Lecture 1: Introduction

Definition of Money:
Money is a generally accepted medium for the exchange of goods and services, for measuring
value, or for making payments.
Different economists defined money in different ways, such as,
“Money is what money does.”- Francis Walker.
Money is “one thing that possesses general acceptability.”- E.R.A. Seligman.
Money is “anything that is generally acceptable as a means of exchange and which at the same
time, acts as a store of value.”- Crowther.
Therefore, money is any item or verifiable record that is generally accepted as payment for goods
and services and repayment of debts in a particular country or socio-economic context.

Chronological Development of Money

The money was not invented but it evolved with passage of time according to the changing
requirements of economies.
It is generally believed that evolution of money has passed through following six stages.
1. Barter
2. Commodity Money
3. Metallic Money
4. Paper Money
5. Credit Money
6. Electronic Money
These stages of evolution of money are discussed as under.

1. Barter:

 In the beginning of civilization the needs of people were very limited and therefore they
used to exchange their goods with other people’s goods or Service.

 Such a system of exchange where goods and services are directly exchanged for each
other without the use of money is called barter system.
 As for examples- corn may be exchanged for ox hides, lemons for orange, shoes for shirts
and so on.

2. Commodity Money:
 In the earliest period of human civilization, any commodity was chosen to serve as
money depends upon various factors like location of the community, climatic
environment of the region, cultural and economic standard of society etc.

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  For example, people living in the seashore adopted shells and dried fishes as money.
African people used ivory and tiger jaws as money

3. Metallic Money:

 With the 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.

4. 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.

5. Credit 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.

6. 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.

Functions of money

Money solves the problems created by the barter system.

First, money serves as a medium of exchange, which means that money acts as an
intermediary between the buyer and the seller. It is accepted freely in exchange for all other
goods.

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 Second, money must serve as a store of value. Holding money is a much easier way of
storing value. We do not need to spend it immediately because it will still hold its value the
next day, or the next year.

Third, money also functions as a unit of account, providing a common measure of the value
of goods and services being exchanged. Knowing the value or price of a good, in terms of
money, enables both the supplier and the purchaser of the good to make decisions about how
much of the good to supply and how much of the good to purchase.

Finally, another function of money is that money must serve as a standard of deferred
payment. Deferred payments are known as those payments which are to be made in the
future. Money enables borrowing and lending easier.

The four prominent functions of money can be summed up in the following couplet:

Money's a matter of functions four,

A Medium, a Measure, a Standard, a Store.
These functions are important for social, psychological and economic development of the
society.

Properties/Qualities/Merits of Good Money:

 
The commodity which is to serve as money should have following properties or qualities:
 
(1) General Acceptability:
 
The most important property of money is this that it should be generally acceptable. Any commodity
which lacks this quality cannot be accorded as money. The general acceptability can be possible if any
commodity possesses at least any one of the followings:
 
(i) Own Value of the Commodity: Gold and silver coins became the money because they were
possessing their own value.
 
(ii) Legal Position: The coins and currency notes are accepted as money because they have legal backing.
 
(iii) Confidence: Cheques, drafts and credit cards are money because they are accepted on the ground of
confidence.
 
(2) Divisibility:
 
The commodity which is to be money should have the quality of divisibility so that the goods in smaller
quantities could be purchased. The cows and goats were not good money because they could not be
subdivided into smaller parts.

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(3) Cognizability:
The good money is one which could easily be cognized. If it does not happen, the counterfeit currency
will come into circulation. As a result, so many problems will rise.

(4) Transportability:
 
Being good money a commodity should have the quality of transportability. The boats, goats and other
metallic coins did not prove to be the good money because it was difficult to transport them. On the other
hand, the credit money issued by banks, central bank or by govt. has the quality of transportability.

(5) Durability:
 
It is something necessary for good money that it must be durable. If any commodity gets stale; or it is
perishable; or it gets infected such commodity would not be called as money. In ancient days in Rome the
soldiers were given the salt as their payment. But during rain etc., it would get wet. Accordingly, it was
not good money. On the other hand, the coins and paper currency are the good money because they are
durable.
 
(6) Standardizability:
 
Good money is one whose all units are alike with respect to their size, quality and design etc. While the
commodity which lacks such all cannot be accorded as good money. As in American colonies the tobacco
was used as money. But it differed in quality. Accordingly, it did not serve as good money. On the other
hand the gold coins were the good money because their size and weight was same. Again, the paper
currency is good money because of standardization.
 
(7) Malleability:
 
The good money is one which could easily be melted and stamped. The gold and silver coins proved to be
good money as compared with iron coins because they were easy to melt.
 
(8) Stability in Value:
 
The good money is one whose value is stable. The money whose value goes on to change will not be
considered as good money. As after World War I, German Mark observed a greater fall in its value,
people lost confidence in it. Accordingly it did not prove to be good money.

Importance of Money:

a) Exchange and money: The first and major function of money is acting as a medium of exchange.
It denotes the transaction motive of the people. Money is used for exchanging goods and services and not
for its own.

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b) Production and money: Monet is the only means to assembling factors of production. It is the main
measurement for determining the value of demand for and supply of goods and services. If value of
demand exceeds value of supply it will encourage the producers to increase their production.

c) Income distribution and money: Income earned from the production process must be distributed
among the factors of production according to their marginal efficiency. And this work has become
possible and easy by the use of money.

d) Consumption and money: individual earns income in terms of money and uses it for purchasing goods
and services. Money gives freedom to the consumers to buy commodities in higher or lower prices.
Consumers can maximize their satisfaction by equalizing the financial sacrifices with marginal utilities of
goods and services in terms of money.

e) Saving and money: money plays very important role in country’s saving creation. It does not need
storehouse to save it. Moreover money in hand provides facility to fulfill any demand. Thus money
provides boundless advantages and people of developed and underdeveloped countries save in terms of
money.

f) Income earning and money: People engaged in any profession earn in terms of money. The wage
provided to the people is of two types- real wage and nominal wage. Both the wages are measured on the
basis of money.

g) Measure of value and money: Money is the measure of value. All things are measured in terms of
money. It helps the valuation of goods and services accurately which was absent in barter system.

h) Lending activities and money: Value of money is more or less stable which facilitates the lending
process of modern economy. In barter system, lending was difficult due to perishability and fluctuation in
value of the commodities. But money has successfully eliminated this problem in lending activities.

i) Trade and commerce and money: Goods and services produced in a country are not only used to
consume internally but also exported to the abroad. The term ‘international trade’ is much more important
in modern times. The medium of export and import and all types of trade and commerce is the money
which increased the speed of business transaction.

j) Capital transformation and money: Capital transformation is done by money. It is especially essential
in establishing production oriented industries. Because all inputs essential for establishing such industries
are bought by money.

k) Economic development and money: Money is the measuring rod of welfare. It is the medium of all
developments because without money there is no input for development.

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l) Government income expenditure and money: Government achieves huge amount of resources from
different sources and also spends the same in different sectors. Accounts of all these are kept in money
terms.

m) Storing value and money: Earnings of the people are not fully consumed. Part of them is stored for
future use and investment. This storing activity is possible to do successfully by money only.

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