Evolution of Money

  • At the beginning, there was no money.
  • People engaged in barter, the exchange of merchandise for merchandise, without value equivalence.
Evolution

Barter System

Positives

  • Simplest in form
  • No foreign Exchange regime
  • No concentration of wealth

Negatives

  • Double coincidence of wants was must
  • No division of labor
  • Exchange of perishable goods
  • No saving capital
  • No circular flow of income
  • No Divisibility or Fungibility of same value

Function of Money

Primary Function

  • Measure of Value
  • Medium of Exchange as it is –
    1. Readily acceptable
    2. Durable, Portable, Recognizable
    3. Divisible, Fungible
    4. Hard to Counterfeit

Derivative Function

  • Store of Value – Savings Investment
  • Transfer of Value – Same value from Kashmir to Kanyakumari
  • Deferred Payment – Time value of Money – 1 month free with 3 month subscription
  • In barter system, it was difficult to determine how much each of the labour should earn from the total production
  • But money’s primary function viz. measure of value makes it possible to determine the share of individual worker in the total production and pay him accordingly
  • Helps in Distribution of National income
  • Anyone who provides any of the four factors of production viz. land, labour, capital, entrepreneurship; will earn money as rent, wage, interest or profit
  • Less chances of exploitation (compared to the Barter system, feudal system, Zamindari system)
  • Thus, money helps in distribution of income among various factors of production
Evolution of Money

Commodity Money

  • USA   Tobacco, Corn, Iron nails were used to make exchanges
  • Aztec – Cocoa beans were used to make exchanges
  • India  – Cowries were used to make exchanges
  • Fiji    Whale teeth were used to make exchanges
Evolution of Money

Problems of commodity money

  • Face Value was not same throughout region
  • Don’t promote international trade
  • Generally commodity used were perishable in nature
  • could cause inflation
  • Generally bulky to carry
  • No fungibility or divisibility
  • No division of labour
Evolution of Money

Metallic Money

  • Started by Kings & Traders with uniformity & precision
  • Intrinsic value
  • Non-perishable
  • Divisible, Fungible
  • Foreign trade possible (without exchange rate)
  • Production was low Prices stable No Hyperinflation
Evolution

Full Bodied Coin

  • Value of metal > Face value

Token Coin

  • Value of Metal < Face value
Evolution
Evolution

Paper Money

Non Legal Tender

  • Bill of exchange, Cheque, bank draft
  • Its also called Optional money – acceptance is optional
Evolution

Legal Tender (Fiat Money)

  • Limited – Coins
  • Unlimited – Currency

Evolution

Non Fiat Money

  • Superstores plastic coins, cards & coupons
  • Shares, Bonds, Debentures, G-Sec, T-bill
  • DD, Cheques, Credit Card, ATM card
  • Bitcoin & other Digital currency
Evolution

India – Paper Standard

RBI

Government

  • Rs. 1 note + All coins
  • Coinage Act 2011 Rs. 1 note to hold Financial Secretary bilingual signature
Demonetization in India
Demonetization in India

Currency standard in India

1935-56

  • 40%gold to the value of currency issued
  • IMF fixed exchange rate

1956

  • Keep 115 cr. Worth Gold + Rs. 400 cr. Worth Foreign security

1995

  • Rs. 115 cr. Worth gold
  • Print as much as you want (backed by financial assets, T.bill, G-Sec)
Demonetization in India

Demonetization in India

  • 1946 – Demonetize 500
  • 1978 – Demonetize 1k, 5k, 10k
  • 2016 – Demonetize 500,1k
Demonetization in India
See Also
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