Money : Unit 1

• Introduction
Money is an essential part of our daily lives, serving as a medium of exchange for goods and
services. It is anything that people widely accept as payment for these goods and services,
as well as repayment of debts. Money comes in various forms, including coins, banknotes,
and digital currencies. Its primary functions are to act as a medium of exchange, a unit of
account, a store of value, and occasionally, a standard of deferred payment. Historically,
different items have been used as money, such as gold, silver, and even shells. Today, most
transactions are conducted using paper money and coins, or electronically via credit cards,
bank transfers, and mobile payments. The invention of money has greatly facilitated trade
and economic activities by eliminating the complexities of barter systems, where people
had to exchange one good directly for another. Understanding money and its functions
helps us manage our personal finances better and appreciate its vital role in the economy.

• Definition
According to Alfred Marshall, “Money is that commodity which is commonly accepted in
exchange for goods and services.”

According to Friedman, “Money is something that is generally accepted as payment for

goods and services and repayment of debts.”

•Functions of Money
1. Medium of Exchange - When money is used to intermediate the exchange of goods and
services, it is performing a function as a medium of exchange. It thereby avoids the
inefficiencies of a barter system, such as the 'double coincidence of wants' problem.

2. Unit of Account – A unit of account is a standard numerical unit of measurement of the

market value of goods, services, and other transactions.

3. Store of value – To act as a store of value, money must be able to be reliably saved,
stored, and retrieved – and be predictably usable as a medium of exchange when it is
retrieved. The value of the money must also remain stable over time. Some have argued
that inflation, by reducing the value of money, diminishes the ability of the money to
function as a store of value.
4. Measure of Value - Money acts as a standard measure and common denomination of
trade. It is thus a basis for quoting and bargaining of prices.

5. Standard of Deferred Payment - A "standard of deferred payment" is an accepted way to

settle a debt – a unit in which debts are denominated, and the status of money as legal
tender, in those jurisdictions which have this concept, states that it may function for the
discharge of debts.

• Classification of Money

1. Animal Money: This is the use of animals as a form of currency. Historically, certain
animals were valuable and used for trade. For example, cattle were used as money in some
ancient cultures.

2. Commodity Money: This type of money is made from valuable physical goods, like gold,
silver, or grains. The value of commodity money comes from the material it’s made of,
which has intrinsic value.

3. Metallic Money: Coins made from metals like gold, silver, copper, and nickel. Metallic
money has been widely used throughout history because it’s durable and has intrinsic
value.

4. Convertible Paper Money: This is paper money that can be exchanged for a fixed amount
of a commodity, usually gold or silver. For example, in the past, you could exchange a dollar
bill for a certain amount of gold.

5. Fiat Money: This is money that has no intrinsic value and is not backed by a physical
commodity. Its value comes from government regulation or law. Modern currencies, like the
US dollar or the euro, are examples of fiat money.

6. Bank Money: This refers to the money created by banks through the process of taking
deposits and making loans. Bank money includes checks, demand deposits, and savings
account balances.
7. Super Money: This is a term that can refer to highly liquid and easily transferable forms of
money, such as large denominations of currency or certain financial instruments that are as
good as cash.

8. Electronic Money: Also known as digital money, this is money that exists only in digital
form. Examples include online banking transfers, cryptocurrencies like Bitcoin, and digital
wallets like PayPal.

9. Fiduciary Money: This type of money is issued based on the trust that it will be accepted
as a medium of exchange. It is not backed by a physical commodity but relies on the issuing
authority’s creditworthiness.

•Types of Economy : Capitalist, Socialist & Mixed

A capitalist economy is one where most businesses and industries are privately owned by
individuals or companies. People and companies have the freedom to make their own
decisions about production and distribution, with prices determined by supply and demand
in the market. The government's role is limited, mainly enforcing laws to ensure fair
competition. Examples of capitalist economies include the United States and Singapore.

In a socialist economy, the government owns and controls most of the major industries and
resources. The government makes most of the economic decisions, focusing on equal
distribution of wealth and resources rather than individual profit. Prices and production
levels are often set by the government. Examples of socialist economies include Cuba and
North Korea.

A mixed economy combines elements of both capitalism and socialism. Some industries are
privately owned, while others are owned or regulated by the government. Both the
government and the private sector share economic decision-making responsibilities. This
system aims to balance market forces with government intervention to ensure fair
competition and provide public services like healthcare and education. Most countries,
including India, the United Kingdom, and Sweden, have mixed economies.
• Importance/Role of Money in Capitalism Economy
In a capitalist economy, money is essential for several reasons. It enables market efficiency
by allowing businesses to buy materials, pay employees, and invest in innovations, driving
economic growth. Money also empowers consumers to express their preferences through
spending, influencing market success. It motivates entrepreneurship by offering the
potential for profit, encouraging individuals to start businesses and foster competition,
leading to better products and services.

