Quick Notes on Money: Origin, Types and Concepts

Let us study about Money. After reading this article you will learn about: 1. Meaning of Money 2. Origin of Money 3. Different Concepts 4. Types of Money.

Meaning of Money:

Everybody knows the answer, but few people can give a precise definition of it. A. A. Walters, comments:

“Throughout the history to the present day there is no agreement on the most fundamental questions—What is money?” However, conceptually something that is accepted in payment for goods and services and in settling debts may be called money.

In the earliest days of civilization, goods were exchanged for goods. Money in the beginning was in the form of commodities. In a later period, precious metals were used as money. Because of the inherent difficulties of metallic money, paper money was evolved.

Furthermore, with the introduction of banking system, chequable bank accounts also served as a medium of exchange. The reason behind the evolution of these types of money is the general acceptability or exchangeability. Yet there is no general agreement regarding the definition.

Crowther defines money “as anything that is generally acceptable as a means of exchange (i.e., as a means of settling debts) and that at the same time acts as a measure and as a store of value”. D. H. Robertson also defines money in the same way.

According to him:

“The term money will be used to denote anything which is widely accepted in payment for goods, or in discharge of other kinds of business obligations.”

The italicized words of these two definitions carry two meanings. Firstly, to become a money, a thing must be acceptable to all. Secondly, anything that is acceptable universally is money. In view of this, paper money, metallic money, bank deposit, etc., have been accepted as medium of exchange. [Bank deposits may, however, be called bank money.]

Some would like to include travellers’ cheque in the orbit of money. Thus, it is clear that money acts as a medium of exchange.

That is why it is said: “Money is what money does” (Stanley Withers). This means that anything which performs the functions of money may be called money.

Origin of Money:

Barter system may be defined as moneyless transactions. This prevailed in primitive societies. But it is still alive, of course, in an exceptional way.

However, in international trade, sometimes direct exchange of goods for other goods (in lieu of currency) takes place. This kind of barter arrangement in international trade, called ‘countertrade’, is resorted to when particular foreign currencies are in short supply or when countries apply foreign exchange controls.

The barter system had to go as it involved serious difficulties in all kinds of transactions. It has been replaced by money. Money is probably the greatest invention of mankind. Its importance in an economy cannot be overemphasized. It is so indispensable that a modern economy may rightly be called a ‘monetary economy’.

According to Geoffrey Crowther:

“Money is one of the most fundamental of Man’s inventions. Every branch of knowledge has its fundamental discovery. In mechanics it is wheel, in science fire, in politics the vote. Similarly, in economics, in the whole commercial side of Man’s existence, money is the essential invention on which all the rest is based”.

Though the invention of money is regarded as the greatest achievement of mankind, its date of invention is still unknown to us. In fact, its history is partly imaginary, though anthropological research has confirmed much of it.

Different Concepts of Money:

If money supply is to be monitored and controlled we need to measure it. We find a close relationship between money supply, growth, and inflation.

Monetary policy aims at controlling the stock of money so that the problem of inflation or deflation can be avoided. Before explaining the relationship between money supply growth and the rate of inflation, we must know exactly what money supply is.

Usually, there are two measures of the money supply—narrow money supply, and broad money supply. Because of the differences in the nature of deposits of banks, we face two broad measures of money supply.

Narrow money supply is called M₁. It consists of notes and coins in circulation and demand deposits with banks and central bank. This narrowest measure of money supply has the attribute of greatest liquidity in the sense that this kind of money supply can be quickly and easily used for transactions. This may be called transactions money.

Broad money supply, M₂, consists of M₁ plus other deposits (savings deposits, time deposits, etc.). These deposits are indeed liquid but not quite as liquid as demand deposits included in M₁. These deposits are not immediately available for spending. After a certain lapse of time, these deposits could be utilized for purchasing goods and services. That is why we need a broad measure of money supply, called M₂.

However, there are some differences in the definitions of money supply from country to country. In view of this, we find disagree­ments about whether M₁ (narrowly-defined) or M₂ (broadly-defined) or something else is the best definition of money supply.

