Introduction:- Every human being is dependent on each other to satisfy his needs, as a result of this self-reliance exchange of goods and services takes place. In ancient times, this exchange used to be in the form of goods, which was called barter system, but as the needs diversified, this system proved to be inefficient. Generally accepted as a means of exchange, gold and silver coins were introduced in the beginning, but gradually, along with paper currency, other metal coins were also issued for circulation and in the present time credit cards And debit cards are the era of plastic currency.

Money is anything that is generally acceptable as a medium of exchange, measure of value, store of value and as a standard of deferred payments.

According to walker :- “Money is as money does this mean that the term money should be use to include anything which performs the function of money“. Anything which is generally acceptable by the people in exchange of goods and service or in repayment of debt.

The most comprehensive definition of currency is given by Prof. Crowther.
According to him, “any commodity which is generally accepted as a means of exchange and at the same time serves as a measure and store of value, is called money”.

In simple language, ‘money‘ means that commodity which plays an important role in the purchase and sale of goods. Money has played an important role in the modern economy because goods can be easily exchanged through money. Money flow has clarified its contribution to the exchange system by eliminating the defects of barter system.

Finally, Money is anything which is generally used as a medium of exchange, measure of value, store of value and means of standard deferred payment.

It covers all types of money: coins, paper notes, cheques, digital money, plastic money etc….
It can be used to buy anything as it is legally accepted by everyone.
It removes the problem of double coincidence of wants as anyone can buy anything he needs.

TYPES OF MONEY

Some of the major leads under which money has been classified are as follows:(i) Full Bodied money;
(ii) Representative Full bodied money;
(iii) Credit money.(i) Full bodied Money :-Any unit of money, whose face value and intrinsic value are equal, is known as full bodied money, i.e. Money Value = Commodity Value. For example, during the British period, one rupee coin was made of silver and its value as money was same as its value as a commodity.(ii) Representative Full-bodied Money :-It refers to money which is usually made of paper. The value of representative full-bodied money is much higher than its value as a commodity. It is accepted as money as it can be conveniently used for carrying out transactions.Such a type of paper money is 100% backed by metallic reserve of gold or silver and is redeemable at the option of the holder. For example, in case of convertible paper receipts, a person can exchange the amount stipulated on the paper receipt for equal value of gold.Two Kinds of Representative Money :-A. Convertible Paper Money :-It refers to the currency notes which are freely convertible into full-bodied money (gold or silver) at any time at the option of the holder. However, 100% backing of gold or silver is not desired as all the notes in circulation are not simultaneously presented for conversion.B. Inconvertible Paper Money:It is that kind of paper money which cannot be convertible into full-bodied money at the option of the holder. However, it circulates and commands value as its issue is regulated by a responsible government. This money does not have any backing of standard coins or bullion. Indian one-rupee note is a good example of inconvertible paper money.

(iii) Credit Money:

Credit money refers to the money whose intrinsic value (as a commodity) is much lower than its face value, i.e. Money Value > Commodity Value. For example, face value of Rs 100 note is Rs 100, but we would get a much lower value if we sell the note as a piece of paper. Credit cards, bank deposits are other examples of credit money.

The various forms of credit money are:

(a) Token coins:

These refer to small coins of various denominations, which are issued to facilitate day-to-day requirements of the people. All Indian coins, like those of Rs 10, 5, 2 or 1, are token coins since their value as money is more than value of metal contained in them.

(b) Representative Token money:

It is 100% backed and is fully redeemable in some commodity such as gold or silver. It is generally in the form of paper and market value of what is actually offered is less than value printed on paper notes.

(c) Circulating promissory notes issued by central bank:

These are currency notes issued by Reserve Bank in India. These include all currency notes of denominations like Rs 1,000, Rs 500, Rs 100, etc. Each promissory note contains the words, “I promise to pay the bearer the sum of Rs…………. “, and is signed by the Governor of India. The commodity value of a promissory note is much less than its money value.

