- 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 widely accepted in payment for goods" (Focuses on exchange function).
- “Anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.” — Dr. Kent
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 token money whose face value is higher than intrinsic value (e.g., ₹1, ₹2, ₹5 coins).
- Currency Notes: Paper money issued by RBI; inconvertible and legal tender for unlimited amounts.
- Deposit (Bank) Money: Bank deposits operated through cheques; widely used for large and safe transactions.
- Credit Cards: Not money supply; allow purchase on credit, with payments ultimately settled in money.
Key Points: Types of Money
Key Points: Functions of Money
- Medium of Exchange & Measure of Value: Money is used to buy and sell goods and services and to express prices, income, and expenditure in a common unit.
- Standard of Deferred Payments & Store of Value: Money makes future payments (loans, wages) easy and allows saving for future needs.
- Transfer of Value & Liquidity: Money helps transfer value across persons and places and is the most liquid form of wealth.
- Basis of Credit & Economic Measurement: Money forms the base of bank credit and helps measure national income and other macroeconomic variables.
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 means the total money held by the public at a given time.
- It is a stock concept, measured at a particular point of time.
- Main components are currency and bank deposits.
- M₁ is the narrow measure; M₃ is the broad and most important measure in India.
- High-powered money (M₀) is issued by the central bank and forms the base of credit creation.
Key Points: Inflation
- Inflation means a persistent and significant rise in the general price level in an economy.
- It is not a one-time rise in prices; prices must rise continuously over time.
- Inflation is measured by the inflation rate, i.e. percentage increase in average prices.
- Two main types:
Demand-pull inflation – caused by excess demand over supply.
Cost-push inflation – caused by rise in production costs (wages, oil, profits).
