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

“Money can be defined as anything that is generally acceptable as a means

of exchange and that at the same time act as a measure and a store of
value.” = CROWTHER

TWO IMPORTANT THINGS MERIGE FROM THIS DEFINITION :

1- Money has been defined as a function its perform. That is why economist says MONEY IS WHAT
MONEY DOES.
2- An essential requirement of any kind of money is that it must be generally acceptable to every
member of the society.
 EVOLUTION OF MONEY
• Use of commodity as Money : in beginning their was a commodity which
was selected as a medium of exchange.
• Use of Metalic Money : They are easily handeld and stored. They do not
deteriorate. (not because they are valuable but because they were
scare}
• Use of Paper Money: China was the first country who invented the paper
money.
Scarcity is more important than value.
 EVOLUTION OF MONEY
 The word “money” is derived from the Latin word
“Monet”
 The origin of money is lost
 Hunting society, skin of wild animals were used as
money
 Pastoral society used livestock
 Agriculture society used grain and foods
 The Roman used cattle and salt.
DIFFERENT STAGES OF EVOLUTION
OF MONEY
1. COMMODITY MONEY
2. METALIC MONEY
3. PAPER MONEY
4. CREDIT MONEY
5. ELECTRONIC MONEY
1. COMMODITY MONEY
 When different commodities were used as a medium of
exchange (BARTER SYSTEM)

 Cow , Goats, Axes, Dried Fishes etc were used as

medium of exchange.
 1. COMMODITY MONEY

 Commodity money had different problem like:

1. Storing Problem
2. Durability problem
3. Transportation problem
4. Divisibility problem
1. Commodity Money (Barter
System) :. In ancient times, barter
system was mostly prevailed in the
world. This system started creating
difficulties in trade as barter trade
cannot be done between two
individuals if one has need for
something that another have but
the latter individual has no need of
something that former is offering.
 2. METALLIC MONEY
• The next step in the evolution was the discovery of precious metals like
Gold, Silver, Copper.
• “ Metallic Money consist of coins made of Gold, Silver, Copper or nickel as a
mode of payment.”
2. METALLIC MONEY
UnCoined Metals
 Metals were not used as a coin but as a Bullion.
 T h i s created the problem of measuring the weight &
Value.
 S u p p l y of money also became problem when
tmines were fully used up or new mines were
discovered.
 2. METALLIC MONEY
Coined Metals.
 A s a next step, standard coins were created.
 T h e y had a standard weight & value.
 Problem of un coined metals dissolved by the use
of coined metals.
2. METALLIC MONEY
Metallic money can be:
FULLY BODIED
• Whose Face Value is equal to the value of metal contained
in it.
TOKEN MONEY
• Its Face Value is Higher than Intrinsic Value (Value of
Metal)
 3. PAPER MONEY
 W h e n paper currency was introduced as a mode
of payment.
 O rig ina ted as a receipt issued by Goldsmiths.
 T h e s e receipts were then later on used for
payments.
 D iff e re ncein the value of receipts was becoming
a problem then.
The first paper currency issued by RBI was a 5 rupee note bearing King
George VI’s portrait, in January 1938.
 3. PAPER MONEY

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

Money is matter of function four,

A medium ,a measure, a standard , a store.

• Money as a Medium of Exchange - explanation

• Money as a Measure of Value

• Money as a Store of Value

• Money as a Standard of Deferred Payments

CLASSIFICATION OF MONEY
• Limited Legal tender
1-Legal Tender • Unlimited Legal Tender
Money • Optional Money (No legal
Tender)

• Fully Bided Money

(Standard Money)
2- Metallic Money • Token Money
• Subsidiary 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.

 Money has facilitated Exchange And Promoted Trade

 Money Promote Division of Labour and Productivity

 Money Promote saving.

 Money Helps in maximizing Satisfaction or Profits by

Consumers and Producers.

 Money can help in reviving the Economy from

Recession or Depression.
 GRESHAM”S LAW OF MONEY
• Acc. To Sir Thomas Gresham -“Bad money drives out Good money”
• Good Money : The money which is of full value & any depreciation in it
does not effect its economic value. In context of paper money, good
money is that which is not torn and worn.
• Bad Money : The money which loses its original value due to depreciation
or any case. Money whose value is less than its internal value.

