ECONOMICS – XI – Commerce & Arts.

2. MONEY.
In modern world all economic activities of human beings depend on money. It
facilitates mechanism of exchange. The term ‘Money’ is derived from the Latin term
‘Moneta’ (Moneta is the other name of Goddess Juno). ‘Money is regarded as anything that
is generally accepted within the community as a medium of exchange & measure of value’.
Money is defined differently by different economist on the basis of its functions &
general acceptability.
According to Prof. Walker, “Money is what money does”.
According to Prof. Newly, “Anything is money which functions as a medium of
exchange”.
According to Crowther, “Money is anything that is generally acceptable as a means
of exchange and at the same time acts as a measure and a store of value”.
❖ Features / Qualities of Money: -
1. Universal / General Acceptability: - The primary condition for anything to be called as
money is that it must be generally accepted by all people in the country without any
hesitation in the exchange of goods & services. Otherwise, it cannot be money. It should
be accepted either by law or custom.
2. Homogeneity: - All units of particular kind of money or money of same denomination
such as rupee coins or notes are to be look like in features. There should be
homogeneity or uniformity.
3. Cognizability: - It means money must be recognized by sight, sound, touch etc. without
any difficulty. Thus, notes of different denomination must differ in size, shape, colour,
design, hallmark etc. for easy identification.
4. Portability: - Money should be capable of being carried easily from one place to another
without any difficulty, expense, risk or inconvenience etc. Currency notes are more
portable than metallic coins but bank money & plastic money are more portable than
paper money.
5. Durability: - Money must be capable of being durable or it should be made from durable
articles as people use money frequently in transactions. Thus, it can be used as a store of
value or held for over a period of time
6. Divisibility: - Money should facilitates fractional payments and easy exchange of goods
& services. Thus, money must be capable of being divided into small denominations like
₹1, ₹2, ₹5 etc.
7. Stability of Value: - Since, the values of other goods & services have to be expressed in
terms of money, it is necessary that the commodity which is selected as money should
be stable in its value. Hence, it is necessary to maintain price stability.
8. Attractive: - Money should be attractive with proper size, shape, design, hallmark etc. to
protect them from duplication and for easy identification.

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 ECONOMICS – XI – Commerce & Arts.

❖ Types of Money: -
1. Animal Money: - In the early life of civilization, primitive farming communities were
using various domestic animals as money such as cows, horse, ox, donkeys, sheep, goats
etc. This money was subject to certain drawbacks like indivisibility, portability,
perishability etc.
2. Commodity Money: - In the evolution of human beings, different commodities were
used as money such as food grains, animal skins, salt, shells etc. The commodity used as
money was dependent upon various factors like climatic conditions, location, culture,
economic development etc. This money had various limitations like perishability,
indivisibility, storage problem, portability etc.
3. Metallic Money: - The money made out of various metals like gold, silver, bronze,
copper, nickel etc. is called metallic money. Because of scarcity, continuous rise in prices
& lack of uniformity in metallic pieces, people were started to use metallic coins instead
of metallic money.
4. Metallic Coins: - Metallic coins have standard shape, size, weight, design & stable value.
Various kings & rulers were minted their coins from gold & silver with their pictures &
seals. But now a days these coins are minted by the governments of countries. Metallic
coins are of two types,
a) Standard Coins: - Standard coins are also called full bodied coins. Standard coins are
those coins whose face value & intrinsic value (metal value) are the same. These coins
are made out of costly metals like gold & silver, hence they are rare in circulation.
b) Token Coins: - Token coins are those coins whose face value is greater than their
intrinsic value. These coins are made out of cheap metals like copper, bronze & nickel,
hence these are commonly used. Token coins are divided into limited legal tender &
unlimited legal tender.
5. Paper Money: - The money made from papers is called paper money or currency notes.
Paper money was introduced by China. Currency notes have unlimited legal tender as
they are issued by central government or central bank of the country. In India, one-
rupee notes & all coins are issued by the government of India and all other currency
notes are issued by the RBI. Paper money can be classified as Representative paper
money, Convertible paper money & Inconvertible paper money (Fiat money).
6. Bank / Credit Money: - Bank money is also called as credit money. Bank money refers to
bank deposits. The depositors can convert their bank deposit money or transfer at any
time by the use of cheques, demand drafts etc. It is not legal tender money.
7. Plastic Money: - Plastic money involves transfer of balance in the bank account that is to
be transferred among the customers. Debit card & credit card are used widely as plastic
money, but they do not have general acceptability & legal tender.
8. Electronic Money: - Electronic money or E-money is broadly defined as an electronic
store of monetary value on a technical device & backed by central bank. It can be
transferred by using various devices like mobile, computer, tablet etc. Digital wallets are
also a form of electronic money which does not have legal tender.

