CHAPTER -

5
Money
 BARTER SYSTEM

Barter System – The direct exchange of goods for goods , without the use of
money is called Barter System .
For example : Wheat may be exchanged for cloth; house for horses, etc., or
a teacher may be paid wheat or rice as a payment for his/her services.

It is also called as C-C Economy (commodity to commodity exchange

economy).

But , Today Bartering no longer exist ,

except perhaps between friends .
LIMITATIONS OF BARTER SYSTEM

1.Lack of double coincidence of

wants
2.Lack of divisibility
3.Difficulty in storing wealth
4.Absence of common measure of
value
5.Lack of standard of deferred
payment
EVOLUTION OF MONEY
Due to the limitation of barter system , to overcome these
difficulties money was invented by society .
Major stages through which money has evolved according to
growth of indrustilisation are :
1. Commodity Money: exchange of goods for goods .
2. Metallic Money: Metals like gold, silver, copper, etc. were
used as they could be easily handled and their quantity can be
easily ascertained.
3. Paper Money: It was found inconvenient as well as dangerous
to carry gold and silver coins from place to place. So , paper
money was invented which is regulated and controlled by RBI
in India .
4. Credit Money: The cheque (known as credit money or bank
money), itself, is not money, but it performs the same functions
as money.
5. Plastic Money: Use of Debit Cards and Credit Cards for
making payments are called Plastic Money .
MONEY
Money: Money is something which is generally acceptable as a
medium of exchange and act as a “measure” and “store” of value –
is called money .

Function of money
MEDIUM OF EXCHANGE
(PRIMARY FUNCTION)
•Money when used as a medium of exchange helps to
eliminate the basic limitation of barter trade, that is,
the lack of double coincidence of wants.

•Individuals can exchange their goods and services

for money and then can use this money to buy other
goods and services according to their needs and
convenience.

•Thus, the process of exchange shall have two parts: a

sale and a purchase.

•It help both the parties in obtaining maximum

satisfaction and profit independently .
MEASURE OF VALUE/UNIT OF ACCOUNT
(PRIMARY FUNCTION)

•Money works as a common denominator into which

the values of all goods and services are expressed and
has made the maintenance of ‘Books Of Accounts’
possible.

•When we express the values of a commodity in

terms of money, it is called price and by knowing
prices of the various commodities, it is easy to
calculate exchange ratios between them.

•It act as a ‘Standard Yard Stick’ of measurement for

making valuation of goods and services,
STANDARD OF DEFERRED PAYMENT
(SECONDARY FUNCTION)
•Deferred Payment refers to payments made in
Future.

•Credit has become the life and blood of a modern

capitalist economy.

•In millions of transactions, instant payments are

not made. The debtors make a promise that they
will make payments on some future date. In those
situations money acts as a standard of deferred
payments.

•It has become possible because money has

general acceptability, its value is stable, it is
durable and homogeneous.
STORE OF VALUE
(SECONDARY FUNCTION)
•Wealth can be conveniently stored in the form of
money. Money can be stored without loss in value.

•Savings are secured and can be used whenever there is

a need.

•In this way, money acts as a bridge between the

present and the future.

•Money occupies less space for storage in comparison

with goods.

•It is also known as asset function of money.

TRANSFER OF VALUE
(SECONDARY FUNCTION)

•Money also functions as a means of transferring

value.

•Through money, value can be easily and quickly

transferred from one place to another because
money is acceptable everywhere and to all.

•Anybody can sell his fixed property existing at a

particular place with the help of money ; to buy
another property or commodity of his choice at
another place .
 Legal Tender Non-Legal
Money Tender Money

Limited Legal Un-Limited

Tender Legal
Money Tender
Money
 Legal Tender Money
The money that has a legal sanction of the government behind it – is
called as Legal Tender Money.
It is also called Fiat Money.
It is issued by the government to which no person can refuse in
consideration of payment for a transaction.
Ex. Indian Currency and Coins.

Legal Tender Money can be of two types:

1. Limited Legal Tender Money : It is the money which can be
accepted up to a certain maximum limit.
Ex. In India, Coins up to Rs. 1000 only can be accepted legally in
payment .

2. Unlimited Legal Tender Money : It is the money which can be

accepted up to any amount in accepting payment at a time.
Ex. All Currency Notes in India .
 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 includes credit Instrument such as

draft,cheque,,bills of exchange.

It is also called fiduciary money as it is accepted on the

basis of trust.
MONEY SUPPLY
Money supply: The volume of money held by the public at a point of time,
in an economy, is referred to as the money supply. Money supply is a stock
concept.
In India, RBI uses 4 alternatives measures of money supply called
M1,M2,M3,M4.
M1,M2 are Narrow Concept of Money .
M3,M4 are Broad Concept of Money.

M1
M1 = C + DD + OD
where,
C=Currency notes and coins with the public (excluding cash in hand of all
commercial banks) [C]
DD=Demand deposits of all commercial and co-operative banks excluding
inter-bank deposits. (DD),
O.D =Other deposits with RBI [O.D]
(Other deposits are the deposits held by the RBI of all economic units
except the government and banks. OD includes demand deposits of semi
government public financial institutions (like IDBI, IFCI, etc.), foreign
central banks and governments, the IMF, the World Bank, etc.
 M2
M2 = M1=Saving deposit with post offices saving banks.
(M1 = C + DD + OD )

M3
M3 = M1+ Net time deposit with Commercial Banks.
(M1 = C + DD + OD )
Time Deposit - Time deposits are the deposits that cannot be withdrawn
before the expiry of the stipulated time for which deposits are made. Fixed
deposit is an example of time deposit.

M4
M4 = M3+Total Deposit of Post Office (Excluding NSC)
(M1 = C + DD + OD )
NSC – National Saving Certificate.
It has least cash liquidity and can’t be converted into cash easily.
IMPORTANT TERMS
High-Powered Money: High-powered money is money produced by the
RBI and the government. It consists of two things: (a) currency held by the
public and (b) Cash reserves with the banks.

Standard Coin: Standard Coin refer to those coin whose ‘Printed Or Face
Value ‘ is equal to its ‘Intrinsic Value’ .
(Intrinsic Value – Cost of metal used in the coin).
It is also called as Full-Bodied Money .

Token Coin: The money whose printed value or face value is much
greater than its intrinsic value.
Ex. All Indian Coins are Token Coins.