WHY GRESHAM’s LAW is Applicable?

• Human Nature: Discard bad things and accept good things.
• Hoarding of money: people have saving tendency so they prefer to save good money
rather bad money.
• Melting of coins: It happens that the value of specific metal is added to
increase its market value
 EXPLANATION OF GRESHAM’S LAW
1. In case of Monometalism:
• Only one standard currency is used.
• When standard and full bodies currency are used and among them some remains new.
• Here Greshams law applied , old and depreciated coins are circulated in a market

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.

3- In Case of paper and coin currency:

Gresham’s law is not applicable in paper currency but due to human nature good currency is hoarded and
bad currency is circulated. It’s a human tendency tried to save fresh one.coin currency old times Gresham
law was applicable.
 MONEY SUPPLY
• Its play very crucial role in the determination of price level and interest rate.
• Money Supply is determined by the policy of
Central Bank and Government.
Government
Commercial Bank & Public
Importance of Money Supply : Growth of the money supply is an important not only for the
acceleration of the process of economics development but also for the achievement of price
stability in the economy.
A healthy growth of economy required that there should be neither
inflation or deflation.
 MONEY SUPPLY IN INDIA
• It refers to the total supply of money in circulation in a given country’s
economy at a given time. Money supply is considered as an important
instrument for controlling inflation by some of the economist.

• 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.

• Money Supply data is collected, recorded, and published periodically by the

RBI. These are also known as “ Reserve Money”.
 CONCEPT OF MONEY SUPPLY AND ITS
MEASUREMENT:
• According to the standard concept of money
supply, it is composed of the following two
elements:
• 1. Currency with the public,
• 2. Demand deposits with the public.
Currency with the Public:
• 1. Currency notes in circulation issued by the Reserve
Bank of India.
• 2. The number of rupee notes and coins in circulation.
• 3. Small coins in circulation.
Demand Deposits with the Public:
• The other important component of money supply are demand deposits of the
public with the banks. These demand deposits held by the public are also
called bank money or deposit money. Deposits with the banks are broadly
divided into two types: demand deposits and time deposits.

• 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. 

• M0 Reserve Money) = Currency in Circulation + Banker’s

Deposit with RBI + Other Deposits with RBI.

• Money Supply M1 or Narrow Money:

• This is the narrow measure of money supply and is composed of the
following items:
• Ml = C + DD + OD
• Where, C = Currency with the public
• DD = Demand deposits with the public in the commercial and cooperative banks.
• OD = Other deposits held by the public with Reserve Bank of India.
• The money supply is the most liquid measure of money supply as the money included
in it can be easily used as a medium of exchange, that is, as a means of making
payments for transactions.
• Money Supply M2:
• M2 is a broader concept of money supply in India than M1. In addition to
the three items of M1, the concept of money supply M2 includes savings
deposits with the post office savings banks. Thus,
• M2 = M1 + Savings deposits with the post office savings banks.

• Money Supply M3 or Broad Money:

• M3 is a broad concept of money supply. In addition to the items of money supply
included in measure M1, in money supply M3 time deposits with the banks are
also included. Thus
• M3= M1+ Time Deposits with the banks.

• , 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:

• Money multiplier is the degree to which money supply is expanded as a

result of the increase in high-powered money. Thus
• m = M/H
• Thus money supply is determined by the size of money multiplier (m) and
the amount of high- powered money (H). If we know the value of money
multiplier we can predict how much money will change when there is a
change in the amount of high-powered money.
 MEASURES OF MONEY
SUPPLY

Purpose of measuring Money Supply

• To control and regulate in accordance
with monetary requirement of the
country.
• Excess money supply lead to inflation and
shortage lead to economic recession
 MEASURES OF MONEY SUPPLY

• Based on the medium of exchange and store

of value functions of money, the RBI
undertakes different measures of money
supply.
• They are M0, M1, M2, M3 and M4 from
reserve, narrow to broader measures.
• Among these measures of money supply,
M0,M1 and M3 are the most important
money supply measures.
 REFERENCE
• http://www.microeconomicsnotes.com/money/money-in-economics-definit
ion-types-functions-characteristics-importance-and-evils-economics/1510
0
•THANK YOU