NATURE AND FUNCTION

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Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country. In the words of popular economist Coulborn Money is a mean of valuation and payments. According to professor Knap (Wharton), Any thing which is declared by the state as money is money.

Out of need for the govt. to have a legal tender. To have a medium of exchange and standard of value. Originated as commodity money, but all contemporary money systems are fiat money. Currency is the most common form of money.

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Money systems consist of:Currency (bank notes and coins). Bank money (balance held in accounts and savings account).

checking

Coins and Bank notes are the two most common physical form of money.

Money may be thought of as currency, which is issued by authority of the state. Currency is that which is used in trade as a means of exchange. Currency may be anything that, either through custom or use is used in trade as a means of exchange. For something to function as currency, it is desirable that it possesses certain legal characteristics ,i.e, its ownership must be able to pass freely from person to person.

1. 2. 3. 4. 5.

First stage: Commodity money: (animals, salt, stone, skin etc). Second stage: metallic money: (Gold and silver) Third stage: Paper money: (currency) Fourth stage: credit money or bank money: (checks, bank draft,) Fifth stage: Electronic money: (ATM, Credit cards).

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Barter System Goods or services are directly exchanged for other goods or services. Does not use any medium of exchange as money. Barter replaces money during monetary crisis. With time, human needs and wants began to increase and such a system brought a list of difficulties to man.

Inconveniences of barter system. lack of Double co-incidence of wants Indivisibility of goods Difficulty in storing of value Lack of common measure of value Difficulty in transfer of wealth Difficulty in state Taxes and payments

2) Compacted Physical form Easily portable, light weight material which was priced was used. Shells were the most preferred. It was reported to have been used as early as 2000 B.C in all societies that existed.

Inconveniences of the compacted physical form.

Price

varied widely depending upon the quality of the material used. People has to educated in-depth about the criteria to check the quality of the material. Due to deterioration, the price of the specimen material went down on storing ( as opposed to increase in value with time ).

3) Metallic money The value of the metal was at first measured by size and weight. Silver and gold were the most commonly used.

Later ,a stamp was put upon it to save the trouble of weighing and to make the value known at sight.

Inconveniences of the metallic money

1) Estimating the weight of the metal during every transaction in order to find its face value. 2) Clipping -shaving off tiny slivers from the sides or edges of coins. 3) Sweating -shaking a bunch of coins together in a leather bag and collecting the dust that was thereby knocked off.

4) Paper Money

China was the first to issue it. Included fiduciary money, transferable book entries, promises to pay specified amounts of gold and silver. Was adopted in most of the countries.

5) Modern Currency Finally, evolved into the form of currency that we know today. Spanish Dollars were the first currencies which were made a legal transaction in most of the countries.

Inconveniences Since the cost of producing currency is far below its exchange value, forgery is common.

6) Credit Money
Credit money is any claim against a physical or legal person that can be used for the purchase of goods and services.

Banknotes which are not backed by specie are

categorized as credit money.

Examples are :Personal IOUs

7) Electronic Money

Electronic money is money or scrip that is only exchanged electronically it involves the use of computer networks, the internet and digital stored value systems. It is an online representation used to exchange value within another system, or within itself. Examples are Electronic funds transfer (EFT), direct deposit, digital gold currency and virtual currency

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Commodity money
scarce precious metals, conch shells, barley, beads etc are used as commodity money . Its value comes from the commodity out of which it is made. The commodity itself constitutes the money, and the money is the commodity. Use of commodity money is similar to barter

2) Representative money
It is that money that consists of token coins, or other physical tokens such as certificates It can be reliably exchanged for a fixed quantity of a commodity such as gold or silver. Its value stands in direct and fixed relation to the commodity that backs it.

3) Fiat money
value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). It has value only by government order. It is damageable in the form of paper and coins. The law defines the rules for its replacement if it is damaged or destroyed.

4) Currency
It refers to physical objects generally accepted as a medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply. nearly all contemporary money systems are based on fiat money.

5) Commercial bank money or demand deposit

They are claims against financial institutions that can be used for the purchase of goods and services. A demand deposit account is an account from which funds can be withdrawn at any time by check or cash withdrawal without giving the bank or financial institution any prior notice. Demand deposit withdrawals can be performed in person, via checks or bank drafts, using automatic teller machines (ATMs), or through online banking

 Commercial bank money is created through fractional-reserve banking. Commercial bank money differs from commodity and fiat money in two ways
It is non-physical, as its existence is only reflected in the account ledgers of banks and other financial institutions. there is some element of risk that the claim will not be fulfilled if the financial institution becomes insolvent

1) 2) 3) 4)

Medium of exchange. Unit of account. Store of value. Standard of deferred payment

Medium Of Exchange When money is used to intermediate the exchange of goods & services. It is required for the Separation of the act of sale from the act of purchase. Avoids the inefficiencies of the barter system. Avoids the 'double coincidence of wants' problem.

Unit Of Account

Standard numerical unit of measurement of the market value of goods, services, and other transactions. Necessary prerequisite for the formulation of commercial agreements that involve debt.

To function as a 'unit of account', whatever is being used as money must be: Divisible into smaller units without loss of value; precious metals can be coined from bars, or melted down into bars again.

Fungible: that is, one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art or real estate are not suitable as money.

Standard Of Deferred Payment

It is an accepted way to settle a debt a unit in which debts are denominated, and the status of money as legal tender, in those jurisdictions which have this concept, states that it may function for the discharge of debts. When debts are denominated in money, the real value of debts may change due to inflation and deflation.

Store Of Value To act as a store of value, a money must be able to be reliably saved, stored, and retrieved and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time. Inflation, which reduces the value of money, diminishes the ability of the money to function as a store of value.

- It is the amount of financial instruments within a specific economy available for purchasing goods or services. Financial instruments usually includes currency, demand deposits and various other types of deposits. The amount of money in an economy is measured by adding together these financial instruments creating a monetary aggregate.

- How easily an item can be traded for another item, or into the common currency within an economy. Money is the most liquid asset because it is universally recognised and accepted as the common currency. Money gives consumers the freedom to trade goods and services easily without having to barter. Liquid financial instruments are easily tradable and have low transaction costs.

General Acceptability Stability of value Transportability Storability Divisibility Homogeneity Distinguishable formation