Economics assignment: MONEY
INDEX
1. INTRODUCTION
2. HISTORY OF MONEY / MONEY SUPPLY
3. FUNCTION OF MONEY / MONEY SUPPLY
4. MEASURES OF MONEY / MONEY SUPPLY
5. 5 TYPES OF MONEY
INTRODUCTION
Money is commonly referred to as currency. Money is an
economic unit that functions as a generally recognized
medium of exchange for transactional purposes in an
economy. Money provides the service of reducing transaction
cost, namely the double coincidence of wants. Money
originates in the form of a commodity, having a physical
property to be adopted by market participants as a medium of
exchange. The use of money as currency provides a
centralized medium for buying and selling in a market. This
was first established to replace bartering. Monetary currency
helps to provide a system for overcoming the double
coincidence of wants. The double coincidence of wants is a
ubiquitous problem in a barter economy, where in order to
trade, each party must have something that the other party
wants. When all parties use and willingly accept an agreed-
upon monetary currency, they can avoid this problem. In order
to be most useful as money, a currency should be:
1. Fungible: Units of the good should be of relatively
uniform quality so that they are interchangeable with one
another. If different units of the good have different
qualities, then their value for use in future transactions
may not be reliable or consistent.
2. Durable: The physical character of the good should be
durable enough to retain its usefulness in future
exchanges and be reused multiple times.
3. Portable: It should be divisible into small quantities so
that people appreciate its original use value - highly
enough that a worthwhile quantity of the good can be
conveniently carried or transported. An indivisible good,
immovable good, or good of low original use-value can
create issues. Trying to use a non-portable good as
money could produce transaction costs of either
physically transporting large quantities of the low value
good or defining practical, transferable ownership of an
indivisible or immobile object.
4. Recognizable: The authenticity and quantity of the good
should be readily ascertainable to the users so that they
can easily agree to the terms of an exchange. Trying to
use a non-recognizable good as money produces
transaction costs of agreement on the authenticity and
quantity of the goods by all parties to an exchange.
5. Stable: The value that people place on a good in terms of
the other goods that they are willing to trade should be
relatively constant or increasing over time. A good
whose value varies widely up and down over time, or
consistently loses value over time is less suitable. Trying
to use a non-stable good as money produces transaction
costs of repeatedly revaluing the good in each successive
transaction and the risk that the exchange value of the
good might drop below its other direct use-value or not
be useful at all, in which case it will no longer circulate
as money.
HISTORY OF MONEY SUPPLY
The history of the Indian rupee traces back to ancient India in
circa sixth century BCE. Ancient India was one of the earliest
issuers of coins in the world, along with the Chinese wen and
Lydian staters. The first Indian coins were minted by the
Mahajanpadas (the Republic Kingdoms of ancient India)
known as Puranas, Karshapanas or Panas. These
Mahajanapadas included Gandhara, Kuntala, Kuru, Panchala,
Shakya, Surasena, and Saurashtra. These coins were made of
silver and a standard weight but with irregular shapes and
different markings like Saurashtra had a humped bull,
Dakshin Panchala had a Swastika and Magadha had several
symbols. Then first Maurya emperor Chandragupta Maurya
came up with the Punch Marked Coins minting of silver, gold,
copper, or lead. Indo-Greek Kushan kings introduced the
Greek custom of engraving portraits on the coins. Chanakya,
prime minister to the first Mauryan emperor mentioned the
minting of coins such as Rupyarupa (silver), Suvarnarupa
(gold), Tamararupa (copper) and Sisarupa (lead) in his
Arthashastra treatise.
The Turkish Sultans of Delhi had replaced the royal designs
of Indian kings with Islamic calligraphy by the twelfth
century AD. The currency was made up of gold, silver and
copper known as Tanka and the lower valued coins known as
Jittals. The Delhi Sultanate also attempted to standardise the
monetary system by issuing coins of different values. The
Mughal Empire from 1526 AD consolidated the monetary
system for the entire empire. In this era, the evolution of the
rupee occurred when Sher Shah Suri defeated Humayun and
issued a silver coin of 178 gms known as Rupiya and these
coins were remained in use during the Mughal period,
Maratha era and British India. When the British East India
Company set itself up in India in the 1600s, Sher Shah’s silver
Rupiya had remained popular. Despite many attempts to
introduce the sterling pound in India, the Rupaiya grew in
popularity and was even exported as a currency to other
British colonies.
