Notes on Money: Functions, Evolution, and Modern Currency
1. Role of Money in Daily Transactions
- Ubiquity
of Money:
- Money
is central to daily activities like buying goods (e.g., groceries,
clothes), paying for services (e.g., transport, education), and settling
debts.
- Examples:
Paying electricity bills, purchasing meals, booking movie tickets,
receiving salaries.
- Transactions
Without Immediate Payment:
- Some
exchanges involve promises to pay later (e.g., credit purchases, loans).
2. Why Transactions Use Money?
- Eliminates
Double Coincidence of Wants:
- Barter
System Challenge: Requires two parties to want each other’s goods.
- Example:
A shoe manufacturer needs wheat but must find a farmer who both sells
wheat and needs shoes.
- Money
as a Solution:
- Shoe
maker sells shoes for money → uses money to buy wheat from any
farmer.
- No
need for mutual needs; money acts as a universal intermediate.
- Flexibility
and Convenience:
- Money
allows saving for future use and purchasing anything at any
time.
3. Barter System vs. Monetary Economy
|
Barter System |
Monetary Economy |
|
Direct exchange of
goods (e.g., shoes for wheat). |
Uses money as a medium
of exchange. |
|
Requires mutual need (double coincidence of wants). |
Money bridges
gaps between buyers/sellers. |
|
Time-consuming and
inefficient. |
Fast, scalable, and
adaptable. |
4. Evolution of Money
- Commodity
Money:
- Early
societies used items like cattle, grains, or salt (e.g., ancient India
used grains/cattle).
- Limitations:
Perishable, non-divisible, bulky.
- Metallic
Coins:
- Gold,
silver, and copper coins (intrinsic value due to precious metal content).
- Used
globally until the 20th century.
- Modern
Currency:
- Paper
notes & coins (no intrinsic value).
- Accepted
due to government authorization (legal trust).
5. Modern Currency: Features & Legal Backing
- Government
Authority:
- In
India, the Reserve Bank of India (RBI) issues currency
on behalf of the government.
- No
private entity can print money.
- Legal
Tender:
- By
law, the Indian rupee (₹) cannot be refused for settling
debts/transactions.
- Example:
A vendor must accept ₹10 for a ₹10 product.
- Trust
Over Intrinsic Value:
- Modern
currency holds value because people trust the issuing authority
(government/RBI).
6. Money as a Medium of Exchange
- Definition:
A universally accepted intermediary for transactions.
- Advantages:
- Enables
specialization (e.g., farmers focus on crops, shoemakers on shoes).
- Simplifies
trade across regions and time (e.g., saving money for future use).
Key Terms
- Double
Coincidence of Wants: A barter requirement where two parties must
mutually desire each other’s goods/services.
- Legal
Tender: Currency legally recognized for settling transactions (e.g., ₹
in India).
- Medium
of Exchange: Any item (e.g., money) used to facilitate the
sale/purchase of goods/services.
Examples for Clarity:
- A
farmer sells rice for money → uses money to buy medicines.
- A
student pays college fees via cheque (no physical cash needed).
- RBI’s ₹500 note has value because the government guarantees it, not because the paper is valuable.
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