In view of this controversy, we do not like to make any distinction between M₁and M₂ and we like to refer the money supply as currency held by the public, plus deposits. Symbolically, M_S = C_P + D. In this connection, Samuelson remarks that “the exact definition of money supply is a matter of taste rather than scientific necessity.”

In this connection, we may refer the RBI’s four measures of money supply—M₁, M₂, M₃, and M₄:            

M₁ = C_P + demand deposits + other deposits with the RBI.

M₂ = M₁ + post office savings bank deposits.

M₃ = M₂ + time deposits with banks.

M₄ = M₃ + total post office deposits (including National Savings Certificate).

Of all these, M₁ is considered as the most important measure of money. M₁includes virtually all the money supplied by the RBI, the Government of India, and the commercial banks. Note that, in this measure of money, money is used as the medium of exchange and money does not earn any income itself since only demand deposits held by the public with the commercial banks are taken into account.

Types of Money:

(a) Commodity Money:

Money is a very old convenience since it is generally accepted as a medium of exchange. In the earliest days of human civilization, commodities were commonly used as money. During the World War II, the British and German prisoners of war camp used cigarettes amongst themselves as the medium of exchange, rather by consensus and not by the fiat of the government.

Anyway, cigarettes could not be thought of as ‘money’ in the true sense because of its certain inherent characteris­tics. At that time, it acted as a ‘crude’ form of money. But the commodity money had no general acceptability since it circulated as money in a particular locality.

Once people moved from primitive rural locality, commodity money lost its acceptability even in a pure simple localized economy. That is why one finds an historical association between metal and money. Money became synonymous with precious metals.

(b) Metallic Money:

Three metals—silver, copper and gold—were used for the purpose of exchange. Of all the commodities, metals proved its great advantages. More or less, all the attributes of good money (e.g., stability of value, divisibility, cognoscibility, acceptability, etc.) were to be found in money metals. But metallic money had some inherent defects. Firstly, the ascertainment of the quality of metals was a tiresome process.

Secondly, divisibility of metals for smaller transactions was highly inconvenient, if not impossible. The invention of coins removed some of these difficulties. The king of a country had kept the right to issue coins with standard weight and quality by stamping his name on them. This is how coins came into existence.

(c) Paper Money:

After coinage, the next stage in the development of money was paper money. Metallic money, made of precious metals, suffers from the disadvantages of being stolen easily. It is both dangerous and inconvenient to carry precious metals from one place to another. European merchants and people kept their gold and silver with goldsmiths for safe custody.

Against these deposits of metals, goldsmiths issued a paper- receipt showing a claim of the owners of metals. The receipts that the goldsmiths issued were perhaps the first form of paper money. The depositors used these metals to carry transactions, wherever the situation arose.

But it ultimately turned out to be cumbersome transactions. With the passage of time, these goldsmiths were able to generate confidence among depositors as well as general public. Consequently that bit of paper became substitute for metallic money.

This document helped the process of transaction easily. Later on, the issue of paper money was left into the hands of the commercial banks. Nowadays, the central bank of a country has been given monopoly power to issue paper notes.

(d) Credit Money:

Another type of money in the modern world is credit money or bank money (cheques, drafts, promissory notes, etc.). It is difficult to imagine a modern economy without credit. Large transactions over the entire country as well as outside the country are credit transactions. With the increase in economic activity, the need for an ever-increasing supply of money is felt.

In fact, economic transactions have become easier and smooth with the use of credit money or bank money, so that paper currency running to lakhs and crores of rupees, for transaction purposes need not be used. Since cheques and drafts can be sent safely in any part of the world, these are considered to be superior to paper notes.

(e) Electronic Money or E-Money:

In this age of computer technology, we have entered a new stage of evolution of the payments system with the advent of electronic money, e-money is a money that is stored electronically, i.e., cheques are put in the e-mail. Its important forms are credit cards, debit cards and electronic cheques.

Former enables people to purchase goods by electronically transferring money directly from their accounts to the seller’s account. Electronic cheques allow Internet users to pay their payments directly over the Internet without having to send a paper cheque. All these suggest that we are heading towards near cashless society.