(d) Demand Deposits in bank:

Deposits are claims of creditors (depositors) against bank. These deposits can be withdrawn from the bank or transferred from one person to another by issuing a cheque. Such deposits do not have backing in terms of any bullion (gold or silver). The commodity value of a cheque is much lower than its money value. Demand deposits are very convenient for making transactions of huge amounts as they remove the risk of carrying large amounts of cash.

MONETARY SYSTEM IN INDIA

- In India, monetary authority is ‘Reserve Bank of India’.
- Paper currency standard is followed in India.
- Coins are regarded as limited legal tender money.
- RBI has sole monopoly to issue currency in India.
- Ministry of Finance issues 1 rupee coins and notes in India.
- India follows Minimum Reserve System for issuing notes. It means that RBI has to keep a minimum of Rs. 200 crores as gold and foreign exchange with the World Bank for issuing coins and notes.

HIGH POWERED MONEY

High powered money is the money produced by RBI and the government.
It includes currency held by the public and the cash reserves held by the banks.
It is denoted by symbol .
It is different from money because money consists of demand deposits while it includes cash reserves which act as a base for generating demand deposits.

Why Money is Important or The inconvenience of barter exchange

The following were the inconvenience of barter exchange:-

Lack of double co-incidence of wants :- Simultaneous fulfillment of mutual funds wants of buyers and sellers is known as double co-incidence of wants.

Example :- The producer of jute may want shoes in exchange for his jute. But he may find it difficult to get a shoemaker who is also willing to exchange his shoes for jute. Thus a seller has to find out a person who wants to buy seller’s goods and at the same time who must have what the seller wants. This is called double coincidence of wants which is the main drawback of barter exchange

Absence of common measure of value :- In the barter system, all commodities are not of equal value and there is no common measure (unit) of value of goods and services, in which exchange ratios can be expressed. For example, if A has wheat and B has rice, then it is difficult to decide, how much wheat is needed to exchange with one kilogram of rice. In the absence of common measure, the exchange ratio is fixed randomly, in which one of the party generally suffers.

Lack of standard for deferred payment :- there is problem of borrowing and lending. It is difficult to engage in contract which involve future payments due to lack of any satisfactory unit.

Difficulty in storing wealth:- It is difficult for the people to store wealth or journaling purchasing power for future use in the form of goods like wheat, potato etc.

FUNCTIONS OF MONEY

State and Explain the function of money.

Function of money are reflected in the following well-known couplets (Slogan) :- “Money is the matter of function a medium, a measure, a standard and store”

The functions of money are broadly classified as :-

Primary Functions:- They are also called the main or essential functions of money, under these all those functions of money are included which are found in all the countries of the world. This work is as follows:-

Money – a medium of exchange :- people exchange goods and services through the medium of money. Money act as a medium of exchange or as a medium of a payment. Money by itself has no utility. It is only an intermediary.

Money – as a unit of account or measure of value :- Money is the measuring rod different goods produce in the country are measured in different units like cloth in metre, milk in litre and sugar in kg etc. without a common unit exchange of goods become very difficult. Value of all goods and services can be expressed very easily in a single unit called money.

Secondary Function:-

Money- as standard of deferred payment(Delay) :- Debts are usually expressed in terms of money of accounts loan are taken and repaid in terms of money. The use of money as- the standard of deferred or delay payment immense simplifies borrowing and lending operations because money maintains a constant value to time.

Money- as a store of value :- Wealth cab be stored in terms of money for future. It serves as a store of value of goods in liquids form by spending it we can get any commodity in future. Holding money is equivalent to keeping a reserve of liquid assets.

Transfer of value:- An important auxiliary function of money is that money also performs the function of transfer of value. With the help of money it is very easy to transfer value from person to person and from one place to another because money is easily accepted at every time and everywhere, with the help of money these transfers can be done efficiently in less time. Whereas it is very difficult to transfer goods but through money transfer of all goods can be done successfully.

Note :-

Inductive Functions :- Those functions of money which only run the economy. They do not motivate the economy to achieve high rates of growth and development.
Eg:- Primary and secondary functions of money.

Dynamic Functions:- Those functions of money which provide stability to the economy and take the economy to a higher level of growth and development. Eg:- Expanding the money supply so that recession is removed.

