Chapter 4

MONEY

Definition of money:
Money is defined as an instrument that serves as a medium of exchange, store of value,
a measure of value and a standard for deferred payments.

Basic Functions of money:

The basic functions of money are:
(1) Money acts as a medium of exchange.
(2) Money serves as a store of value.
(3) Money is a measure of value.
(4) Money serves as a standard for deferred payments.

Barter System of Exchange:

Barter System of exchange is a system in which goods are exchanged for goods.
Money as a medium of exchange does not exist.

C-C economy: (C stands for commodity)

C-C economy is an economy which is dominated by barter system of exchange.
C-C exchange refers to the barter system of exchange.

Drawbacks of the Barter System and their Elimination:

Following are the principal drawbacks of Barter System of Exchange and with the
evolution of money as a medium of exchange, these drawbacks have been eliminated:
(1) Double Coincidence of Wants:
. Double Coincidence of wants implies that the two individuals are in possession of such goods which
they are willing to exchange for the satisfaction of their wants at a point of time.

Accordingly, under the barter system, exchange remained extremely limited.

Elimination:
. With the evolution of money as a medium of exchange, the problem of double coincidence of wants
has vanished.

. Money as a medium of exchange has separated the acts of sale and purchase.
(2) Lack of a common unit of value:
. Under barter system, no common unit of value was available in which the value of all goods and
services can be measured.

Elimination:
. Evolution of the money has given us a common unit of value and therefore, a system of accounting .

(3) Difficulty of Future payments or contractual payments:

. Under barter system of exchange, it was very difficult to decide the future payments. Future payments
would have to be stated in specific goods and services which may involve dissatisfaction among the
parties.

Elimination:
. Evolution of the money has facilitated the future payments or contractual payment.

(4) Difficulty of Storage of value:

. in the barter system, savings is possible only by way of storage of goods.

. It involves storage costs as well as the fear of capital loss.

Elimination:
. Evolution of the money has made storage and tranfer of value much easier.

Forms of Money:
(1) Fiat money and Fiduciary money, and
(2) Full bodied money and Credit money.

(1) Fiat money and Fiduciary Money:

Fiat money refers to that money which is issued by order/authority of the government.

Fiduciary money refers to that money which is accepted as a medium of exchange because of the
trust between the payer and the payee.

(2) Full bodied money and Credit Money:

**Full bodied money refers to money in terms of coins whose commodity value is equal to the
money value, as and when these are issued.
Money value = Commodity value

**Credit money refers to that money in which money value is more than commodity value.
Money value > Commodity value
 Supply of money:
Money supply refers to the total stock of money which is held by the people of a country or which is
available in the economy at a point of time.

Money supply does not include that stock of money which is held by those who supplies money For example:
Stock of money held by the government or by the banking system of a country….

It only includes that stock of money which is held by those who demand money.

Measurement of Money supply:

There are four alternative measures Money supply-
But according to the syllabus, only is discussed.