Legal Definition of Money

According to this definition, "Money is what the law says it is"

● It means that anything will be called money if the law proclaims it to be money.
● It will be commonly accepted measure of value.
● It will be endowed with legal tender power.
According to this aspect, money is of two kinds:
1. Legal tender money
It means money defined under the law of land (of the country).
● It is endowed with legal tender power i.e., it has the legal power to discharge debts.
● A creditor who refuses it, is not legally entitled to receive anything else in payment of
an existing debt from the debtor.
● It is also called Fiat money because it serves as money on the order (fiat) of the govt.
Legal tender status given to money is of two types :
● Limited legal tender (coins). It is the money which can be accepted upto a certain
maximum limit. For example, in India, coins up to 1000 only (as per coinage bill passed
in August 2011) can be accepted legally in payment. The creditor may refuse to accept
payment beyond total sum of R1000.
● Unlimited legal tender (currency notes). It is the money which can be accepted upto any
amount in accepting payment at a time for example, all currency notes have unlimited
legal tender as all currency notes can be used to make payments of unlimited amount.
2. Non-legal tender money
It is also called optional money.
● This money is accepted on the basis of trust that the issuer of money commands.
● It is also called Fiduciary money as it is accepted as money on the basis of trust.
● It includes credit instruments such as drafts, cheques, bills of exchange etc.
● Optional money basically refers to demand deposits (any deposit account on which a
cheque can be written) of banks. The amount in demand deposits is payable on
demand.
Functional Definition of Money
o This definition will include all things (as money) which perform the four functions that money does.
o According to this definition, anything which performs these functions, will be called money
ü A unit of value.
ü A medium of exchange.
ü A standard of deferred payments.
ü A store of value.
o General acceptance is the essential characteristic of money.
o Anything which is commonly accepted as a medium of payment is money (not concerned with legal aspect
only).
o It implies that coins and paper currency (Fiat) and chequable deposits (fiduciary) will come
o under functional definition of money.
Narrow vs. Broad Money
1. Narrow Definition of Money
v It is based upon medium of payment function of money.
v Anything which is commonly accepted as medium of exchange is included in narrow
definition of money.
v It includes currency (C) and demand deposits (DD).
M = C+ DD
2. Broad Definition of Money
v It is based upon store of value function of money.
v Anything which has a high degree of moneyness is broad money.
v Anything which is widely used as a store of value is included in this category of money.
v It includes currency (C), demand deposits (DD), saving deposits (SD) and time deposits
(ID) of banks and post offices.
M = C + DD + SD + TD
Money and Near Money
1. Money
ü Money is anything which is used as a medium of payment (exchange).
ü It has legal sanction of the law of land (govt. of the country).
ü Therefore, it refers to paper currency, coins and demand deposits.
ü It basically refers to 'cash'.
ü It is most liquid form of money.
2. Near Money
ü This is a close substitute of money.
ü It can be easily converted into 'cash'.
ü This is highly liquid asset. For example, bonds, shares, gold etc.
ü It can not be used directly as a medium of exchange (First needs to be
converted into cash).
BARTER SYSTEM: MEANING AND FEATURES

In the primitive stages of economic development, human needs were very limited.
The market transactions were limited to the extent of mutual exchange of goods
between two or more individuals. This is barter. Barter means exchange of goods
for goods. An economy where there is barter of goods and services, is called a
C-C economy i.e., commodity for commodity exchange economy.

Meaning
"Barter Exchange is Direct Exchange of Commodity for Commodity".
Features of Barter System
1. Barter system can be practical only if there is "Double coincidence of wants" ie.,
simultaneous fulfilment of mutual wants of buyers and sellers e.g., when a farmer gives
cotton and gets shoes from the shoemaker in return.
2. If "double coincidence of wants" does not exist, there will be huge 'trading costs'.
3. Trading costs refer to costs of engaging in trade. They are:
(i) Search Cost. It is the physical cost of searching for a person willing and prepared for the
exchange of goods. Also, it is the cost of deterioration caused to the good during search
period.
(i) Disutility of Waiting. It refers to the discomfort one would have to undergo in spending
more time and effort in searching for the person who both needs the good you have more
than anything else and has the good that you need more than anything else (in simple
words, simultaneous fulfilment of mutual wants).
4. With economic development, exchange through barter became impractical.
Limitations/Problems of Barter System
1. Lack of unit of value / account. In the barter system, there is no common measure of value of goods and
services. In the absence of a common unit of measurement, evaluation of goods and services is not possible. In
the absence of a common unit, proper accounting is not possible.
The value of each good would have to be expressed in as many quantities as there are kinds and qualities of
other goods in the market (when thousands of articles are produced, there will be unlimited exchange ratios).
For example, if there were 1000 goods and services in the market, then the value of each good would have to
be expressed in terms of 999 others.
2. Lack of double coincidence of wants. "Simultaneous fulfilment of mutual wants by buyers and sellers is known
as double coincidence of wants". In barter system there is lack of double coincidence of wants. It is very rare
when owner of some good or service could find someone else who wanted his good or service and also
possessed the good/service which the person requires (owner).
For example, the producer of jute may want shoes in exchange, but he may find it difficult to get a shoemaker
who is also willing to exchange his shoes for jute. The person might have to get into some intermediate
transactions before the actual exchange takes place (e.g., a person desires to exchange his cow for a bullock
cart; the intermediate transactions may be cow for horse, horse for boat, boat for sheep and finally sheep for
bullock cart). In an attempt to avoid intermediate transactions, he would have to accept something less desirable
than what he wants.
3. Lack of standard of deferred payments. Barter system lacks a standard of deferred payments. It
creates problem in entering into contracts which involve future payments because of lack of any
satisfactory unit. There is a problem of borrowing and lending. As a result, future payments are to be
stated in terms of specific goods or services. Credit transactions become difficult because there could be
ü Disagreement regarding the quality of goods.
ü Disagreement regarding the specific type of good.
ü Disagreement about change in the value of the good as the commodity may lose or gain its value
over the duration of the contract (benefiting either the creditor or the debtor).

4. Lack of store of value. Under barter system, it is difficult to store wealth for future use. The barter
system does not provide for any method of storing generalised purchasing power power which gives
freedom of choice that money offers). It is difficult to store wealth in the form of goods like cattle,
wheat, potatoes etc. Storing commodities as wealth has certain problems:
ü It involves costly storage.
ü Deterioration or appreciation in the value of stored commodity.

Problem of quickly disposing of the commodity without loss if the owner wants to buy something else.