MONEY & BANKING

ASSIGNMENT

CONCEPTS OF MONEY
PRESENTED BY :
GROUP 1

SIMARPREET KAUR 201018

TARANPREET KAUR 201033
GUNEET SINGH 201073
SIMRAT KAUR 201078
SAHAJPREET SINGH 201088
 TOPICS TO BE
COVERED :

1.INTRODUCTION TO MONEY
2. BARTER SYSTEM OF EXCHANGE
3.FUNCTIONS OF MONEY
4. EVOLUTION OF MONEY
5.PHYSICAL PROPERTIES OF MONEY
6.DEFINITION OF MONEY
7.CLASSIFICATION OF MONEY
 INTRODUCTION TO MONEY
Money is regarded as one of the three greatest Inventions of mankind, the discovery of
fire and wheel being the other two. Modern economies are money using economies.
These economies are based on specialisation and division of labour which necessitate
the exchange of goods and services. Money is needed to facilitate the exchange of
goods and services. Money is generated by the Central and the Commercial banks of a
country.

“Money is one of those concepts which, like a teaspoon or an umbrella are

defined primarily by the use or the purpose which they serve.” – Hawtrey

.Money is defined as an instrument that serves as a medium of exchange, store of

value, a measure of value and a standard for deferred payment.
 BARTER SYSTEM OF EXCHANGE
Barter System of Exchange is a system in which goods are exchanged for
goods.
Drawbacks of Barter Exchange-

I. Double coincidence of wants- It means what one person wants to sell

and buy must coincide with what some other person wants to buy and
sell. For eg: if a person has surplus of wheat and needs clothing, he looks
for a person who needs wheat and at the same time possesses clothing.
So it is very difficult that such coincidence of wants may take place.
II. Absence of common measure of value-Under the barter exchange, it
is very difficult to value each and every commodity to be expressed in the
terms of all the other commodities in the market.
 DRAWBACKS OF
BARTER SYSTEM:

III.Problem of Divisibility- There was no common unit of measurement so

there was problem of divisibility. Many commodities are indivisible. If these
goods are divided into small parts they become useless . Under barter
system, it is very difficult to exchange big good for a small good.

IV.Problem of Storing Wealth-This system does not allow any convenient

method of storage of wealth. Under the barter system of exchange it is
very difficult to store the goods and services for future uses because of
their perishable nature or high cost of storage.
 FUNCTIONS OF MONEY
• Money came into existence to overcome the difficulties of barter system of
exchange. By performing various functions in the economy, money has
solved the difficulties of barter and made the functioning of the economy
easier and better which are as follows:

I. Medium of Exchange-Money acts as medium of exchange

which is used to purchase the goods & services because it has
general acceptability.
II. Measure of value-The value of goods & services can be
measured in terms of money.
 III.Store of Value-It means storing of purchasing power for the future
usage. All goods & services can be stored in terms of money for future
uses.

IV. Unit of Accounts-All transactions become accountable in the form of

money.

V. Standard of deferred payments- Deferred payments means

payment contracted to be made at a future date.
* Money serves as a standard of deferred payments, like
borrowing ,repayment of loans ,interest etc.
* This function has made possible smooth working of the borrowing and
lending facilities.
EVOLUTION OF
MONEY
SOME OF THE MAJOR STAGES THROUGH WHICH MONEY HAS EVOLVED ARE AS FOLLOWS: (I)
COMMODITY MONEY (II) METALLIC MONEY (III) PAPER MONEY (IV) CREDIT MONEY (V) PLASTIC
MONEY.

(I) 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’.

(II) METALLIC MONEY:

WITH 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.
(III) PAPER MONEY:
IT WAS FOUND INCONVENIENT AS WELL AS DANGEROUS TO CARRY GOLD AND SILVER COINS
FROM PLACE TO PLACE. SO, INVENTION OF PAPER MONEY MARKED A VERY IMPORTANT STAGE
IN THE DEVELOPMENT OF MONEY. PAPER MONEY IS REGULATED AND CONTROLLED BY
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.

(IV) CREDIT MONEY:

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.

(V) 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.
 PHYSICAL PROPERTIES OF MONEY
1. PORTABILITY:Money should be divisible into small quantities so that
consumers can carry different quantities of the commodity with ease. It
should be convenient for consumers to carry smaller quantities of the
commodity when purchasing goods and services from retail stores. If the
commodity is immovable or indivisible, consumers will have to incur
additional costs to physically transport the commodity.
2. DURABILITY: Money should be durable enough to withstand repeated
usage and retain its usefulness for use in future transactions. The
commodity or currency should remain functional, without requiring frequent
maintenance or repair over its lifetime. If the commodity is not durable, it will
degrade quickly with repeated use, and it will not be useful for future
transactions.
3. DIVISIBILTY: MONEY CAN BE DIVIDED INTO FAIRLY SMALL UNITS
SO THAT IT CAN FACILITATE TRANSACTIONS OF VARIOUS SIZES. THIS
CAN BE UNDERSTOOD BY DIAMONDS THAT MAY BE DURABLE AND
PORTABLE BUT NOT DIVISIBLE AS COMPARED TO GOLD AND SILVER.

