Money and Financial Markets

PART-I (Money)

Chapter 1
Evolution of Money

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

 Contents

1. Barter system
2. Evolution of money.
3. Classification of money.
4. Money and near money.
5. Qualities of good money material.
6. Definition of money
7. Functions of money.

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

 1. Barter System (Goods Exchanged for Goods)

Advantages

1) Simple, devoid of complex modern monetary system.

2) No question of disequilibrium in goods market.

3) Free from problems of modern monetary system.

4) Personal and natural resources are utilized ideally.

5) Devoid of the problems of international trade such as

foreign exchange crisis, adverse balance of payments.

6) There is no problem of concentration of economic power

as BS discard the possibility of storing the commodities.

7) Reaps the benefit of division of labor.

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

Barter System
Disadvantages

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

 2. Evolution of Money
– Invention of Money
– Development of Money

1) Animal money

2) Commodity money

3) Metallic money

4) Paper money

5) Credit money

6) Electronic banking stage

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

 3. Classification of Money

- metallic money; paper money; and credit money.

1) Money proper and money of account

2) Commodity money and representative money

3) Legal tender and optional money

4) Metallic money: (a) standard or full-bodied money and (b) token money

5) Paper money: a) representative paper money b) convertible paper money

c) inconvertible paper money d) Fiat money

6) Credit money

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

4. Money and near money

•Money: consists of coins, currency notes and demand deposits of the

banks.
•Near Money: The assets which cannot be technically regarded as
money but can perform the same functions of money are called near
money assets.

Degree of Moneyness (Liquidity) of Assets

Pesek & Saving:

Any Asset that earns interest is not money.

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

 Types of near money

• Bills of exchange
• Bond
• Equity shares
• time deposits (cheques, postal service deposits etc.)

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

 Money & near money
•Distinction
– Definition
– Liquidity
– Function
– Use in Transaction

• Similarities
– Claims
– Same in Qualitative terms
– Act as Store of Value

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

5. Qualities of Good Money
•General acceptability
•Portability
•Durability
•Divisibility
•Homogeneity
•Cognisability
•Stability
•Malleability

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

 6. Definition of Money

• Walker “Money is that money does”.

• DH Robertson “Anything which is widely accepted in
payment for goods or in discharge of other kinds of
business obligations is called money”.
• Approaches to the Definition of Money
– Transaction Approach
– Monetarist Approach

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

Approaches to the Definition of Money

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

Empirical Definition:
Transaction Vs. Liquidity Approach
•Transaction Approach
● Medium of exchange function of money.
● Measure is reliable and predictable relationship to national
economic goals.

Defects:
● Narrow definition of money.
● Compatible with only QTM.

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

Empirical Definition:
Transaction Vs. Liquidity Approach
•Liquidity Approach
● Store of value function of Money.
● Broader measure of money supply.
● Liquidity depends upon:
– Existence of secondary market
– Maturity period

Difficulties in Adoption
● Quantify liquidity.
● Institutional framework and availability of data.
● RBI does not have control over NBFI.

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

 7. Functions of Money

a. Primary functions: the medium of exchange and the measure

of value

b. Secondary functions: standard of deferred payment, stores of

value and transfer of value.

c. Contingent functions: distribution of national income ,

maximization of satisfaction etc.

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

 Functions of Money
1. Medium of exchange
2. Measure of value
3. Standard of Deferred payments
4. Store of value
5. Transfer of value
6. Distribution of national Income
7. Maximization of satisfaction
8. Basis of credit system
9. Liquidity to wealth
Money is a matter of functions four,
A medium, a measure, a standard, a store,
As this does not Complete the picture,
We may add transferability more.

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›

Static and Dynamic functions of money
Paul Enzing classifies the functions of money into two broad categories.

• Static function:

• Acts passively without affecting economic activities.

• Tool for the working of price mechanism.

• Dynamic Function

• Effect on Price Level

• Effect on Interest Rate

• Effect on Utilization of Resources

• Effect on Government Expenditure

Bibhuti Ranjan Mishra VNIT, Nagpur 1-‹#›