UNIT 1 Money is anything which can serve as a medium of exchange.

Historically, all sorts of things like animals, agricultural produce, metals have been used as a medium of exchange. Today, it is prominently paper money, i.e. the currency notes. Although today paper money is prominent, yet instances of agricultural produce, metals, etc. can be found here and there, particularly in villages. In many Indian villages food for work is still a practice. This shows that many mediums of exchange existed side by side but only one medium or the other found a prominent place. Since many mediums of exchange existed simultaneously we can talk of evolution of money in terms of the prominence of the mediums. Up to first half of the 18th century, the mediums of exchange were goods with increasing use of metals, particularly gold and silver. The paper money was introduced in the organised manner for the first time around 1750s. So from around 1750s till 1930s gold and silver were prominently used but at the same time there was increasing use of paper money. Why did gold and silver found prominence during this phase? There were many reasons. First, gold and silver were widely accepted in monetary transactions, like buying and selling, borrowing and lending, for storing wealth, etc. Second they were in limited supply. Third, they are durable nearly non-perishable. Fourth, gold and silver can easily be divided into monetary units. From 1930s onwards most countries are now using paper currency as a prominent, and nearly exclusive, medium of exchange. Why so? It is mainly because of phenomenal rise in the volume of transactions needing more and more of money. But why gold and silver were found wanting? The main reason was their limited supply. The worlds production of gold and silver was not enough to match the requirements of increasing volume of internal and external trade. Even if supply was sufficient, inconvenience in handling large transactions, lack of safety during transportation of metals, etc. came in the way of using gold and silver as a prominent medium. Note that today paper currency is in prominence as a medium of exchange, people still prefer to hold gold and silver. They hold not because it can be used as a medium of exchange, but because it is durable and easily convertible into paper currency for use as a medium of exchange. Role & Importance of money in modern economy There is no doubt that money facilities and motivates all economic activity relating to consumption, production, and exchanges & distribution.

es the harnessing various factors of production, so that the entrepreneurs is able to maximize profit. international.

ey accelerated the process of industrialization. growth of national wealth & social welfare. Money is an important feature of virtually every economy. Without money, members of a society must rely on the barter system in order to trade goods and services. Unfortunately, the barter system has an important downside in that it requires a double coincidence of wants- in other words, the two parties engaged in a trade must both want what the other is offering. This feature makes the barter system highly inefficient. For example, a plumber looking to feed his family would have to search out a farmer who needs plumbing work done on his house or farm. If such a farmer were not available, the plumber would have to figure out how to trade his services for something that the farmer wanted so that the farmer would be willing to sell food to the plumber. Luckily, money largely solves this problem. Money is an essential and basic necessity in a modern economy. In the beginning of human existence, human needs were so simple that they could be satisfied by barter system , i.e., exchange of goods for goods. In baster system, an individual produces some goods in greater quantity than what he could consume and then exchanges the extra units with another individual for something he needed in return. Barter system suffered from lack of double coincidence of wants, lack of common measure of value, difficulty in stored of extra goods and indivisibility of goods. The main advantage of using money is that it decomposes a single barter transaction into two separate transaction of Sale and Purchase. People can hold their wealth in the form of money as a generalised purchasing power which can be utilised to buy goods and services as and when they desire. Money s a pivot around which the whole economy revolves. It alone has the power to buy things directly in the market. It does not require to be spent. All economic system-Capitalist, Socialist and Maixed-need money. Money may not produce anything, but without it, nothing can be produced.With the help of money, consumers make payment for goods and services.With the help of money, producers can but raw material, plant and machinery. They can settle their debts and pay corporate taxes.Money has contributed to economic growth all over the world because it has removed trade barriers.With the help of money, government realises all taxes, fees, fines, penalties and other sources of public revenue.Thus, money can serve mankind if it is controlled and regulated. But if it goes out of control, it can lead to disastrous consequences. It is rightly said that "money is a good servant and a bad master". DEFINITION OF MONEY It is very difficult to give a precise definition of money which will cover all its aspects. Many definitions have been suggested by various economista. Most of the definitions are based on different functions performed by money. Thus, it is impossible to give a comprehensive, accurate and universal definition of money. Some of the definitions of money are:

