Amity International School, Mohali

Chapter- Money
Handout
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 payments.

Barter system refers to exchange of goods for goods.

Limitation of barter exchange
 Lack of double coincidence of wants
 Lack of common measure of value
 Lack of standard of deferred payments.
 Lack of store of value

1. Lack of double coincidence of wants.

Barter system can work only when both buyer and seller are ready to exchange each other’s
goods ……
2. Lack of common measure of value
In the barter system all commodities are not of equal value and there is no common measure
of value of goods and services in which exchange ratio can be expressed.
3. Lack of store of value

Under barter system it is difficult for people to store wealth for future use because:
 Most of the goods (like wheat, rice, vegetables etc.) do not possess durability, i.e.
Their quality deteriorates with passage of time.
 Storage of goods requires time and efforts.
 As a result, good cannot be used to store the earning for a long period.

4. Lack of standard of deferred payments

Under barter system contract involving future payment or credits transaction cannot takes
place because of following reasons:
 The borrower may not be able to arrange goods of exactly same quality at the time of
repayments.
 There may be conflicts regarding which specific commodity is to be used for
repayments.
 The commodity to be repaid may lose or gain its value at the time of repayments.
So, it is very difficult to make deferred payments in the form of goods.

Functions of money
1. Primary function
2. Secondary function
 Amity International School, Mohali
Chapter- Money
Handout

1.medium of exchange
2. measure of value
1. Standard of deferred payment
2. Store of value

1. Primary function
1. Medium of exchange
Money as a medium of exchange can be used to make payments for all transactions of goods
and services.
• Money when used as a medium of exchange helps to eliminate the basic limitation of barter
trade, that is, the lack of double coincidence of wants.
• Individuals can exchange their goods and services for money and then can use this money
to buy other goods and services according to their needs and convenience.
• Thus, the process of exchange shall have two parts: a sale and a purchase.
• The ease at which money is converted into other goods and services is called “liquidity of
money”.

2. Measure of value
Money works as a common denominator into which the values of all goods and services are
expressed.
• Another important function of money is that it serves as a common measure of value or a
unit of account.
• Under barter economy there was no common measure of value in which the values of
different goods could be measured and compared with each other. Money has also solved this
difficulty.
• As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all
other things can be compared.” Money measures the value of economic goods.
• When we express the values of a commodity in terms of money, it is called price and by
knowing prices of the various commodities, it is easy to calculate exchange ratios between
them.

1. Secondary function
a. Standard of deferred payments
Money as a standard of deferred payment means that money act as a standard for payments
which are to be made in future.
• In millions of transactions, instant payments are not made.
• The debtors make a promise that they will make payments on some future date. In those
situations, money acts as a standard of deferred payments.
 Amity International School, Mohali
Chapter- Money
Handout
- the standard of deferred payment of simplified the morning in lending operations what has
led to the creation of financial institutions

b. Store of value:
Money is a way to store wealth. Although wealth can be stored in other forms also but money
is most economical and convenient way to provide security to individuals to meet
contingency and predictable emergencies and to pay future dates. In barter it was difficult to
do that.

Definition of Money

In macroeconomics, money is defined as anything that is universally accepted as a medium of

exchange, a unit of account, and a store of value. It enables the smooth operation of the
economy by facilitating transactions and is central to economic activity.

Fiat Money

1. Definition: Fiat money is currency that has no intrinsic value and is not backed by a
physical commodity like gold or silver. Its value is derived purely from the
government's decree or "fiat," meaning the legal order declaring it as legal tender.
2. Characteristics:
o It is accepted because the government mandates it as legal tender.
o It is a form of paper currency without intrinsic value.
3. Example: The Indian Rupee (₹), the US Dollar ($), etc., are examples of fiat money.

Fiduciary Money

1. Definition: Fiduciary money is based on trust rather than government decree. It

includes instruments that rely on trust and are payable upon demand.
2. Characteristics:
o It is not legal tender but is accepted as a medium of exchange.
o Trust in the issuer (e.g., banks) is essential for its acceptance.
3. Example: Bank checks, promissory notes, and other demand deposits that are
accepted based on trust fall under fiduciary money.