THE BRITISH EMPIRE
In the 18th Century, the Bank of Hindostan General Bank in
Bengal and the Bengal Bank became the first banks in India to
issue paper currency. During this time paper money was first
issued in British India. After the 1857 revolt, the British made
the rupee the official currency of colonial India, with the head
of King George VI replacing native designs on banknotes and
coins. In the 19th century, the British introduced paper money
into the subcontinent. The Paper Currency Act of 1861 gave
the Government the monopoly of notes issued throughout the
vast expanse of British India, which was a considerable task.
Eventually, the management of paper currency was entrusted
to the Mint Masters, the Accountant Generals and the
Controller of Currency. A series carrying the portrait of
George V was introduced in 1923 and was continued as an
integral feature of all paper money issues of British India.
These notes were issued in denominations of Rs 1, 2½, 5, 10,
50, 100, 1,000, 10,000. The Reserve Bank of India was
formally inaugurated on Monday, April 1, 1935, with its
Central Office in Calcutta. Section 22 of the RBI Act, 1934,
empowered it to continue issuing Government of India notes
until its own notes were ready for issue. The bank issued the
first five rupee note bearing the portrait of George VI in 1938.
This was followed by Rs. 10 in February, Rs 100 in March
and Rs 1,000 and Rs 10,000 in June 1938. The first Reserve
Bank issues were signed by the second Governor, Sir James
Taylor.
The first paper currency issued by the Reserve Bank of India
was a five rupee note bearing King George VI’s portrait, in
January 1938. After gaining Independence in 1947, India’s
modern Rupee reverted back to the design of the signature
Rupee coin. The symbol chosen for the paper currency was
the Lion Capital at Sarnath which replaced the George VI
series of banknotes. So, the first banknote printed by
Independent India was a 1 rupee note.
The "Anna Series" was introduced on 15 August 1950. This
was the first coinage of the Republic of India.
The King's image was replaced by Ashoka's Lion Capital. A
corn sheaf replaced the tiger on the one rupee coin. The
monetary system was retained with one rupee consisting of 16
Annas. The 1955 Indian Coinage (Amendment) Act, which
came into force with effect from 1 April 1957, introduced a
"Decimal series". The rupee was now divided into 100 'Paisa'
instead of 16 Annas or 64 Pice. In order to aid the blind in the
country, each coin had distinctly different shapes – the round
1 naya paisa, scalloped edge 2 naya paisa, the square 5 naya
paisa, and the scalloped edge 10 naya paisa. In 1959 a special
issue of rupees ten and Rupees One Hundred were issued for
the Indian Haj Pilgrims so that they could exchange it with
local currency in Saudi Arabia.
In 1969 Reserve Bank of India issued the Mahatma
Gandhi Birth Centenary Commemorative design
series on Rs 5 and Rs 10 notes.
In 1987 Rs 500 note was introduced due to the
growing economy and fall in purchasing power.
[In 1996 the Mahatma Gandhi series of notes was issued, starting with Rs
10 and Rs 500 notes. This series has replaced all notes of the Lion capital
series. A changed watermark, windowed security thread, latent image and
intaglio features for the visually handicapped were the new features.]
On July 15, 2010, India introduced a new currency
symbol, the Indian rupee sign, ₹.
November 8, 2016
The Republic of India witnessed the second major monetary reform in November
2016 when it withdrew the legal tender status of Rs 500 and Rs 1,000 denominations
of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till
November 8, 2016.
FUNCTIONS OF MONEY
Unit of Account :Due to its use as a medium of exchange for
both buying and selling and its use to assign prices to all kinds
of other goods and services, money can be used to keep track
of the money gained or lost across multiple transactions, and
to compare money values of various combinations of different
quantities of different goods and services mathematically.
This makes things such as accounting for profit and loss of a
business, balancing a budget, or valuing the total assets of a
company all possible.
