are those money whose value of money is significantly more than the
value of commodity of which it is made. Eg. Rs. 1 and Rs. 10 coins in the
economy.
2. Representative (Paper money)
It refers to paper notes and representative of full bodied money , such papers are
in fact like a receipt issued by the government for full bodied coins .
3. Credit money
It refers to the bank deposit by the people with banks which they can withdraw
ant an time they like or transfer it to someone else through bank instruments
(cheque , DD etc )

❖ Money supply and its measures

It refers to the total quantity or stock of money available in the economy at a
particular point of time .
SUPPLY OF MONEY
• In other words, the supply of money means the total stock of all the forms of
money (paper money, coins and demand deposits of bank) which are held by the
public at any particulars point of time.
❖ Components of money supply :
There are two main components of money supply .
a. Currency held by the public (c) .
Currency created by RBI is called ‘High Powered Money’ . It consists of the
coins and paper currency .
b. Net Demand Deposit held by the commercial bank (DD)
• These are created by commercial banks and are called Bank Money .
• These are current account deposits payable on demand. These can be
withdrawn or encased at any time by using cheques. The bank does not
pay any interest on these deposits but provided cheque facilities.
❖ Measures of money supply
In India, there are four alternative measure of money used by Reserve bank of India-
M1, M2, M3 and M4
M1 = C + DD + OD
M2 = M1 + Saving deposits with post office saving banks
M3 = M1 + Net time deposits
M4 = M3 + Total deposits of the post office saving organisation (Excluding National
Saving Certificate )
Key :
C – Cash currency held by public(coins and paper notes)
DD – Demand deposits of people in commercial banks
OD – Other deposits (with RBI) of international institutions like IMF, World Bank
and Govt. institutions like NABARD.
In practice, M3 is widely used in India as measure of money supply, which is also
called aggregate monetary resources of the country.
• Degree of liquidity
M1 – Most Liquid
M4 - Least Liquid
• Narrow money and Broad money
M1 ,M2 – Narrow Money
M3 ,M4 – Broad Money
DYNAMISM OF MONEY
➢ facilitated exchange up to infinite limits
➢ over lasting funds with establishment of financial institutions
➢ inflow of capital within and outside the country