The Origin of Money

Little known – Historians believe money

originated as religious object of value,
which ultimately evolved into a medium
of exchange.
Religious Relics
11th century- gold emerged as a common
medium of exchange.
Royal coinage
Types of Money
1. Commodity Money
Money backed by stores of commodity.
Physical commodity is itself in circulation
It has monetary as well as non monetary
uses
Sth valuable to society for its physical
properties is chosen to perform money
(a)Full bodied money
-Face value and physical value will be
same. Gold coin.
-Commodity itself circulates as money
-Chances of wear and tear
(b)Representative full bodied Money –
-Actual commodity Held in inventory-
Gold Certificates- claim to the physical
commodity
-Redeemable.
-Stored in govt vault or treasury
-Physical value of gold certificate
negligible
-Face value high and mentioned on the
certificate
-100% reserve reserve backing.
2. Fiat Money
-Unbacked money
-Fiat latin word which means ‘let it be
done’
-Promise / Guarantee by issuing
authority

Reserve Backing Systems

-100% reserve system
-Proportional reserve system
-Minimum reserve system
India- RBI (1957)
200 cr rupees –i- 115 cr gold
ii- 85 cr. rupee notes, foreign exch and
other approved government financial
instruments
(a)Paper Notes
-Face value is much greater than physical
value
(b)Token Coins
-Inferior metals
Physical Properties of Money
1. Portability – for the ease of use in
transaction
-Sth valuable in smaller quantities
2. Divisibility – to permit transaction of
various sizes money shd be made of a
commodity that is divisible into smaller
units
Gold Vs Diamond
3. Durability
Shd not wear and tear or depreciate
quickly while in use.
4. Recognizable Value- it shd be easy for
people engaged in exchange to agree to
the value of the good used as money