MONEY & FUNCTIONS OF 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. 2. 3. 4. 5. Facilitates exchanges and satisfaction of wants Common measure of value Capable of subdivisions Convenient store of value 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 MONEYA 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- 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 form unlimited legal tender. They can be offered to an unlimited extend.
Limited legal tender coins of smaller denominations can be paid to the limit of ten rupees only.
• 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.
• 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 paperfire/flood/white ants • Over issue by govt during financial crisis.
FUNCTIONS OF MONEY
1. 2. 3. 4. MEDIUM OF EXCHANGE STORE OF VALUE STANDARD MEASURE OF VALUE 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