- Early Forms: Animal money (cow, sheep) and commodity money (grains, shells, salt) were used first but had problems of indivisibility and storage.
- Metallic & Paper Money: Metallic money and coins developed for durability and uniformity; later replaced by paper money issued by the government/central bank.
- Bank, Plastic & Electronic Money: Bank (credit) money uses deposits and cheques; plastic money (debit/credit cards) and e-money enable cashless transactions.
- Legal Status: Legal tender money must be accepted by law (coins, notes), while non-legal tender money (cheques, bills) can be refused.
Definitions [2]
Definition: Barter System
“The direct exchange of economic goods, one for another.” — Chandler
Definitions: 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 store of value."
- Prof. Walker: "Money is what money does" (Shows money is defined by its functions).
- Robertson: "anything which is widely accepted in payments for goods or in discharge of other kinds of business obligations.”
- “Anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.” — Dr. Kent
- G.D.H. Cole: "Money is anything which is habitually and widely used as a means of payment and is generally accepted in the settlement of debts.”
Key Points
Key Points: Barter System
The barter system’s limitations—double coincidence of wants, no standard value, storage issues, indivisibility, and deferred payments—led to the invention of money, which streamlined trade and economic growth.
Key Points: Concept of Money
- Money eliminates barter system problems by providing a common medium of exchange.
- Three main functions: medium of exchange, measure of value, store of value.
- Must be generally acceptable to function as money.
- Modern economy completely depends on money for smooth transactions.
- Digital payments are the newest evolution in money's history.
Key Points: Modern Form of Money
- Coins = metallic money; token money; limited legal tender; issued by Government of India
- Currency Notes = paper money; issued only by RBI; inconvertible; unlimited legal tender; also token money
- Deposit Money = bank deposits against which cheques are drawn; safe and convenient; cheques are NOT legal tender
- Legal Tender = money that cannot be refused by law; coins are limited legal tender; notes are unlimited legal tender
- Credit Cards = NOT money; create a loan, not a payment; real money still settles every credit card transaction
- Token Money = face value > intrinsic value (applies to both coins AND notes)
- Fiat Money = value declared by the government; backed by trust and law, not gold or silver
Key Points: Types of Money
Key Points: Functions of Money
- Money removes barter difficulties and supports smooth exchange.
- Primary functions: medium of exchange and measure of value/unit of account.
- Secondary functions: standard of deferred payments, store of value and transfer of value.
- Contingent functions: maximise utility and profit, distribute national income, support credit and provide liquidity.
- Overall, money is “a medium, a measure, a standard, a store” with transferability added by some authors.
Key Points: Importance of Money
- Facilitates Consumption and Production: Money gives consumers purchasing power and helps producers decide what and how much to produce based on prices and demand.
- Removes Difficulties of Barter System: Money eliminates problems like double coincidence of wants, indivisibility of goods, and lack of a common measure of value.
- Helps in Distribution of Income: Payments to factors of production such as wages, rent, interest, and profit are made easily in terms of money.
- Promotes Capital Formation: Savings are made in money form and mobilised by banks and financial institutions for investment and economic growth.
- Supports Trade and Exchange: Money facilitates smooth internal and international trade by acting as a medium of exchange and basis of price mechanism.
- Important for Public Finance and Social Welfare: Government collects revenue and incurs expenditure in money, and social welfare and standard of living are measured in monetary terms.
Key Points: Supply of Money
- Money supply = the public's stock of money at a point in time; excludes government, RBI, and bank holdings.
- Two components: Currency (fiat money, legal tender) and Demand Deposits (bank money, not legal tender).
- RBI uses 4 measures: M₁ (narrowest, most liquid) → M₂ → M₃ → M₄ (broadest, least liquid).
- M₁ captures money purely as a medium of exchange; M₃ adds the store-of-value dimension (time deposits).
- M₃ is the most widely monitored by the RBI and macroeconomic policymakers.
- High-Powered Money (M₀) is the foundation — a small increase in M₀ leads to a multiplied increase in total money supply via the money multiplier.
- India's currency share (~50%) in the money supply is far higher than in developed countries like the USA (~18%), reflecting lower banking penetration.
Key Points: Inflation
- Inflation = persistent + appreciable + general rise in prices — all three must be present.
- A 2–3% annual inflation is healthy; it becomes a problem only when excessive.
- Demand-Pull Inflation = too much demand; too little supply → prices rise.
- Cost-Push Inflation = rising costs (wages/oil/monopoly power) → producers raise prices.
- Three sub-types of cost-push: wage-push, profit-push, and supply shock (oil shock).
- The inflation rate measures the % increase in average prices year over year.
