J.

S Tutorials
Subject: Economics
Topic: Money
Chapter: 2
Class: 11th

Introduction:

* The concept of money is an important concept which has brought about a revolutionary
change in the economic life of human beings.

* Money which is in circulation today was created to reduce the difficulties in ‘Barter System’.

* Barter system is the exchange of one commodity in terms of another.

* For e.g., exchange of rice for milk, tea for sugar, etc.

Difficulties in Barter system

1. Problem of double coincidence of wants:

➢ Lack of double co-incidence of wants was one of the major limitations of barter system.
➢ For instance, person ‘A’ has cloth and he wants rice in exchange and person ‘B’ has
rice but he does not want cloth in exchange.
➢ In this case exchange between ‘A’ and ‘B’ would not take place as their wants do not
coincide with each other.

2. Lack of common measure of value:

➢ While exchanging goods for goods, there was no standard unit of account to determine
the value of a commodity.
➢ For e.g., it was difficult to compare two litres of milk with two kilograms of rice.

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3. Difficulties in storage of goods:

➢ It is necessary to store goods for future consumption.

➢ Sometimes due to perishable nature of certain goods, it was difficult to store them for
future.
➢ Perishable commodities like milk, eggs, fish, vegetable etc. were difficult to store.
➢ This was also due to lack of space required to store heavy and bulky goods.

4. Problem of making deferred payments:

➢ Deferred payment means payments to be made in future.

➢ Repayment of loan was difficult due to exchange of commodities.
➢ It was difficult to repay the perishable goods in the same condition in future.

Definition of Money:

According to 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".

Types of Money:

1) Animal money:

➢ In pre-historic period, ‘animal money’ was used as a means of exchange.

➢ For e.g., cow, sheep, goat etc.
➢ However, due to their indivisible nature, it got banned and commodity money came
into existence.

2) Commodity money:

➢ In olden days, the commodities to be used as money were dependent upon climatic
conditions and culture.
➢ For e.g., animal skin, grains, shells, feathers, tusk, salt, rare articles and stones were
used as a medium of exchange.
➢ Due to the problem of storage of such commodities, metallic money came into
existence.

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3) Metallic money:

➢ Metallic money used durable metals.

➢ For e.g., gold, silver, copper, aluminium, nickel etc.
➢ However, scarcity of precious metals and lack of uniformity in metallic pieces gave rise
to the use of metallic coins.

4) Metallic coins:

➢ In ancient times, rulers of various kingdoms used small pieces of metals and affixed
their seals on them.
➢ With the passage of time, the monetary system was taken over by the government
authorities.
➢ Coins can be classified as under:

a) Standard or full-bodied coins:

• Full bodied coins are those whose face value is equal to their intrinsic value.
• Face value indicates the exchange value fixed by issuing authority.
• These coins are made out of precious metals like gold, silver etc.
• Standard coins were used for some days during the British period.

b) Token coins:

• Token coins are those whose face value is higher than their intrinsic value.
• These coins are made of cheaper metals like aluminium, nickel etc.
• These coins are of lower denominations and are generally used for settling
smaller transactions.
• In India, all coins in circulation today are token coins.

5) Paper Money:

➢ Paper Money was a substitute for metallic money.

➢ In course of time, issue of currency notes was monopolized by the Central Bank.

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 ➢ Paper money consists of paper currency issued by Government and Central Bank of the
country.
➢ In India, one-rupee notes and all coins are issued by the Government of India.
➢ Currency notes of higher denominations are issued by the Central Bank
(Reserve Bank of India).

6) Bank Money or Credit Money:

➢ Bank money refers to deposits which are in the form of cash saved by the people.
➢ It is used to create credit money.
➢ This can be withdrawable and transferable on demand, by means of cheque, demand
draft etc.
➢ Cheque, demand draft is not actual money but credit instruments through which
deposits are transferable.
➢ Credit money plays an important role in economic development.

7) Plastic Money:

➢ Plastic Money is easy to use in transaction due to advanced technology.

➢ Debit cards and credit cards are used as plastic money.
➢ Further innovation in smart transactions led to the introduction of electronic money.

8) Electronic money:

➢ It is a monetary value that is stored and transferred electronically through a variety of

means i.e., a mobile phone, tablet, etc.
➢ It is backed by the Central Bank.
➢ This is used for purchases and transactions globally.
➢ Digital wallets are known as a form of stored electronic money.

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Functions of Money

A) Primary Functions:

1) Medium of Exchange:

➢ The most important function of money is to serve as a medium of exchange.

➢ Any commodity can be purchased or sold for money.

2) Measure of Value or Unit of account:

➢ Price is the value of a commodity or a service expressed in terms of money.

➢ Money enables to compare the prices of commodities.
➢ Different currencies are used to express the value of commodity in different countries.
➢ For e.g., Rupee in India. Dollar in U.S.A., Pound in U.K., Yen in Japan etc.
➢ Income and expenditures of all kinds, assets and liabilities are stated in terms of money
as a unit of account.

B) Secondary Functions:

1) Standard of deferred payments:

➢ Under barter system taking loans was easy.

➢ However, its repayment was difficult because loan was in the form of grains, cattle etc.
➢ Money has overcome this difficulty.
➢ Payments to be made at a future date is called deferred payments.
➢ By serving as a standard measure of payment over a time, money makes borrowing and
lending easy.

2) Store of value:

➢ Money acts as a store of value.

➢ It not only satisfies wants in the present but also makes provision for satisfaction of
wants in future.
➢ This is possible due to savings.

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3) Transfer of Value:

➢ Money enables transfer of value from one person to another and from one place to
another.
➢ Real assets can be sold at one place and can be purchased at another place with the help
of money.
➢ For e.g., building, plot, shop, agricultural land etc.

C) Contingent Functions:

According to Prof. Kinley, in the modern period money plays an important role almost in all
economic transactions.

1) Measurement of National Income:

➢ National Income is expressed in monetary terms.

➢ Distribution of national income among the four factors of production is in terms of
monetary rewards.
➢ For e.g., rent, wages, interest, profits etc.

2) Basis of Credit:

➢ Commercial Banks create credit money on the basis of primary deposits.

➢ Money provides a liquid base for creation of credit money.

3) Imparts liquidity to wealth:

➢ Money is called the most liquid asset.

➢ It can be easily converted into any asset and any asset can be converted into money.
➢ For e.g., a person can purchase gold and if he wants, he can sell it and purchase
government bonds, securities etc.

4) Estimation of macro-economic variables:

➢ Macro-Economic variables can be easily estimated in monetary terms.

➢ It also facilitates government tax collection, preparation of budget etc.
➢ For e.g., Gross National Product (GNP), total savings, total investment etc.

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Black Money:

➢ It is any money which is received in cash but not accounted for and on which tax is not
paid to the government.
➢ It is tax evaded income, which can be earned through both legal and illegal means.
➢ Black money encourages illegal activities such as corruption, bribery, black marketing,
hoarding etc.
➢ This creates obstacles in economic development.
➢ Economic, political and social instability are created in the economy due to black
money.
➢ To control black money, demonetization is one of the tools, which many countries have
adopted.

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