Store of Value: Because money's usefulness as a medium of
exchange in transactions is inherently future-oriented, it
provides a means to store value obtained through current
production or trade for use in the future in the form of other
goods and services. In particular trading their non-fungible,
non-durable, non-portable, non-recognizable, or non-stable
goods or services for money here and now, people can store
the value of those goods to trade for goods at other times and
places. This facilitates saving for the future and engaging in
transactions over long distances possible.
Standard of Deferred Payment: To the extent that money is
accepted as a general medium of exchange and serves as a
useful store of value, it can be used to transfer value for
exchange use at different times between people through the
tools of credit and debt. One person can loan a quantity of
money to another for a period of time to use, and repay
another agreed-upon quantity of money at a future date. The
stored value represented by the loaned money is transferred
from the lender to the borrower in exchange for an agreed
quantity of stored value in the future. The borrower can then
use and enjoy the value of other goods and services that they
can now purchase in exchange for payment at a later date. The
lender in effect is able to loan the current use of real goods
and services (which he does not himself originally possess) to
the borrower. The sellers of the goods are able to receive
payment for their goods now, instead of loaning the goods
directly to the borrower in hope of future return or repayment.
MEASURE OF MONEY SUPPLY
M1: [CU + DD] M1 is the narrowest measure of the
money supply, including only money that can be spent
directly. More specifically, M1 includes currency and all
checkable deposits.
M2: [M1 + Savings deposits with Post Office savings
banks] M2 is a broader measure of the money supply
than M1, including all M1 monies and those that could
be quickly converted to liquid forms.
M3: [M1 + Net time deposits of commercial banks] M3
is a collection of the money supply that includes M2
money as well as large time deposits, institutional money
market funds, short-term repurchase agreements, and
larger liquid funds
M4: [M3 + Total deposits with Post Office savings
organisations (excluding National Savings Certificates)]
Broad money e.g. M4 money supply is defined as a
measure of notes and coins in circulation (M0) + bank
accounts. It is a broader definition because it includes
bank accounts and not just notes and coins in circulation
5 TYPES MONEY
I. Fiat Money
Examples: Banknotes (paper money) and coins; Fiat money
(fiat currency) is money whose value is not based on its
inherent value but is based on an authoritative decision (fiat)
by the governing body. The government declares it as legal
tender and it must then be accepted as a form of payment
everywhere. Due to not having an intrinsic value, a partially
destroyed bill can be replaced by the Federal Reserve Bank.
On the other hand, commodity money can not be.
II. Commodity Money
Examples: Precious metals (i.e. gold), salt, beads, alcohol;
Unlike fiat currency, the value of commodity money is
intrinsic; its value comes from the commodity it is made from.
If the money is destroyed, it cannot be replaced. It is also
probably the earliest form of money. These commodities are
used as a medium of exchange and gain their value from the
scarcity of the items. The use of this type of money is like
using the barter system where goods and services are
exchanged for the like. Unlike the barter system, using
commodity money functions as a unit of account that allows
you to compare the worth of goods and services.
III. Representative Money
Examples: Certificates, paper money, token coins;
Representative money, like fiat money, has no value of its
own. Unlike fiat money, it is backed by a commodity. As a
commodity-back money, it could be exchanged for precious
metals (like gold) held within a bank vault. It was easier to
carry a certificate around rather than a chest full of gold.
IV. Fiduciary Money
Examples: Checks, bank drafts; Deriving from the Latin
word fiducia, to trust, fiduciary money works on the
promise and trust that it will be exchanged for fiat or
commodity money by the issuer (bank). People are not
required to take it as a form of payment because it is not a
government-ordered legal tender
V. Commercial Bank Money
Example: Funds in a checking account; Commercial money
(also known as demand deposits) is a claim against a bank
for the purchase of goods and services (through the means
of withdrawing in person, check, ATMs, or online
banking). It is a debt-created currency by the bank. They
create more money through a process called fractional-
reserve banking. In this, only a certain percentage of money
the bank “has” is held within it. The other percent is given
to others in the form of loans, in doing so, the bank makes
back more money from the interest and fees charged to
customers.
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