Money Supply

At a given time, the stock of money kept with the people of the society who live within the domestic border of a country is called money supply, the government, central bank and commercial banks do the supply of money. In India, the Ministry of Finance of the Government issues one rupee notes and all types of coins. Apart from this, the Reserve Bank issues all other currencies, but for that, the Reserve Bank has to keep a minimum of Rs 200 crores in gold and coins and foreign assets in which it is necessary to have only gold of 115 crores.

Money Supply :- It refers to the total stock of money held by public at a particular point of time in an economy.

It is a stock concept because it is measured at a particular point of time.

Components of Money Supply:-

a) Currency (paper notes and coins) held by the public(outside the banks)

b) (Net) Demand deposits of the public with the commercial banks.

Basic Measure of Money Supply (Most liquid form)

M₁= C (Currency held by the public) + DD (net demand deposits with commercial banks)

Currency and coins with public : It consists of paper notes and coins held by the public that can be legally used to make payments of debts or other obligations.
Demand deposits of commercial banks : Demand deposits are the deposits of commercial banks from which money can be withdrawn on demand by the depositor using cheque.

Only in case of India:- C + DD + OD (Other deposits with RBI only in case of India)

Other Deposits with RBI:- It include deposits held by the RBI on behalf of foreign banks and governments, World Bank, IMF, etc. However, it does not include deposits of the Indian government and commercial banks with RBI.

Note :-

Other than demand deposits there are time deposits which have a fixed term or maturity period after which they can be withdrawn. E.g: Fixed deposit.
The currency issued by the central bank can be held by the public or by the commercial banks and is called the ‘high powered money’ or ‘reserve money’ or ‘monetary base’.
Demand deposits are created by the commercial banks and are called Bank money.
The money supply is based on the stock concept which means it calculates the volume of money held by the public at a given point in time.

Now Briefly Main Sources of Money Supply : – (i) Government (ii) RBI (iii) Commercial bank

Early Measurement of Money Supply: – In 1961, according to the recommendations of “FIRST WORKING GROUP”, till 1961-68 there was only one measure of money supply for which the term M1 indicator was used.

M₁ = C + DD + OD

M1 was based on the following elements:-
M1= Currency with the public (C) Demand deposit (DD) Other deposits with Reserve Bank (OD)
C = Currency held by the public including paper notes and coins.
Note:- Coins are called limited acceptable currency and paper notes are called unlimited acceptable currency.
DD = Demand deposit with the public which is deposited in the commercial banks which can be withdrawn by check on demand
OD = It includes the following:-
A. Deposits of public financial institutions with the Reserve Bank such as:- IDBI
B Central foreign bank deposits with the Reserve Bank and Government deposits
C Deposits of international financial institutions such as:- World Bank deposits

2 Measures of money supply from 1967-68: – From 1967-68, the Reserve Bank created a new concept of aggregate money resources (AMR) with M1 , under which the measurement of money supply started being presented on a large scale, in M1. Deposits in post office savings accounts were included.

M₂ = M₁ + Saving Deposit with post- Office Saving banks

It is a broader measure of money supply than M1.
Note:- M1 and M2 are called contract money supply.

3 Measures of current currency in force since 1977:-

“The Second Working Group (SWG)” April 1977: Changes were made in the prevailing measures of money, now instead of two measurements, the money supply is measured on the basis of four measures (M1, M2, M3 M4 which are as follows: –

M₃= M₁ + Net time deposit of banks

This concept is broader than M1 as it covers total monetary resources.
Note:- It is also called total monetary instrument.

M₄= M₃ + Total deposit with post office saving organizations (excluding NSC)

M4 is the broadest concept. It covers all post office deposits other than M3 except National Savings Certificates.
Note: – The producers of money supply are considered to be the Government of India, Central Bank and Commercial Banks. M3 and M4 are called expansionary money supply.

“ Third Working Group on Money Supply: Analytics and Methodology of Compilation” (WGMS) (Chairman: Dr. Y.V. Reddy) (1998)