Money
Money
Money
Meaning ,
Classification,
Function
Importance
Gresham’s Law
RBI classification of money
MEANING
Money is anything
serving as a medium of
exchange. According to
According to this
Prof. Walker, ‘Money is
definition, we can include
what as money does. Conceptual Definition
all those things in money,
’
which perform the Money can be defined as any
functions of money. Thus
money does not comprise commodity that is generally accepted
metallic coins and as a medium of exchange and a
currency notes only. It
also includes cheques, measure of value
bills of exchange, etc.,
because they also
perform the functions of
money.
PROBLEMS IN BARTER SYSYTEM
• 1. Double Coincidence of Wants
• 2. Lack of a Standard Unit of Account
• 3. Impossibility of Subdivision of Goods
• 4. Lack of Information
• 5. Production of Large and Very Costly Goods not Feasible.
• Ref:
http://www.yourarticlelibrary.com/economics/money/5-main-difficulties-fo
und-in-barter-system-discussed/37849
DEFINITION OF MONEY
• “Any thing which is widely accepted in payment for goods or discharge of
other kind of business obligations.” – D.H.ROBERTSON
PAPER MONEY
Refers to the Notes issued by
the State or by the Bank,
usually the Central bank.
Paper Money can be:
1. Representative Paper Money.
2. Convertible Paper Money.
After India became independent in 1947, India’s monetary system
3. Fait Paper Money. remained unchanged for a while, with 1 rupee consisting of
64 pice. The first banknote printed by independent India was a 1
rupee note.
3. PAPER MONEY
1- Representative Paper Money.
It is that money which is fully backed by
equivalent metallic reserves.
2- Convertible Paper Money
Which is convertible into coins on
demand.
3- Fait Paper Money
Which is not redeemable or convertible into Gold
or Silver on demand. It is accepted because it is
declared legal tender by the issuing authority and
has general acceptance as a medium of exchange.
The intrinsic value of Fait money is Nil.
4. CREDIT MONEY
Includes Bank money (different instruments offered by the
Banks.)
Cheques, Drafts, etc are examples.
Convenient, Safe and easily convertible into cash.
I t s like Near Money.
5- Plastic Money
5- PLASTIC MONEY
Plastic money is a term used to represent the hard plastic cards used in day to day
life in place of actual banknotes. They come in several forms such as debit cards,
credit cards, store cards and pre-paid cash cards. The plastic cards began to be
used widely after 1970 when the specific standards were set for a magnetic strip.
In 1981, the concept of Credit cards was introduced in India and was on the verge
of an exceptional boom.
6- ELECTRONIC MONEY
Electronic money (also known as e-money,
electronic cash, electronic currency, digital
money, digital cash or digital currency) refers
to money or scrip which is exchanged only
electronically. Typically, this involves use of
computer networks, the internet and digital
stored value systems.
CHARACTERISTICS OF MONEY
General Acceptability.
Stability of Value.
Transportability.
Storability
Divisibility.
FUNCTIONS OF MONEY
• Representative Paper
Money
3- Paper Money • Convertible Paper Money
• Inconvertible Paper Money
1- Legal Tender Money : It is that money which is accepted as a means of payment both by
the Govt as well as the people. This type of money has legal sanction behind it. No one refuse to
accept it as a means of payment.
Legal tender money can be further subdivided under two heads: a) limited legal tender, b) unlimited
legal tender
a) Limited Legal Tender: money which no person can be forced to accept beyond a certain maximum
limit. The Govt under statute fixes the maximum limit. For example 1,2,5,10,20 and 25 paise coins are legal
tender only up to a sum of rupees twenty-five. If some one is called upon to accept the small coins beyond
the maximum limit of Rs 25/- is perfectly free to refuse them
b) Unlimited Legal Tender: money which a person has to accept up to any limit, because it is an unlimited
legal tender. This type of money accepted by the people to an unlimited extent. For example, one rupee coin’s,
fifty paise coins and paper notes of all denominations are unlimited legal tender in India.
c) Optional Money: (Non-Legal Tender): It is that money, which ordinarily accepted by the people, but
has no legal sanction behind it. No one can be forced to accept this type of money against his wish. Different
types of credit instruments like cheques, hundies and bills of exchange are examples of optional money.
