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1
Chapter 2
Money
Definition:
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.
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 which is widely accepted in payment for goods, or in discharge of other kinds
of business obligation.”- D.H. Robertson.
• 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.

Classification of money:

Money
I

Natural Lega
l
I I
Real / Optional
Account
Actual / Near
I i

Unlimited Limited Bank /

Metallic Paper
Credit
i I

Full
Bodied/
Standard
1 Token Represe-
ntative
Convertible Incountable Managed
Money can be classified as follows:
A. Natural Money: Money is of different natures. Again, different countries have different natures of
money. Natural money is of two forms:
1. Real/ Actual money: The money by which day to day transactions are done is called real/
actual money. For example, Dollar, Taka, Rupee, metallic money etc.
a. Metallic money: Money made of metal is called is called metallic money.
I. Full-bodied/ Standard money: The money whose face value is equal to its intrinsic
value, i.e. worth of metallic content is called full bodied/ standard money. In the past,
coins made from silver and gold were regarded as standard money and the system was
called gold and silver standard.
II. Token money: This money refers to a coin which face value is more than its intrinsic
value. These coins are made of cheap metals, like nickel, copper, bronze etc. For example,
coins of 5, 10, 25 and 50 paisa in Bangladesh.
b. Paper money: Paper money consists of currency notes issued by the financial authority or
central bank of the country. It has no intrinsic value.
I. Representative paper money: Representative money is an item such as a token or
piece of paper that has no intrinsic value, but can be exchanged on demand for a
commodity that does have intrinsic value, such as gold, silver, copper, and even tobacco.
II. Convertible paper money: Convertible paper money is also from one of the types of
paper money. The convertible paper money can be exchanged for full bodied money or
standard money upon demand of the holder of money. The government does not maintain
hundred percent reserves against such money. A fractional reserve of full-bodied money is
kept as guarantee for repayment. All paper money is not presented for repayment at a
time, a nominal pan of full-bodied money is sufficient to meet the demand. The
convertible paper money is issued against gold, silver and securities.
III. Inconvertible/ Fiat money: The inconvertible paper money cannot be exchanged for
full-bodied money or standard money. The gold or silver reserves are not kept by the
monetary authority. The money is issued on the written promise of the government. The
gold, silver or currency of other countries can be kept for issue paper money. But such
reserves are not maintained for holders of inconvertible paper money.
IV. Managed money: The money which is circulated by the govt. or central bank to
achieve certain objectives like stabilizing price level, reducing unemployment etc. is
called managed money.
 2. Account money: It is the name of money by which accounts are kept. Each country’s money
has a name by which all accounts and records are made. This name is called account money.
For example, Taka in Bangladesh, Dollar in USA, Rupee in India etc.
B. Legal Money: From the legal view point, money is divided into two classes.
1. Legal tender money: Money circulated under govt. law and people are compelled to accept
as a medium of exchange is called legal tender money.
a. Limited legal tender: The money more than certain amount of which is not compelled to
accept by the people legally is called limited legal tender. For example, coins of 5, 10, 25,
and 50 paisa of Bangladesh.
b. Unlimited legal tender: The money by which transaction of any value can be done and
people are compelled to accept any quantity legally is termed as unlimited legal tender.
For example, notes of 1 to 1000 taka of Bangladesh.
2. Optional/ near money: If the acceptance of money is not compulsive and it depends only on
the will of the people then it is termed as optional/ near money.
a. Bank/ credit money: It denotes cheques, bank draft, pay order, etc issued by the banking
institutions.
b. Other optional money

Qualities of a good money:

1. General Acceptability:
It is the very essence of money. Unless a person knows that the money which he accepts in exchange for
his goods or services will be taken without any objection by others as well, he will not accept it.

It will cease to be current. In order to possess general acceptability, a commodity should have some
intrinsic utility independent of its value for monetary purpose. Gold and silver are generally acceptable to
all without any hesitation because they are used for ornamental and other purposes and can be easily sold
as bullion, besides being used for monetary purposes.

2. Portability:
A commodity fit to be used as money must be such that it can be easily and economically transported from
one place to the other. In other words, it must possess high value in small bulk. Precious metals possess
this quality. In the case of oxen and grain, a small value occupies a large bulk and weight; hence, they are
unsuited as money commodity.

3. Indestructibility or Durability:
As money is passed from hand to hand and is kept in reserve, it must not easily deteriorate, either in itself
or as a result of wear and tear. “It must not evaporate like alcohol, nor purely like animal substance, nor
decay like wood, nor rust like iron.

Destructible articles, such as eggs, dried cod fish, cattle or oil has certainly been used as currency; but
what is treated as money one day must not soon afterwards be eaten up.” Gold coins are very lasting; they
take
about 8,000 years to wear out completely. Silver coins are not equally lasting but wear out fairly slowly.
As such gold and silver are considered to be excellent money commodities.

4. Homogeneity:
All portions or specimens of the substance used as money should be homogeneous, that is, of the same
quality, so that equal weights have exactly the same value. In order that a commodity may be used as a
measure of value, it is essential that its units are similar in all respects. Gold and silver are of the same
quality throughout; their various parts are similar in chemical and physical composition and their
consistency is the same throughout the mass.

5. Divisibility:
The money material should be capable of division; and the aggregate value of the mass after division
should be almost exactly the same as before. If we use diamond as money and by chance it drops from our
hand and breaks, we will suffer an enormous loss. This is not the case with precious metals. Their portions
can be melted and remelted together any number of times without much loss.

6. Malleability:
The money material should be capable of being melted, beaten and given convenient shapes. It should be
neither too hard nor too soft. If the former, it cannot be easily coined; If the latter, it would not last long. It
should also possess the attribute of impressionability so that it may easily receive the impressions.

7. Cognizability:
By it, we mean the capability of a substance for being easily recognized and distinguished from all other
substances. As a medium of exchange, money has to be continually handed about; and it will cause great
inconvenience if every person receiving it has to scrutinize, weigh and test it.

It should have certain distinct marks which nobody can mistake. Gold and silver are at once recognized by
their distinctive color, metallic and heavy weight for small bulk, and, as such, satisfy this condition
admirably

8. Stability of Value:
Money should not be subject to fluctuations in value. Fluctuating standard of value is just like a changing
yard or kilogram. The value of a material, which is used to measure the value of all the other materials,
must be stable.

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.
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 fulfil 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.
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 are stored
for future use and investment. This storing activity is possible to do successfully by money only.