4.INTRINSIC OR RECOGNIZABLE VALUE: THE COMMODITY USED AS

MONEY SHOULD BE EASILY IDENTIFIABLE SO THAT USERS AGREE ON
ITS AUTHENTICITY AND QUANTITY. IT MAKES TRANSACTIONS EASIER
BECAUSE BOTH PARTIES IN THE TRANSACTION AGREE TO THE
TERMS OF EXCHANGE WITHOUT INCURRING ADDITIONAL COSTS OF
PAYING TO VERIFY THE AUTHENTICITY OF THE GOODS BY ALL
PARTIES IN THE EXCHANGE.
WHEN THE COMMODITY IS NON-RECOGNIZABLE, THE PARTIES IN
THE TRANSACTION WILL INCUR TRANSACTION COST TO VERIFY ITS
AUTHENTICITY AND DISTINGUISH BETWEEN REAL MONEY AND
COUNTERFEIT MONEY.
 DEFINITION OF MONEY
1. LEGAL DEFINITION OF MONEY: Money that has a legal sanction by the
government behind it is called legal tender or legal tender money.
Legal tender or legal money means money under the law of land. It is the
money issued by monetary authority or government which cannot be
refused by any person in payment for transactions. The tender or payment
of it constitutes by law the sufficient discharge of debt.

2. FUNCTIONAL DEFINITION OF MONEY: Functional definition of money

refers to money as anything that performs four basic functions,
(a) It serves as a medium of exchange.
(b) It serves as a standard unit of value.
(c) It serves as a means for future / contractual payments or standard of
deferred payments.
(d) It serves as a store of value.
According to this, definition of money includes both notes and coins as well
3. NARROW DEFINITION: Functional definition of money is a
narrow definition of money. It includes only notes, coins and
demand deposits as money. In other words, in its narrow
definition, money includes only those things that function as
money in terms of:
(a) Medium of exchange.
(b) Measure of value.
(c) Standard of future/Deferred payments.
(d) Store of value.

4. BROAD DEFINITION: (a) A broad definition of money also

includes time deposits/term deposits with the banks or post
offices as a component of money.
(b) These deposits can be converted into demand deposits on a
short notice, and are “Near money assets”. Money assets and
 THEORETICAL AND EMPIRICAL
APPROACH TO DEFINITION OF
MONEY
There are two approaches for defining money
(1) A priori or theoretical approach
(2) the empirical approach

In the theoretical approach, money is first conceptualized in the form

of specific functional or Institutional attributes and then the
corresponding measure of money is obtained by aggregating relevant
financial assets possessing those specific attributes like medium of
exchange, unit of value, standard of deferred payments and store of
value i.e. distinction should be made between the concept of money
and the measure of money where conceptualization should be
distinguished from and precede its measurement.
Second is the empirical approach which however does not rely on any
pre conceived notion of money and instead it directly arrives at a
measure of money as an aggregate of financial assets which when
introduced in certain functions gives the best results in terms of
specific criteria like the highest correlation with national income or
having a stable and sturdy demand function.

Among the two approaches, the theoretical approach has a greater

analytical appeal and as a sequence, you should empirically only test
the adequacy of concepts and verify theoretical hypothesis. This
implies that the empirical stage comes only after the relevant concepts
have been defined and hypothesis derived from a suitable economic
model.
 CLASSIFICATION OF MONEY
1. FIAT MONEY: It refers to that money which is issued by
order or authority of the government . It includes all
notes and coins which the people in a country are legally
bound to accept as a medium of exchange.

2. FIDUCIARY MONEY: It is that money which is accepted as

a medium of exchange because of the trust between the
payer and the payee. For example- cheques are fiduciary
money as these are accepted as a means of
payment on the basics of trust, not on the basics of any
order of the government .
3. FULL BODIED MONEY: It refers to money in terms of
coins whose commodity value is equal to the money value
as and when these are issued. For example- a rupee coin
during the British period in India was made of silver.
Commodity value of the coin was equal to its money value
at the time of its issuing . Or , the market value of the silver
contained in the coin was equal to Rs. 1 .

4. CREDIT MONEY: It refers to that money of which money

value is more than the commodity value. It includes token
coins , representative token money , deposits at banks and
circulating promissory notes issued by central banks.