Money facilitates resource allocation by signalling where demand is highest, guiding

businesses to produce accordingly. It supports capital accumulation, enabling businesses to
expand and invest in growth. Finally, money is crucial for the functioning of financial
markets, such as stock exchanges and banks, which provide necessary funds for business
expansion and offer investment opportunities for individuals. In summary, money is vital for
market operations, entrepreneurship, resource allocation, capital accumulation, and
financial markets, ensuring the dynamic nature of capitalism.

• Importance/Role of Money in Socialist Economy

In a socialist economy, money is important for several key functions. Firstly, it helps in the
planned allocation of resources. The government uses money to direct resources and
production where they are most needed, ensuring efficient distribution of goods and
services.

Secondly, money is crucial for funding public services and welfare. Socialism emphasizes
providing essential services like healthcare, education, and housing to all citizens. Money is
used to support these services, improving quality of life and ensuring access to basic needs.

Thirdly, money aids in maintaining economic stability. The government uses money to
manage inflation and unemployment, helping to stabilize the economy and prevent major
economic fluctuations that could lead to social issues.

Lastly, money serves as a tool to incentivize and reward workers. Even in a socialist system,
fair wages and compensation are necessary to motivate individuals and recognize their
contributions.
• Importance/Role of Money in Mixed Economy
In a mixed economy, which blends elements of both capitalism and socialism, money plays a
crucial role in several ways. First, it facilitates efficient market operations. Businesses use
money to buy materials, pay workers, and invest in innovations, driving economic growth
and providing a variety of goods and services.

Second, money supports government intervention. In a mixed economy, the government

steps in to regulate markets, provide public goods, and address social inequalities. Money is
essential for funding public services like healthcare, education, and infrastructure, ensuring
that everyone benefits from essential services.

Third, money helps in balancing resource allocation. It allows for the efficient distribution of
resources based on both market signals and government planning, combining market
efficiency with social equity.

Lastly, money is vital for incentivizing productivity and entrepreneurship. It motivates

individuals and businesses to innovate and improve, contributing to economic development
while also allowing for fair wages and rewards.

• Merits of Money
1. Facilitates Trade - Money makes trading easier by providing a common medium of
exchange. Instead of bartering goods and services, which can be inefficient, money allows
people to buy and sell items directly, speeding up transactions and making trade more
convenient.

2. Acts as a Measure of Value - Money provides a standard measure to compare the value
of different goods and services. This makes it easier to understand how much something
costs relative to other items, simplifying budgeting and financial planning.

3. Serves as a Store of Value - Money can be saved and stored for future use. Unlike
perishable goods, money retains its value over time, allowing people to save for future
expenses or investments without worrying about depreciation.
4. Provides a Unit of Account - Money helps in keeping track of and recording financial
transactions. It offers a consistent unit for measuring and comparing prices, incomes, and
expenses, which is essential for effective financial management and accounting.

5. Encourages Economic Growth - Money fuels economic activity by enabling investments

and facilitating business operations. It allows entrepreneurs to start and expand businesses,
leading to innovation, job creation, and overall economic development.

6. Offers Flexibility and Convenience - Money provides flexibility in transactions as it can be

easily divided into smaller units for various purchases. This convenience allows people to
buy a wide range of goods and services and handle financial transactions efficiently.

• Demerits of Money
1. Encourages Materialism - Money can lead to excessive focus on material possessions,
where people value wealth over relationships and personal well-being. This can create a
culture where happiness is equated with financial success, leading to stress and
dissatisfaction.

2. Can Cause Inequality - The uneven distribution of money can lead to significant social
and economic inequalities. Those with more money can access better opportunities and
resources, while those with less may struggle, widening the gap between different socio-
economic groups.

3. Can Lead to Financial Stress - Managing money can sometimes be stressful, especially if
individuals face financial difficulties or debt. The pressure to earn, save, and manage money
can lead to anxiety and affect mental health.

4. Encourages Unethical Behaviour - The pursuit of money can sometimes lead people to
engage in unethical or illegal activities, such as fraud or corruption. The desire for financial
gain can overshadow moral considerations and lead to harmful behaviour.

5. Can Lead to Overemphasis on Profit - In a pursuit of profit, businesses might prioritize

financial gain over environmental sustainability, employee welfare, or social responsibility.
This can result in negative impacts on society and the environment.
6. May Cause Dependence - An over-reliance on money can lead to dependency, where
individuals or societies become too focused on financial wealth for happiness and security.
This dependency can reduce overall life satisfaction and resilience.