Stanley Withers: "MOney is what money does". Seligman: "Money is one thing that possesses general accept ability". Thus money may be defined as: "Moneyis something which is freely used and generally accepted as a medium of exchange and/or as a unit of account." Various functions of money can be classified into three broad groups: (a) Primary functions, which include the medium of exchange and the measure of value; (b) Secondary junctions which include standard of deferred payments, store of value and transfer of value; and (c) Contingent functions which include distribution of national income, maximization of satisfaction, basis of credit system, etc. These functions have been explained below: 1. Medium of Exchange: The most important function of money is to serve as a medium of exchange or as a means of payment. To be a successful medium of exchange, money must be commonly accepted by people in exchange for goods and services. While functioning as a medium of exchange, money benefits the society in a number of ways: (a) It overcomes the inconvenience of baiter system (i.e., the need for double coincidence of wants) by splitting the act of barter into two acts of exchange, i.e., sales and purchases through money. (b) It promotes transactional efficiency in exchange by facilitating the multiple exchange of goods and services with minimum effort and time, (c) It promotes allocation efficiency by facilitating specialization in production and trade, (d) It allows freedom of choice in the sense that a person can use his money to buy the things he wants most, from the people who offer the best bargain and at a time he considers the most advantageous. 2. Measure of Value: Money serves as a common measure of value in terms of which the value of all goods and services is measured and expressed. By acting as a common denominator or numeraire, money has provided a language of economic communication. It has made transactions easy and simplified the problem of measuring and comparing the prices of goods and services in the market. Prices are but values expressed in terms of money.

Money also acts as a unit of account. As a unit of account, it helps in developing an efficient accounting system because the values of a variety of goods and services which are physically measured in different units (e.g, quintals, metres, litres, etc.) can be added up. This makes possible the comparisons of various kinds, both over time and across regions. It provides a basis for keeping accounts, estimating national income, cost of a project, sale proceeds, profit and loss of a firm, etc. To be satisfactory measure of value, the monetary units must be invariable. In other words, it must maintain a stable value. A fluctuating monetary unit creates a number of socio-economic problems. Normally, the value of money, i.e., its purchasing power, does not remain constant; it rises during periods of falling prices and falls during periods of rising prices. 3. Standard of Deferred Payments: When money is generally accepted as a medium of exchange and a unit of value, it naturally becomes the unit in terms of which deferred or future payments are stated. Thus, money not only helps current transactions though functions as a medium of exchange, but facilitates credit transaction (i.e., exchanging present goods on credit) through its function as a standard of deferred payments. But, to become a satisfactory standard of deferred payments, money must maintain a constant value through time ; if its value increases through time (i.e., during the period of falling price level), it will benefit the creditors at the cost of debtors; if its value falls (i.e., during the period of rising price level), it will benefit the debtors at the cost of creditors. 4. Store of Value: Money, being a unit of value and a generally acceptable means of payment, provides a liquid store of value because it is so easy to spend and so easy to store. By acting as a store of value, money provides security to the individuals to meet unpredictable emergencies and to pay debts that are fixed in terms of money. It also provides assurance that attractive future buying opportunities can be exploited. Money as a liquid store of value facilitates its possessor to purchase any other asset at any time. It was Keynes who first fully realised the liquid store value of money function and regarded money as a link between the present and the future. This, however, does not mean that money is the most satisfactory liquid store of value. To become a satisfactory store of value, money must have a stable value. 5. Transfer of Value: Money also functions as a means of transferring value. Through money, value can be easily and quickly transferred from one place to another because money is acceptable everywhere and to all. For example, it is much easier to transfer one lakh rupees

through bank draft from person A in Amritsar to person B in Bombay than remitting the same value in commodity terms, say wheat. 6. Distribution of National Income: Money facilitates the division of national income between people. Total output of the country is jointly produced by a number of people as workers, land owners, capitalists, and entrepreneurs, and, in turn, will have to be distributed among them. Money helps in the distribution of national product through the system of wage, rent, interest and profit. 7. Maximization of Satisfaction: Money helps consumers and producers to maximize their benefits. A consumer maximizes his satisfaction by equating the prices of each commodity (expressed in terms of money) with its marginal utility. Similarly, a producer maximizes his profit by equating the marginal productivity of a factor unit to its price. 8. Basis of Credit System: Credit plays an important role in the modern economic system and money constitutes the basis of credit. People deposit their money (saving) in the banks and on the basis of these deposits, the banks create credit. 9. Liquidity of Wealth: Money imparts liquidity to various forms of wealth. When a person holds wealth in the form of money, he makes it liquid. In fact, all forms of wealth (e.g., land, machinery, stocks, stores, etc.) can be converted into money MEASURES OF MONEY SUPPLY IN INDIA The Reserve Bank of India defines the monetary aggregates as: Reserve Money (M0) =: Currency in circulation + Bankers' deposits with the RBI + 'Other' deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI's claims on banks + RBI's net foreign assets + Government's currency liabilities to the public - RBI's net non-monetary liabilities. M1=Currency with the public + Deposit money of the public (Demand deposits with the banking system + 'Other' deposits with the RBI). M2= M1 + Savings deposits with Post office savings banks. M3=M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government's currency liabilities to the public - Net non-monetary liabilities of the banking sector (Other than Time Deposits).

M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).