Full-Bodied Money

1. Definition: Full-bodied money refers to money where the value of the metal (like
gold or silver) in the coin is approximately equal to the face value of the coin itself.
2. Characteristics:
o It has intrinsic value because of the metal content.
o Historically, full-bodied money was widely used, especially during the metal
standard era.
3. Example: Gold and silver coins that were valued according to their metal content.
 Amity International School, Mohali
Chapter- Money
Handout
Credit Money

1. Definition: Credit money refers to money that is accepted as a medium of exchange

based on the trust that it will be converted into actual currency on demand.
2. Characteristics:
o It is not backed by physical commodities but by the creditworthiness of the
issuer.
o Modern banknotes and deposits are common forms of credit money.
3. Example: Paper currency, bank deposits, and other instruments that hold purchasing
power but are not backed by physical assets.

Static and Dynamic Definitions of Money

Static Definition of Money

 Focus: Static definitions view money only as primary and secondary functions of
money.
 Implication: It considers only the role of money in facilitating transactions without
regard to its broader impact on the economy.
 Example: In a static view, money's primary role is simply to facilitate trade without
actively influencing economic growth or employment.

Dynamic Definition of Money

 Focus: The dynamic definition encompasses money’s impact on the economy,

including aspects like economic growth, price levels, employment, and income.
 Implication: Money is seen as an instrument of economic policy that can be used to
influence economic activity and growth.
 Example: In a dynamic view, money supply and policies can affect inflation,
economic stability, and growth, making it a tool for economic regulation.

Money supply
Money supply refer to total volume of money held by public at a particular point of time in an
economy.

Measures of money supply

 M1

M1=currency and coin with public+ demand deposits of commercial banks+ other
deposits with rbi
That is.
 M1= Currency and coins with public + Demand deposit of commercial bank + Other
deposits with reserve bank of India
 Currency and coins with public
it consists of paper notes and coin held by the public remember, any currency held with the
government and banks is not included.
 It includes coin of demonetization of rs 10, 5 ,2 , 1 , etc.. and paper notes of
demonetization like
(200, 500, 100 )
 Amity International School, Mohali
Chapter- Money
Handout
 It also termed as legal tender money as it can be legally used to make payments of
debts or other obligations.

 Demand deposit of commercial bank

It refers to demand deposits of the public with the commercial bank , demand deposits are the
deposits which can be encashed by issuing cheques at any time by the account holder. A
demand deposits is treated as equal to currency held as it readily accepted as a mean of
payments.
 Other deposits with reserve bank of India
It includes deposits held by the RBI on behalf of foreign banks and governments, world
bank , IMF etc.. however, it does not include deposits of the Indian government and
commercial bank with RBI.

Agencies Involved in Printing Money in India

 Reserve Bank of India (RBI): Responsible for issuing and regulating the currency in
circulation, except for the one-rupee notes and coins.
 Ministry of Finance: Manages the minting and issuance of one-rupee notes and
coins, as well as coins of various denominations.
 Security Printing and Minting Corporation of India Limited (SPMCIL) and
Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL): These are
the two primary agencies responsible for printing Indian currency notes and minting
coins.

Process of Printing Money

 Currency Note Design and Approval: The RBI designs new currency notes, and
designs are approved by the Central Government. The note's dimensions, security
features, and design elements are finalized before printing.
 Printing Facilities: RBI owns BRBNMPL, which has two printing presses in Mysore
(Karnataka) and Salboni (West Bengal). SPMCIL operates four mints located in
Mumbai, Kolkata, Hyderabad, and Noida for coins, and also operates two currency
printing presses in Nashik and Dewas.
 Quality Control and Security: Once printed, notes go through rigorous security
checks to prevent counterfeiting and ensure quality.

MINIMUM RESERVE SYSTEM:

India follows the minimum reserve system for note issue. Under this system, the central
bank RBI is required to keep a minimum reserve of gold and foreign exchange worth rupees
200 crores, and, on this basis, RBI can issue any number of notes.

₹Out of this ₹200 crore, ₹115 crores must be in gold and the remaining ₹85 crores in
foreign currency assets.
 Amity International School, Mohali
Chapter- Money
Handout
 This reserve acts as a base reserve or a form of financial backing to ensure the stability of
currency issuance.

HIGH POWERED MONEY

It is the ‘Money’ produced by the RBI and the government.  It consists of two things :

a) Currency held by the public

b) Cash reserves with the bank

Money consists of currency and demand deposits, while "High Powered Money" consists of currency
and cash reserves with the bank. It means currency held by the public is common in both.  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.

Deference between Term deposit and Demand deposits