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 ECONOMICS – XI – Commerce & Arts.

❖ Functions of Money: - Functions of money can be classified as,

A. Primary Functions: -
1. Medium of Exchange: - Primary & the most fundamental function of money is that it
acts as a medium of exchange. It facilitates buying & selling of goods & services by
serving as a common medium of exchange. In modern times, entire mechanism of
exchange is based on money due its general acceptability, liquidity & divisibility. It
avoids the difficulty of double coincidence of wants which was facing by people during
barter system.
2. Measure of Value or Unit of Account: - Price is the value of goods & services expressed
in terms of money. Expressing the value of any commodity in terms of other commodity
or service is difficult. This problem of barter system is solved by money. It helps in the
smooth operation of the price system. Every country has standard money in terms of
which values are expressed and measured such as Rupee, Dollar etc.
B. Secondary Functions: -
1. Standard of Deferred Payment: - Deferred payment refers to the payments which are to
be made at some future date. Money serves as a unit in which debts and future
transactions can be settled. It facilitates lending and borrowings, contracts and credit
transactions. Under barter system taking loan was easy, but repayment was difficult as
loans were taken in the form of grains & animals. This difficulty is solved by money &
facilitates deferred payments.
2. Store of Value: - Money acts as an efficient store of value as it is more convenient and
the most liquid asset. Money can be stored without any difficulty and it is a convenient
asset to hold for future use. It is a link between present and future. It can be used to
purchase real & financial assets.
3. Transfer of Value: - Money also helps to transfer income & wealth from person to
person & place to place without any difficulty. In modern times, transfer of purchasing
power from one place to another is very easy because of money only. One can buy
goods & services from far places only due to money.
C. Contingent Functions: -
1. Measurement of National Income: - National income accounting is possible because of
money. In the absence of money, like barter economy it would be an impossible task.
Money also helps to distribute national income among the owners of factors of
production in the form of rent, wages, interest & profit.
2. Basis of Credit System: - Money facilitates credit transactions and it is the basis of the
banking system. It acts as liquid asset of banks on the basis of which they provide credit.
Without money, credit instruments cannot operate.
3. Impart Liquidity to Wealth: - Money is the most liquid asset and it facilitates liquidity to
other assets. It means money can be easily converted into any asset and any asset can
be converted into money.
4. Estimation of Macro Economic Variables: - Macro economic variables like Gross
National Product (GNP), total savings, total investment etc. can be easily estimated in
monetary terms. It also facilitates govt. tax collection, preparation of budget etc.

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 ECONOMICS – XI – Commerce & Arts.

5. Capital & Investment: - Money helps to accumulate capital by means of savings and
investment. It also facilitates transfer of capital from less productive use to a more
productive use.

❖ Difficulties of Barter System: -

1. Problem of double counting of wants: - In barter system, people were facing the
difficulty of double co-incidence of wants. It means the wants of two people must match
with each other to conduct transaction. Without double co-incidence of wants,
transactions were impossible.
2. Lack of common measure of value: - In bater system, it was a difficult task to measure a
value of one commodity in terms of other goods & services as there were no common
measure of value. At the same time, those values have never been stable for a longer
period of time.
3. Difficulties in storage of goods: - During barter system, people were used different
commodities & animals as money. It was difficult for them to store such money for a
longer time as they were perishable in nature & larger in size.
4. Indivisibility of certain goods: - The problem of indivisibility was facing by people during
barter system in case of certain commodities like live stock. Such animals cannot be
divided into two or more parts for transactions.
5. Problem of making deferred payments: - Credit transactions (deferred payments) were
difficult during barter system. It was easy to borrow animals or commodities but
repayment was difficult in the same manner in future.

END.

D. S. BHOIR