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NATURE AND FUNCTION

GROUP __

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Money is any object or record that isgenerally accepted as payment for goodsand services and repayment of debts in agiven country.

In the words of popular economist CoulbornMoney is a mean of valuation andpayments.

According to professor Knap (Wharton),Anything which is declared by the state asmoney is money.

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Out of need for the govt. to have a legaltender.

To have a medium of exchange and standardof value.

Originated as commodity money, but allcontemporary money systems are fiat money.

Currency is the most common form of

money.

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Money systems consist of:-1) Currency (bank notes and coins).

2) Bank money (balance held in checking

accounts and savings account).

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

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Money may be thought of as currency, whichis issued by authority of the state.

Currency is that which is used in trade as ameans of exchange. Currency may beanything that, either through custom or useis used in trade as a means of exchange.

For something to function as currency, it is

desirable that it possesses certain legalcharacteristics ,i.e, its ownership must beable to pass freely from person to person.

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1. First stage: Commodity money: (animals,salt, stone, skin etc).

2. Second stage: metallic money: (Gold andsilver)

3. Third stage: Paper money: (currency)4. Fourth stage: credit money or bank money:

(checks, bank draft,)

5. Fifth stage: Electronic money: (ATM, Creditcards).

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1) Barter System

Goods or services are directly exchanged forother goods or services.

Does not use any medium of exchange asmoney.

Barter replaces money during monetary crisis.

With time, human needs and wants began toincrease and such a system brought a list ofdifficulties to man.

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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

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2) Compacted Physical form

Easily portable, light weight material whichwas priced was used.

Shells were the most preferred. It wasreported to have been used as early as 2000B.C in all societies that existed.

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Inconveniences of the compacted physical form.

Price varied widely depending upon the qualityof the material used.

People has to educated in-depth about thecriteria to check the quality of the material.

Due to deterioration, the price of thespecimen material went down on storing ( asopposed to increase in value with time ).

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3) Metallic money

The value of the metal was at first measured

by size and weight. Silver and gold were the most commonly

used.

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Later ,a stamp was put upon it to save thetrouble of weighing and to make the value

known at sight.

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Inconveniences of the metallic money

1) Estimating the weight of the metal duringevery transaction in order to find its facevalue.

2) Clipping -shaving off tiny slivers from the

sides or edges of coins.

3) Sweating -shaking a bunch of coins togetherin a leather bag and collecting the dust that was

thereby knocked off.

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5) Modern Currency

Finally, evolved into the form of currency thatwe know today.

Spanish Dollars were the first currencieswhich were made a legal transaction in mostof the countries.

Inconveniences

Since the cost of producing currency is far

below its exchange value, forgery is common.

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6) Credit Money

Credit money is any claim against a physical orlegal person that can be used for the purchase of

goods and services.

Banknotes which are not backed by specie arecategorized as credit money.

Examples are :Personal IOUs

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7) Electronic Money

Electronic money is money or scrip that isonly exchanged electronically

it involves the use of computer networks, theinternet and digital stored value systems.

It is an online representation used toexchange value within another system, orwithin itself.

Examples are Electronic funds transfer (EFT),direct deposit, digital gold currency andvirtual currency

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1) 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

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2) Representative money

It is that money that consists of token coins, orother physical tokens such as certificates

It can be reliably exchanged for a fixed quantity of acommodity such as gold or silver.

Its value stands in direct and fixed relation to the

commodity that backs it.

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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.

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4 Currency It refers to physical objects generally accepted as a

medium of exchange.

These are usually the coins and banknotes of aparticular government, which comprise the physicalaspects of a nation's money supply.

nearly all contemporary money systems are based

on fiat money.

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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 bycheck 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, usingautomatic teller machines (ATMs), or through

online banking

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Commercial bank money is created throughfractional-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 financialinstitutions.

there is some element of risk that the claim will not be

fulfilled if the financial institution becomes insolvent

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1) Medium of exchange.

2) Unit of account.

3) Store of value.4) Standard of deferred payment

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Medium Of Exchange

When money is used to intermediate theexchange of goods & services.

It is required for the Separation of the act ofsale from the act of purchase.

Avoids the inefficiencies of the barter system. Avoids the 'double coincidence of wants'

problem.

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Unit Of Account

Standard numerical unit of measurement ofthe market value of goods, services, andother transactions.

Necessary prerequisite for the formulation of

commercial agreements that involve debt.

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To function as a 'unit of account', whatever isbeing used as money must be:

Divisible into smaller units without loss ofvalue; precious metals can be coined frombars, or melted down into bars again.

Fungible: that is, one unit or piece must beperceived as equivalent to any other, which iswhy diamonds, works of art or real estate arenot suitable as money.

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Standard Of Deferred Payment

It is an accepted way to settle a debt a unit

in which debts are denominated, and thestatus of money as legal tender, in those

jurisdictions which have this concept, statesthat it may function for the discharge ofdebts.

When debts are denominated in money, thereal value of debts may change due to

inflation and deflation.

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Store Of Value

To act as a store of value, a money must be

able to be reliably saved, stored, andretrieved and be predictably usable as amedium 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 tofunction as a store of value.

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- It is the amount of financial instrumentswithin a specific economy available forpurchasing goods or services.

Financial instruments usually includes

currency, demand deposits and various othertypes of deposits.

The amount of money in an economy is

measured by adding together these financialinstruments creating a monetary aggregate.

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- How easily an item can be traded for anotheritem, or into the common currency within aneconomy.

Money is the most liquid asset because it is

universally recognised and accepted as thecommon currency.

Money gives consumers the freedom to tradegoods and services easily without having tobarter.

Liquid financial instruments are easilytradable and have low transaction costs.

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General Acceptability Stability of value

Transportability

Storability Divisibility

Homogeneity

Distinguishable formation

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