Money and Banking

Wednesday, February 20, 2013

The Barter System 
Barter system refers to the direct exchange of goods for goods without the use of money. People preferred Money Economy over Barter Economy due to the inconveniences in the Barter system. 
  1. Need for double coincidence of wants 
  2. Lack of common measure of value 
  3. Indivisibility of certain goods 
  4. Lack of store of value 
  5. Difficulty in transferring wealth 
  6. Difficulty in making deferred payments 
Evolution of Money 
Money is anything which is generally acceptable in exchange for goods and services and in the settlement of debts. 

Present day Money Economy came into existence in three different stages. 

1. Commodity Money 
In the primitive societies, some commodities such as animal skin, beads, shells, arrows, tobacco, wheat etc were used as commodity money. But, soon it they were abandoned as they did not possess some essential qualities of money such as acceptability, divisibility, portability etc. 

2. Metallic Money 
After sometimes, people started using some metals such as bronze, nickel, copper, silver, gold etc in their transactions. Difficulties faced in weighing and scarcity of these metals led to the development of Coinage. Later, the ruling authorities replaced unstandardized coins with standardized coins. Still there were problems of trimming and debasing. 

3. Paper Money 
Early goldsmiths used to accept the deposit of gold and silver. They issued receipts for the precious metals deposited with them. These receipts were paper claims to gold. It can be exchanged for gold at any time. People realized that these receipts were far easy for the payments of debt and other transactions than carrying gold. As these receipts were accepted by people in the process of exchange, these receipts became the first paper money in the history of money. At present, each country issues its own paper notes, but they are not convertible into gold. 

Features of Money 

1. Acceptability (money must be generally acceptable) 
2. Durability (it must be last longing but not perishable) 
3. Divisibility (it must be divisible without loosing its value) 
4. Uniformity (it must be similar in quality and its intrinsic value) 
5. Portability (it must be easy to carry) 
6. Scarcity (it must be limited in supply) 
7. Stability (it must be stable in value) 

Functions of Money 

1. Medium of Exchange 
Money is acceptable by everyone. It has removed the difficulties of barter economy. 

2. Measure of Value 
The value of goods and services are now measured in terms of money. 

3. Store of Value 
Money helps to store wealth for a longer period. But it is not a good store of value during inflation. 

4. Standard for Deferred Payments 
Goods and services can now be obtained and payment of debt can be settled sometimes later. 

Types of Money 
Money is generally classified into three forms; 

1. Metallic Money 
Metallic money consists of coins made up of gold, silver, copper etc. It varies in weight and value. 

a) Full bodied money (face value of the coin equals its intrinsic value, that is the value of metal contained in it) 
b) Token Money (the face value of the coin is greater than its intrinsic value. Modern coins are examples) 

2. Paper Money 
Receipts (paper claims) issued by the goldsmiths were the first form of paper money. The modern paper money is called as Legal Tender. It means that the paper money is recognized by law, issued by the central bank and authorized by the state. Modern paper money is not backed up by gold and is referred as Fiat or Fiduciary money. 

3. Bank Money 
Bank money consists of cheques, drafts, traveler’s cheques, bills of exchange etc. 

Bank 
Bank is a financial intermediary. It is a deposit-taking institution who acts as a repository for money deposited by other economic agents. Each country has a state owned Central Bank to regulate the banking system.
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