MONEY & FUNCTIONS

OF MONEY
DEWETT 364/384
 MONEY
• In ancient times , man’s wants were
few. He led a simple life and mainly
lived on hunting and fishing.
• With passage of time, human wants
multiplied
• BARTER SYSTEM- Exchanging
commodities for commodities without
using money
• To day we cannot think of life without
money.
BARTER – INCONVENIENCE.
• Need for double coincidence- when
goods have to be directly exchanged
for goods, it is essential that both
parties should stand in need of each
other’s possessions.
• A shoe maker may need a hat, but the
hat maker does not need shoe?-
exchange cannot take place!
 DIFFICULTY IN SUB
DIVISION
• Suppose X has a cow and
wants some salt.
• He cannot split the cow
• If he is prepared to accept salt
for his cow, the quantity will be
far greater than he can use
immediately
 Absence of common
measure of Value
• There were no means of
comparing values. Even
after bargain is struck , both
will remain dissatisfied.
 No ‘ Store of Value’
• Goods cannot be stored for a long
time.
• Some of them wholly perish after some
time.
• Think what would become if each of
you brought a cow, goat or birds to pay
college fees?
• Such things cannot be stored as
money.
EVOLUTION OF MONEY
• As barter was difficult and inconvenient
method of exchange, people selected some
commonly accepted commodities like wheat,
corn, tobacco, skin, beads, gold dust etc as
money in different parts of the country
• Gradually metals like gold and silver were
adopted as money almost every where.
• Later coins were replaced by paper notes for
convenience
• Still later, cheques, drafts and promissory
notes came to be used as in addition to notes
 Different stages of
development

• Commodity money
• Metallic money
• Paper currency
• And finally bank money
 Money - definition
• “money is that money does” – WALKER
• “one thing that possess general acceptability”-
SALIGMAN
• “anything which is widely accepted in payment for
goods or in discharge of other kinds of business
obligation is called money” – D.H.ROBERTSON
• “ the essence of money is that it can be passed from
hand to hand in one act of circulation to another”-
G.D.H.COLE
• “anything that is generally acceptable as a means of
exchange and at the same time acts as a measure
and store of value” – CROWTHER
• Crowther’s definition may be considered better as it
covers general acceptability and functional criterion
 ADVANTAGES OF MONEY
1. Facilitates exchanges and satisfaction of wants
2. Common measure of value
3. Capable of subdivisions
4. Convenient store of value
5. Money is thus the central point of all economic
activity.
6. Money and prices determine the total amount of
material goods that a salaried man or a wage
earner can consume.
7. Money represents general purchasing power.
8. Money is beneficial to society in general
Conclusion – thus, not only money removed all the
inconvenience of barter, but it has also proved
beneficial to the consumer, the producer and the
community in general.
 KINDS OF MONEY
• Broadly speaking, there are
2 kinds of money
2. Metallic money
3. Paper money
• STANDARD MONEY
It is subject to free coinage. Any
body can convert the metal to get
coins out of it. Its real or “intrinsic
value” is equal to to its face value.
It is unlimited legal tender. It is
either made of gold or silver.
 Kinds of money--
• TOKEN MONEY-
• A coin has value because it is made of
valuable metals. When the value stamped
on the coin is in excess of its contents, it is
called a “token coin”. They have a higher
metal value
• In short, token coins are
4. Limited legal tender
5. Not subject to free coinage
6. Have face value more than metallic or
intrinsic value
 LEGAL TENDER
• LEGAL TENDER- is money that can be
paid to clear one’s debts. No body can
lawfully refuse to accept it and it is
backed by government

Unlimited legal tender

The rupee and half rupees Limited legal tender
form unlimited legal tender. coins of smaller denominations
They can be offered to can be paid to the limit of
an unlimited extend. ten rupees only.
 PAPER MONEY
• Paper money is printed on paper and
has no intrinsic value. It is widely used
today.
• Paper money is simple, convenient and
economical for making exchange and
discharging obligation on an extensive
scale. Currency notes are now issued
by RBI.
 PAPER MONEY-
ADVANTAGES
• Light and handy
• It is more economical to manufacture
than metallic money
• Convenient to carry . In a very small
package, huge value can be
accommodated.
• Advantages for banks to store
 PAPER MONEY -
DISADVANTAGES
• No value outside the country of issue.
Gold and silver coins are accepted
even by foreigners as they have some
intrinsic value.
• Possibility of damage to paper-
fire/flood/white ants
• Over issue by govt during financial
crisis.
FUNCTIONS OF MONEY
1. MEDIUM OF EXCHANGE
2. STORE OF VALUE
3. STANDARD MEASURE OF VALUE
4. STANDARD OF DEFERRED
PAYMENTS
5. IT TRANSFERS VALUE
MEDIUM OF EXCHANGE
• Money solves all the difficulties of
barter. The man with a cow who
wants to purchase a horse need
not hunt for a horse seller who
wants a cow. He can sell the cow in
the market for money and the
purchase a horse. The
convenience is great.
 STORE OF VALUE
• Money can be stored more
conveniently and safely at home or
depositing in a bank etc. The
stream of income and expenditure
may not come together. An
employer may have to pay wages
daily or monthly but income can
come at irregular intervals
STANDARD MEASURE OF
VALUE
• One inconvenience of barter was
the lack of a common measure of
value in terms of which other
values could be expressed . Money
removes this difficulty. It is easy to
compare the respective value of
commodities. Values are
expressed in terms of money.
STANDARD OF DEFERRED
PAYMENTS
• Money also serves as a standard of
payments which are to be made
after a lapse of time.
• Money makes borrowing and
lending much less risky. Thus it
helps in stimulating all kinds of
economic activities which depends
on borrowed money or credit
 MEANS OF
TRANSFERRING VALUE
• One can sell one’s immovable
and movable belongings at one
place and buy them elsewhere.
Value will thus be transferred.
 ESSENTAIL OF GOOD
MONEY.
• Generally acceptable medium
of exchange.
• It must be suitable store of
value.
• Should be capable of
transferring value