2 – Metallic Money: This money is made of a particular metal (i.e.,
Gold, Silver, Copper, Nickel, etc.,). Metallic Money is further classified
under three sub heads:
a) Fully Bided Money: Facevalue = Intrinsic Value
b) Token Money: Face Value < Intrinsic Value
c) Subsidiary Money: Subsidiary coins are issued to facilitate smaller
payments. Its like token money
3 – Paper Money : Paper money can be classified under three
heads:
a) Representative Paper Money : Representative money is any
medium of exchange, often printed on paper, that represents
something of value, but has little or no value of its own (intrinsic value).
b) Convertible Paper Money : Under this money is converted into
standard coins made of gold or silver. It means the paper currency
issue by the Central bank was fully backed by the reserves of gold
and silver of equal value kept by it i.e. FULL RESERVE SYSYTEM.
c) Inconvertible Paper Money: Now-a-days paper money is
inconvertible type. Money is not convertible into gold and silver or
other previous metals.
d) Fiat Money: Fiat means Order. Paper money which is issued by
the order of te Government . As they are legal tender, they are
generally acceptable in exchange of goods and services.
MINIMUM RESERVE SYSTEM
The Reserve Bank has monopoly to issue currency notes of all
denominations except one rupee notes. Since the one rupee note issued by
the Ministry of Finance but distributed by the RBI through currency
commercial banks.
Meaning :Printing of currency notes in India is done on the basis of
Minimum Reserve System (MRS). This system is applicable in India
since 1956.
According to this system, the
Reserve Bank of India has to maintain assets of at least 200 crore
rupees all the times. Out of this 200 crore, the 115 cr rupee should in
the form of Gold or gold bullion and rest 85 cr. should be in the form of
foreign currencies.
OBJECTIVE MINIMUM RESERVE
SYSTEM
There are many objectives of MRS but a few are;
1. To ensure the confidence of the Indian currency holders that the currency held by
them is a legal tender and they will receive the value of the currency held by them.
2. The Minimum Reserve System is a token of confidence to the general public that the
Indian government is liable to pay them as per the face value of the notes because the
RBI governor promise to the public that “I promise to pay a the bearer a sum of 100/500
rupee.”
3. RBI wants to ensure the appropriate supply of currency in the economy through MRS.
4. Through the MRS the RBI accelerate the economic growth of the country without
increasing the rate of inflation in the economy.
IMPORTANCE OF MONEY CHAND )
PG NO.286(S.
2. In case of Bimettalism:
• Two standard currency are used. ( ex. Gold & Silver)
• Exchange rates are fixed for the transaction of both the currency.
• The currency whose value is greater that will be good currency.
• Economist Analyze the money supply and develop policies revolving round it
through controlling interest rates and increasing or decreasing the amount of
money flowing in the economy.
• DEMAND DEPOSIT: Demand deposits in the banks are those deposits which can be
withdrawn by drawing cheques on them. Through cheques these deposits can be transferred to
others for making payments from whom goods and services have been purchase
• TIME DEPOSIT: Deposit in banks which can be drawn after some bounded time like
fixed deposit , RD
MEASURES OF MONEY SUPPLY
• From April 1977, the Reserve Bank of India has adopted four concepts of money
supply in its analysis of the quantum of and variations in money supply.
• , recently RBI in its analysis of growth of money supply and its effects on the
economy has shifted to the use of M3 measure of money supply. In the
terminology of money supply employed by the Reserve Bank of India till April
1977, this M3 was called Aggregate Monetary Resources (AMR).
• Money Supply M4:
• The measure M4 of money supply includes not only all the items of M3
described above but also the total deposits with the post office savings
organisation. However, this excludes contributions made by the public
to the national saving certificates. Thus,
• M4 = M3 + Total Deposits with Post Office Savings Organisation.
DETERMINANTS OF MONEY
SUPPLY:
• Money supply in an economy we shall use M, concept of money supply
which is the most fundamental concept of money supply. This concept of
money supply is composed of currency held by the public (Cp) and
demand deposits with the banks (D). Thus
• M = Cp + D …(1)
• Where, M = Total money supply with the public
• Cp = Currency with the public
• D = Demand deposits held by the public
• The two important determinants of money supply as described in
equation are
• (a) the amounts of high-powered money which is also called
Reserve Money by the Reserve Bank of India and
• (b) the size of money multiplier.
• 1. High-Powered Money (H):
• The high-powered money which we denote by H consists of the currency
(notes and coins) issued by the Government and the Reserve Bank of
India. A part of the currency issued is held by the public, which we
designate as Cp and a part is held by the banks as reserves which we
designate as R.
• H = Cp+ R …(2)
• Where, H = the amount of high-powered money
• Cp = Currency held by the public
• R = Cash Reserves of currency with the banks.
2-MONEY MULTIPLIER: