Definition, Types, Functions, Characteristics of Money, cash and currency in economics

 

In this article we are going to discuss about:-

one. Evolution of cash

two. Which means and Definitions of cash

 three. Stages within the Evolution

 four. Characteristics

five. Classification

six. fashionable Forms

seven. Importance

eight. Value

9. Evils.

 

Evolution of Money:

As barter system was associate degree inconvenient methodology of exchange, folks were compelled to pick out some artifact that was most ordinarily accepted in this space as a medium of exchange. Thus, an outsized kind of merchandise came to be used as money; bit by bit the foremost enticing metals, like gold, silver, etc., were adopted as cash virtually all over.

 

Money has currently taken the place of of these commodities. Later coins were replaced or supplemented by paper money for the explanations of economy and convenience. The bank cheques, drafts and speech act notes came into use additionally of currency to function the foremost necessary style of cash. However, nowadays every country has its own standard and therefore the cash of 1 isn't sometimes acceptable outside its borders.

In fact, this is often one in every of the explanations that makes international trade completely different from internal trade. cash wasn't fabricated long. the event of cash was rather slow. it's the results of a method of evolution through many hundred years.

 

The different varieties of cash indicate the various stages of the event of cash. Wheat, corn, tobacco, skins, beads, gold, etc. Even live animals served as a medium of exchange at completely different times in several elements of the globe. Rulers altogether lands found that creating coins could be a profitable business and took it into their own hands.

 

Meaning and Definitions of Money:

The word “money” is believed to originate from a temple of ‘Juno’, set on Capitoline, one in every of Rome’s seven hills. within the ancient world Roman deity was usually related to cash. The temple of Roman deity Moneta at Rome was the place wherever the mint of Ancient Rome was set.

 

The name “Juno” could derive from the Italian god Uni (which means that “the one”, “unique”, “unit”, “union”, “united”) and “Moneta” either from the Latin word “monere” (remind, warn or instruct) or the Greek word “moneres” (alone, unique).

Now-a-days everyone acknowledges cash however typically doesn't skills to outline cash. cash has been outlined otherwise by completely different economists. whereas some social scientist like WALKER has outlined cash in terms of the functions, whereas others like economist, COLE, ROBERTSON, etc., have stressed on the overall acceptableness side of it.

 

To function cash, the definition of cash ought to be comprehensive enough to hide all the essential functions that money performs within the economy. Before we have a tendency to attain the foremost appropriate definition, it's essential to review many definitions of cash as given by some eminent economists.

Definitions of Money:

Money is one such conception that is incredibly troublesome to be restricted to some well-defined set of words. It’s terribly straightforward to know however troublesome to outline. Still, an oversized range of economists have given style of definitions, some definitions area unit too in depth whereas others area unit too slim. numerous economists like academician. Walker, Robertson, Seligman, etc., have used completely different characteristics for outlining it.

According to faculty member. Walker, “Money is what cash does”. it's related to the functions performed/roles contend by cash.

However, an acceptable definition should be comprehensive and should emphasise not solely on the necessary functions of cash however additionally on its basic characteristics, specifically general acceptableness. trying from this criterion, we discover Crowther’s definition to be the foremost appropriate.

“Anything that's typically acceptable as a method of exchange (i.e., as a method of subsiding debts) which at identical time, acts as a live and as a store important .” — Crowther

This definition covers all the 3 necessary functions of cash and additionally stresses its basic characteristic, specifically general acceptableness.

Legal Tender cash and fiduciary Money:

Legal tender cash is issued by the financial authority of a rustic. it's legal sanction of the govt. each individual is absolute to settle for tender cash in exchange for product and services, and within the discharge of debts.

Legal tender cash is of 2 kinds:

(a) restricted tender, and

(b) Unlimited tender.

Fiduciary elective cash is non-legal tender cash because it is usually accepted by the individuals in final payments. It includes credit instruments like cheques, drafts, bills of exchange, etc. Acceptance of elective cash depends upon the need of an individual.

 

Stages within the Evolution of Money:

(i) Animal Money:

In ancient Asian nation, Go-Dhan (cow wealth) was accepted as type of cash. Similarly, within the fourth century B.C., the Roman State had formally recognized cow and sheep as cash to gather fine and taxes.

(ii) goods Money:

The second stage within the evolution {of cash|of cash} is that the introduction of goods money. goods cash is that cash whose price comes from a goods, out of that it's created. The commodities that were used as medium of exchange enclosed univalve shells, bows and arrows, gold, silver, food grains, massive stones, embellished belts, cigarettes, copper, etc.

However, the goods cash had varied drawbacks like there may well be no standardization important  for cash, lacks the property of movability and indivisibility. thus this way of cash became Associate in Nursing unsuitable medium of exchange.

(iii) Coinage:

The next step is coinage. this is often similar to a goods cash however the goods is that the metal that the cash is formed of. Thus, it is seen that goods cash is of 2 varieties i.e., gold-bearing and non-metallic.

When the utilization of cash wasn't therefore terribly in depth, copper may do the work however once the amount of transactions redoubled step by step, silver so gold was used as a main metal for cash and coins of little denominations were ready either of copper or of silver.

Metallic cash at one stage were used as full bodied cash, i.e., the complete price was up to the intrinsic price of the metal.

Non-metallic artifact cash was used on an oversized scale in our period of civilization.

(iv) Paper Money:

The next vital stage within the evolution {of cash|of cash} is that the folding money that replaced the aluminous money. The transfer of total {of cash|of cash} in terms of aluminous money was each inconvenient and risky. Therefore, written documents were used as temporary substitutes for cash. a person may deposit cash with a loaded bourgeois or a goldsmith and acquire a receipt for the deposit.

These receipts and documents weren't actual cash however temporary substitutes of cash. This marked the event of folding money. These paper notes bit by bit took the shape of currency notes.

(v) Bank Money:

As the volume of transactions redoubled, folding money started changing into inconvenient due to time concerned in its tally and house needed for its safe-keeping. This crystal rectifier to the introduction of bank cash (or credit money).

Bank cash implies demand deposits with banks that ar withdraw in a position through cheques, drafts, etc. Cheques ar wide accepted lately significantly for business transactions. Debit and credit cards conjointly fall into this class.

Characteristics of Money:

1. General Acceptability:

Money is accepted by all as a medium of exchange. Thus, it's general acceptableness. nobody denies to simply accept cash as a medium of exchange. individuals don't hesitate to simply accept it as customary of payment.

2. live of Value:

Value of any smart or service will simply be measured in terms of cash. it's accepted as a live important .

3. Active Agent:

Money is a lively agent of AN financial system. In fashionable economy, cash is needed in each industrial method. method of production cannot begin while not the participation of cash.

4. Liquid Assets:

Money is very liquid plus. It will simply be reborn in merchandise and services. Debt, stock and bills, etc., ar the opposite assets however the liquidity of cash is highest than the opposite assets. One should 1st get to convert different assets into cash, then it may be reborn in desired merchandise or services, whereas cash will directly be reborn.

5. cash could be a suggests that ANd not an End:

 

The word cash is suggests that to amass things desired. cash itself can not be wont to satisfy. it's indirectly wont to get any merchandise or services to satisfy human needs.

6. Voluntary Acceptability:

Money is voluntarily accepted by individuals. there's no demand to urge legal approval. individuals continuously would like to carry cash.

7. Government Control:

Reserve Bank of Asian nation and Govt, of {india|India|Republic of Asian nation|Bharat|Asian country|Asian nation} have AN authority to issue currency that is accepted as a style of cash in India. No different authority will issue currency notes. Thus, the govt keeps management over the money offer within the country.

Classification of Money:Money assumes such a big amount of forms in world that it's troublesome to spot what constitutes cash and what not. completely different economists have classified cash in numerous forms.

The a lot of vital classifications of cash ar as follows:

(i) Actual cash and cash of Account:

Actual cash is that that truly circulates within the economy. it's used as a medium of exchange for merchandise and services in an exceedingly country. as an example, paper notes of various denominations and coins in actual circulation in Asian nation represent the particular cash. cash of account is that style of cash in terms of that the accounts of a rustic ar maintained and transactions created.

For example, rupee is that the cash of account in India. Generally, actual cash and cash of account area unit an equivalent for a country; but, generally actual cash could also be totally different from the money of account. for instance, rupee and paise is that the cash of account in India. In real observe, however, one subunit coin is obscurity visible.

(ii) trade goods cash and Representative Money:

Commodity cash is created of an exact metal and its face price is up to its intrinsic price. it's additionally remarked as robust cash. Representative cash, on the opposite hand, is usually created either of low cost metals or paper notes. The intrinsic price of the representative cash is a smaller amount than its face price. Currency notes and coins area unit smart samples of representative cash in India. Representative cash might or might not be regenerate into robust cash.

(iii) cash and Near-Money:

Money is something that possesses a hundred per cent liquidity. Liquidity is that the quality of being like a shot and perpetually exchangeable fully price for cash. Near-money refers to those objects which may be control with very little loss of liquidity. for instance, National Savings Deposits, savings and loan association Deposits and different similar deposits don't seem to be cash as a result of they're not typically acceptable in paying debt; these, however, might be simply and quickly changed for cash with none loss or with minimum loss.

(iv) metallike cash and Paper Money:

This classification relies upon the content of a unit of cash. cash product of some metal like gold and silver is named metallike cash. On the opposite hand, cash product of paper, like currency notes, is named paper currency.

Metallic cash is sub-classified into:

(a) customary cash, and

(b) money.

Standard cash is one whose intrinsic price is up to its face price. it's created of some valuable and has free coinage. {token cash|money} is that sort of money whose face price is above its intrinsic price. Indian monetary unit coin is AN example of money. paper currency includes bank notes and government notes that flow into easily.

Paper money is assessed into following parts:

(a) Representative paper currency, that is a hundred per cent backed and is absolutely redeemable in some valuable.

(b) Convertible paper currency, which may be regenerate into customary coins at the choice of the holder. it's not absolutely backed by precious metals.

 

(c) Inconvertible paper currency, that can't be regenerate into robust cash. Indian one rupee note could be a ideal of inconvertible paper currency.

(d) paper money, that is issued by the govt of the country below emergency conditions. It doesn't have any backing of reserve.

(v) Credit Money:

It is additionally referred to as bank cash. This consists of deposits of the folks control with the banks, that area unit collectible on demand by the depositors. Cheques, drafts, bills of exchange, etc., area unit samples of credit cash.

Modern kinds of Money:

1. Currency:

The currency could be a country’s unit of exchange issued by their government or financial organisation whose price is that the basis for trade. Currency includes each metallike cash (coins) and paper currency that's publicly circulation.

(a) metallike Money:

Metallic cash refers to the coins that area unit used for tiny transactions. Coins area unit most frequently issued by the govt. samples of coins area unit fifty paise coins, and 1, 2, five and ten rupee coins.

(b) Paper Money:

It refers to paper notes and used for big transactions. every currency note carries the legend, ‘I promise to pay the bearer the add of 50/100 rupees’ reckoning on the worth of note. The currency notes area unit punctually signed by the Governor of run batted in.

Simply, the that means of legend is that it may be regenerate into different notes or coins of equal price. samples of currency notes area unit one, 2, 5, 10, 20, 50, 100, five hundred and 2000 rupee notes.

2. Deposit cash or Bank Money:

It refers to cash deposited by folks within the bank on the premise of that cheques may be drawn. Customers of the deposit coins and currency notes within the bank for safe-keeping, cash transferring and additionally to urge interest on the deposited cash.

This cash is recorded as credit to the account of the bank’s client which may be withdrawn by him on his/her want by cheques. Cheques area unit wide accepted recently as a result of transfer of cash through cheques is convenient.

3. medium of exchange cash (Force Tender):

Legal tender cash is that the currency that possesses legal sanction or approval by the govt. It implies that the individual is guaranteed to settle for it in exchange for merchandise and services; it can't be refused in settlement of payments of any kind.

Both coins and currency notes area unit medium of exchange. they need the backing of presidency. They function cash on the enactment (order) of the govt. however someone will lawfully refuse to simply

accept payment through cheques as a result of there's no guarantee that a cheque are going to be honored by the bank just in case of meagerly deposits with it.

Currency is that the commonest sort of medium of exchange. it's something that once offered in payment extinguishes the debt. Thus, personal cheques, credit cards, debit cards and similar non-cash strategies of payment don't seem to be sometimes legal tenders.

Coins and notes area unit sometimes outlined as a medium of exchange. The Indian monetary unit is additionally medium of exchange in Asian nation however Bhutanese Bhutanese monetary unit isn't medium of exchange in India.

4. Near Money:

It is a term used for those which are not cash but highly liquid assets and can easily be converted into cash on short notice such as bank deposits and treasury bills. It does not function as a medium of exchange in everyday purchases of goods and services.

5. Electronic Money:

Electronic money (also known as e-money, electronic cash, electronic currency, digital money, digital cash or digital currency) involves computer networks to perform financial transactions electronically. Electronic Funds Transfer (EFT) and direct deposit are examples of electronic money. The financial institutions transfer the money from one bank account to another by means of computers and communication links. A country wide computer network would monitor the credits and debits of all individuals, firms, and government as transactions take place in the economy.

It exchange funds every day without the physical movement of any paper money. This would eliminate the use of cheques and reduce the need for currency.

6. Fiat Money:

Fiat money is any money whose value is determined by legal means. The term fiat currency and fiat money relate to types of currency or money whose usefulness results not from any intrinsic value or guarantee that it can be converted into gold or another currency but from a government’s order (fiat) that it must be accepted as a means of payment.

A distinction between money and currency may be made here. The term ‘currency’ includes only metallic coins and paper notes which are legal tender and are in actual circulation in the country. The term ‘money’ however includes not only currency in circulation but also credit instruments. In other words, we may say that all currency is money but all money is not currency.

Importance of Money:

Money plays a significant role in modern economy. It has an active role in economic activities.

Importance of money in an economy can be discussed as below:

1. Money and Production:

Money helps in various ways in the process of production. Money can help producers to decide, plan, execute and manage the production activities. Moreover, the existence of money helps the producers to assess the quality and quantity of demand of a consumer.

2. Money and Consumption:

Money has a great importance in consumption. Consumers with the help of the money can easily decide, what they want and how much. They have a ready command over the goods and services. Moreover, they can postpone their demands, if required.

3. Money and Distribution:

Money has made it possible to distribute the reward accurately and conveniently among the various factors of production. The reward can be distributed in terms of wages, rent, interest and profit in the form of money.

4. Removal of the Difficulties of Barter:

There were some difficulties attached to the barter system of exchange, i.e., lack of double coincidence of wants, problem of measurement of value, problem of future payment, etc. Invention of money has overcome all the difficulties of barter system. There is no need to find double coincidence of wants and value can be measured easily in terms of money.

5. Money and Capital Formation:

Money is essential to facilitate capital formation. Savings of people can be mobilized in the form of money and these mobilized savings can be invested in more profitable ventures. Financial institutions are the part of this process. They mobilize the savings and channelize them in productive process.

6. Money and Public Finance:

Public finance deals with the income and expenditure of the government. Government receives its income in the form of money through taxes and other means and make expenditures in development and administrative processes.

7. External Trade:

Money has facilitated trade not only inside the country but also outside countries. With the use of money, goods and services can easily and rapidly be exchanged. Though in external trade foreign currencies are used in receipts and payments but they are exchanged with the help of domestic currencies.

8. Money and Economic Development:

Supply of money in a country affects its economic development. If the money supply is more, then it may lead to inflationary situation in the economy which may hamper growth. Similarly, if the supply of money is lesser than what is required then there will be shortage of liquidity which will lead to lesser investments and hence lesser employment.

Value of Money:

The value of money means all is related with its exchange value. Apart from exchange value of money it has no other independent value. In other words, the money is always related with its exchange value. As we know the eye whether of human person or animal does not have its own light, similarly the eye can see only with either by artificial or natural light. In the same way, the value of money can be judged or perceived only when it is related with its power of purchase.

In the words of Crowther “The value of money is what is will buy.” In other words the value of money depends on its purchasing power. In this connection the other definition of Robertson may also be referred. As per this definition— “The value of money means the amount or things in general which will be given in exchange for a unit of money.”

In this way the value of the money depends on its purchasing power either of a commodity or other services. It is also evident that the value of money and value of commodity has opposite relationship. This means when there is an increase in the value of commodity, the value of money will decrease.

The above discussion may be made clear by an example:

Suppose in a particular situation by one unit of money 5 oranges or 1 kg of sugar can be purchased. This means that the one unit of money is equivalent to 5 oranges or one kg of sugar. Now the value of any or all things take and increasing position then the value of money will certainly decrease.

In other words, if 1 kg of sugar was available for Rs. 2 only where when the value of sugar is available for Rs. 3, that it can be presumed that the initial power of Rs. 2 did not remain so much that 1 kg of sugar can be purchased with old value. This means that in case of increase the value of money will be to the diminishing power of purchase. So, it is proved that there is opposite relationship between the power of money and the com­modity.

Now the significant question arise that when the differences between the value of commodity and the value of services appear different, then in what way the base value can be judged because of the fact the difference between the retail price and the wholesale price.

The solution of such problem has been found out on the following three consecutions:

 

(1)    Wholesale Value:

(2)    Whatever value becomes prevalent in the wholesale market is usually taken as wholesale value. So, the wholesale value is easy to be found out because the value of money usually is displayed on this very base. This is called the wholesale value of the money.

(2) Retail Value:

The value prevalent in the retail market is called as retail value. But the retail value may be perceived separately on different places. This means the retail value will remain constant. The calculation of the retail value is always different from one place to another and as such the base of retail price is difficult in comparison to wholesale price.

(3) Labour Value:

In order to make payment the money among the labourers the value prevalent in such a market is usually called the value of labour. Now the value of labour will never be constant and it will also vary from place to place. So, it cannot be accepted as bases of value.

Evils of Money:Money is not an unmixed blessing. It is said that money is a good servant but a bad master.

Several evils of money are said to be:

(i) Economic Instability:

Several economists are of the opinion that money is responsible for economic instability in capitalist economies. In the absence of money, saving was equal to investment. Those who saved also invested. But in a monetized economy, saving is done by certain people and investment by some other people. Hence, saving and investment need not be equal. When saving in an economy exceeds investment, then national income, output and employment decrease and economy falls into depression.

On the other hand, when investment exceeds saving, then national income, output and employment increase and that leads to prosperity. But if the process of money creation and investment continues beyond the point of full employment, inflationary pressures will be created. Thus inequality between saving and investment are known to be main cause of economic fluctuations.

The main evil of money lies in its liability of being over-issued in the case of inconvertible paper money. The over-issue of money may lead to hyper-inflation. Excessive rise in prices brings suffering to the consuming public and fixed income earners. It encourages speculation and inhibits productive enterprises. It adversely affects distribution of income and wealth in the community so that the gulf between the rich and poor increases.

(ii) Economic Inequalities:

Money is a very convenience tool for accumulating wealth and of the exploitation of the poor by the rich. It has created an increasing gulf between the ‘haves’ and the ‘have-nots. The misery and degradation of the poor is, thus, in no small measure due to the existence of money.

(iii) Moral Depravity:

Money has weakened the moral fiber of man. The evils to be found in the affluent society are only too obvious. The rich monopolizes all the social evils like corruption, the wine and the woman. In this case, money has proved to be a soul-killing weapon.

(iv) Medium of Exploitation:

Prominent socialist like Marx and Lenin condemned money but it helps the rich to exploit the poor. When the communists came to power in Russia, they tried to abolish money. But they soon realized that to run a modern economy without money was impossible. All economic activity has to be based on monetary calculations. Accordingly, money is fully and firmly established in all Socialists States. Money performs several functions like facilitating optimum allocation of the country’s resources, functions as a medium of exchange and a measure of value, guides economic activity and is essential for facilitating distribution of national income.

Home ›› Economics ›› Mediums of Exchange ›› Money