04 Apr

Money

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Contents

• Meaning and Evolution
• Barter System of Exchange
• Forms of Money

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1) MEANING AND EVOLUTION:

• A thing which is commonly accepted as medium of exchange is called Money.
  – E.g.
  • A rupee in India is money. In older times coins of gold and silver were considered
    money.
• Other than acting as medium of exchange, money has following uses:
  – Store of value (instrument of saving)
  – Measure of value
  – Standard of deferred payments (payments made sometimes in future)
• So, more comprehensively, money can be defined as an instrument that serves as medium of exchange, store of value, measure of value and standard for deferred payments.

2) BARTER SYSTEM OF EXCHANGE:

• It is a system in which goods are exchanged for goods.
• Drawbacks:
  • Requirement of double coincidence of wants.
    • Introduction on money has separated the acts of sale and purchase.
  • Lack of common unit of value
  • Difficulty of future payment and contractual payment
  • Difficulty of storage of value and transfer of value
  • Money has taken care of all these drawbacks.

3) FORMS OF MONEY:

1. Fiat Money and Fiduciary Money
   • Fiat money is that money which is issued by order/authority of the government. It includes all notes and coins which the people in the country are legally bound to accept as a medium of exchange.
     • Understanding Legal Tender and Fiat Money
     • Fiat money doesn’t have an intrinsic value. What value it has depends on the public confidence in the currency’s issuer.
     • Legal Currency is any currency declared legal by a government. It is legally
       accepted mode of payment in a country, usually its currency.
     • Generally, governments issue a fiat currency and then make it legal tender by setting it as the standard for repaying debt.
   • Fiduciary Money is that money which is accepted as a medium of exchange because of the trust between the payer and the payee.
     • E.g., Cheques are fiduciary money as they are accepted as a means of payment on the basis of trust, not on the basis of any order of the government.
     • Note: Cheques are not legal tender, as they can be refused as a mode of payment by a party.
2. Full Bodied Money and Credit Money
   • Full bodied money refers to money in terms of coins whose commodity value is equal to the money value as and when these are issued.
     » E.g., 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 issue.
   • Credit money refers to that money of which money value is more than commodity value.
     • E.g., money value of a Rs 20-coin today is more than the commodity value of the coin.
       • Otherwise, people would have melted the coins and sold the metal in the market at a price greater than 20 rupees.
   • In Summary:
     • In Full bodied money (Money value = Commodity value)
     • In Credit Money (Money value > Commodity value)