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1 INTRODUCTION TO MONEY

The word money is derived from Latin word ‘’Monet’’. Money used in economic
transactions and also serve as medium of exchange. Money can be defined as “Money
can be anything that is generally acceptable as a means of exchange that at the same time
acts as a measure of value.’’ (Crowther)
OR
“Money is anything that is generally accepted in payment for goods and services or in the
repayment of debts”. (Mishkin)

In modern world, money is considered as a basic necessity. The benefit of the discovery
of money is to over comes the problems of barter system in which goods were exchanged
against other goods. As goods were of different quality and quality, a simple unit of
measurement was necessary for conducting the economic transactions. With the help of
money people can make payments. Producers buy raw material, plants and heavy
machinery with the help of money. Government realizes taxes, fees, and fines through
money. Economic growth cannot be possible without use of money.

Money is the backbone of capitalistic economy everyone according to his capacity

engaged in economic activities. Individual who owned money has complete right for
production decisions and consumption pattern. Consumers and producers receive money
income in the form of wages, interest etc. Money is a center of a circle and in capitalist
economy money performs the important function of solving the central problem through
price mechanism.

Features of Money:
1. Medium of Exchange: It is accepted as medium of exchange for the settlement of
economic transactions.
2. Legal Tender: It is used as legal tender for repayment of debts, wages, interest,
profit etc.
3. Pricing: It is used as standard in the development of pricing mechanism for
economic activities
4. Unit of Measurement: It is used as accounting measure for different
services/things.
5. Savings: It is used as a tool to save and store purchasing power for future period.

1.2 FORMS OF MONEY

In old times, people used to rely on their own produce goods for living purposes and were
self-sufficient and there was no need of money at that time. With development of
agricultural societies and better tools, excess production was easy to obtain. For this
excess production, different societies developed various exchange mechanism for
meeting individual needs and barter system was developed. Barter system of exchange of

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goods and service without using any medium of exchange like money in payment system.
Different forms of money used in different countries or regions are discussed below;

1. Commodity Money:
Commodity money is made up of valuable commodity like wheat, goats, etc.
people used these commodities for exchange purpose and fulfill their needs. As
time passed on, people faced many problems due to commodity money like storing
value, durability, divisibility etc.

2. Metallic Money or Coins:

The next step in the evolution of money in payment system is metallic money.
Metallic money is made up of precious metal like gold, silver and copper. Metallic
money was introduced to overcome the problem of commodity money in term of
quality and quantity. There were two kind of metals.
a. Un-coined Metals
Metals were not used as coins but as bullion. This creates the problem of measuring
the weight and value.
b. Coined Metal
After the failure of uncoiled metals, standard coins were created. They had a standard a
weight and value. Problems of un-coined metals are solved by the use of coined metals.

3. Paper Money:
Paper currency is made up of paper and used for payment system and also used as a
medium of exchange. It consists of notes issued by the state or central bank. Paper
money can be;
a. Convertible paper money: It is converted into coins on demand e.g. gold and
silver certificates.
b. Fiat paper money: It is not converted into coins on demand and it is accepted in
transaction at its face value due to its unlimited legal tender.

4. Credit Money or Bank Money:

The next step in the evolution of money in payment system is the credit money. It
means the use of different instrument (cheque) issued by the bank as a medium of
exchange. The advantage of bank money is that they are easy and safe to transport
for payment purpose.

5. Electronic Money:
The next stage in the development of payment system is Electronic money replaces
credit or bank money due to the expansion of technology. Electronic money is
consisting of ATM, debit card, credit card and online banking. People can make
payments and receive money through online banking system and save their time.

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1.3 FUNCTIONS OF MONEY
Money is anything that is widely used as a mean of payments and is generally expectable
in settlement of debts.
s. It is also used in economic transactions or medium of exchange
purpose.

Primary Functions:
1. Medium of Exchange
xchange
Money is used as a medium of exchange and the sale and purchase of different
products can be made through money. It is the most important function of money.
People sell their products for money and use that money to purchase different
products to fulfill their needs.

2. Measure of Value
Money as a measure
sure of value means that money works as a common denomination,
the value of all goods and services are expressed in terms of money. As we
measures weight in kilograms or pounds and distance in kilometers, similarly we
measure the value of money in terms of money.

3. Standard of Deferred Payments

P
Money also serves as a standard of payment
payment made after a lapse of time to settle
debts and make investments.

4. Store of Value:
Money is the most liquid assets from all the assets therefore it is easier to store
value in the form of money.

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Secondary Functions:
1. Instrument for Lending:
People save money and deposit it in to banks. The banks advance these savings as
loans to businessmen and earn profit by charging interest.

2. Instrument of Economic Policy:

Money is an instrument of an economic policy of the government. Money is the
powerful factor to achieve growth, reduce unemployment and maintain expansion
of economic activity.

3. Tool to Monetary Management:

Money helps in increasing output and employment. Money is also help in
determining the distribution of wealth among the members of society.

4. Aids to Production and Trade:

Barter difficulties can be solved with the help of money. It helps in the production
of goods and services and facilitates expansion of trade.

1.4 QUALITIES OF IDEAL MONEY

The essential attributes of ideal money are as follows;

1. General Acceptability:
The most essential quality of an ideal money material is that it would be acceptable
as a medium of exchange without any objection by others for goods and services.

2. Portability:
Good money has quality of portability means it can be easily and economically
transported from one place to the other. In other words it possesses high value in
small bulk.

3. Durability:
As money is passed from hand to hand and is kept in reserves it must not easily
deteriorate either in itself or as a result of wear and tear.

4. Homogeneity:
All potions of the substance used as money should be homogeneous that is of the
same quality so that equal weights have the same value. It is essential that its units
are similar in all respects.

5. Divisibility:
The money material should be capable of division and the aggregate value of the
mass after division should be almost the same as before.

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6. Malleability:
The money material should be capable of being melted and given convenient
shapes. It should be neither too hard and nor too soft. It should also possess the
attribute of impressionability.

7. Recognizability:
One of the very much important essential of a good money material is that it should
be easily recognizable by the eye, ear or the touch. It should have certain distinct
marks which nobody can mistake.

8. Stability of Value:
Money should not be subject to fluctuations in value. The value of a material which
is used to measure the value of all the other material must be stable.

Exercise
Q. 1 Give short answer to following questions:
1. Define money.
2. Write the functions of money.
3. What is barter system?
4. Write down the features of ideal money.

Q. 2 Collect the foreign currency notes of at-least five different countries and compare
their features.

References (Books)
1. Financial Markets and Institutions by Anthony Saunders

2. Financial Institution Management by Helen P. Lange

3. Financial Institutions and Markets by Meir G. Kohn

4. Financial Markets and Institutions by Frederic Mishkin and Stanley G Eakins

5. Fundamentals of financial institutions management by Marcia Millon Cornett

6. Money and Banking by [Link] Nasir