CHAPTER 3
MEANING & FUNCTION OF MONEY
• Money is commodity which is used to denote anything which is widely
accepted in payment for goods or in discharge of other business
obligations ROBERTSON
•Money as anything that is generally acceptable as a mean of exchange
(i.e.; as Means settling debt) and that at the same time acts as a medium
of exchange CROWTHER (IDEAL DEFINITION)
Money is what money does
(1) Hartley weather
(2) walker
MONEY & CURRENCY
• The term currency includes Metallic Coins and paper Notes
• They are referred as Currency because these are LEGAL TENDER
and are in actual circulation in the country
The term Money, However I assigned a wider meaning
• It includes not only Metallic Coins and paper notes but also
DEMAND DEOSITS
ALL CURRENCY IS MONEY BUT ALL MONEY IS NOT CURRENCY
Radcliffe Committee Report 1959
TWO APPROACHES TO DEFINING MONEY
1. TRADITIONAL APPROACH
A. General acceptability
B. Functional aspects
2. EMPERCISTS APPROACH
A. bond
B. Currency & financial Assets
* FUNCTIONS OF MONEY
1. PRIMARY FUNCTION
A. Money is medium of exchange
B. Money is measure of value
2. SECONDARY FUNCTION
A. Standard of deferred payments
B. Stoke of purchasing power
C. Means of transferring purchasing power
3. CONTINGENT FUNCTION
A. Basis of credit
B. Distribution of social income
C. Helps to equalize marginal utilities and managerial productivities
D. Increase productivity of capital
E. Help to maintain repayment capacity
F. Money represents generalized purchasing power
G. Money gives liquidity to capital
3. DEFINITIONS OF MONEY DESCRIPTIVE OF
FUNCTIONAL DEFINITIONS
1. HARTLEY WEITHER
2.COULBORN
3.THOMAS.
• LRGAL DEFINITIONS
► KNAAP
• COMMON ACCEPTABILITY DEFINITIONS
.SELIGMAN
.COTE
.KEYNES
CLASSIFICATION OF MONEY ON THE BASIS OF
NATURE OF MONEY
1. ACTUAL MONEY
2. MONEY OF ACCOUNT
1. ACTUAL MONEY
• Money which is current in practice in country
• It is a Medium of Exchange as well as Standard of deferred
Payments
• Purchasing power can be store in term of actual money
• Ex one rupee, one paise
Actual Money Further classified in two heads:
A. Commodity Money
Made of certain metal
• Face value = Intrinsic value
• Also known as Full Bodie Money Not only Medium of Exchange
but it is also store of Purchasing Power
B. Representative Money
• Money which is in circulation & serves as medium of Exchange
• Purchasing power cannot Stores in term of this money
•Representative money is not a god medium of storing purchasing
power because it commands little intrinsic value
• Ex paper money
Representative paper further classify
Convertible paper money
.That money which the issuing authority is under an Obligation to
convert into commodity money
Inconvertible paper money
• That paper money which the issuing authority is under No
obligation to convert into commodity money.
2. MONEY OF ACCOUNT
• Refer to that money on which accounts are made in the country
• It is not necessary that
• this type of money actually in practice
ON THE BASIS OF LEGALITY
1. LEGAL TENDER MONEY
Further classified two categories
A. Limited legal tender money
B. Unlimited legal tender money
2. OPTIONAL MONEY
A. Cheque
B. Hundi
C.bills
1. LEGAL TENDER MONEY
That money which is accepted as a means of payment both the
government as well as the people
• This money has Legal sanctioned Behind it
Further classified in Two Categories:
A. Limited legal tender Money
That money which no person can be forced to accept beyond a
certain maximum limit
• 1,2,5,10, 20
B. Unlimited legal tender Money,
That money which a person has to accept up to any limit because it
is a unlimited legal render.
OPTIONAL MONEY
• That money accepted by the people but has no legal sanctioned
behind it
• No one force to accept this type of money against the wishes
• Ex. Cheque, Hundi, BOE.
ON THE BASIS OF MONEY COMMODITY
1. METALLIC MONEY
A. Standard money
B. Token money
C. Subsidiary
2. PAPER MONEY
A Representative paper money
B. convertible paper money
C. inconvertible paper money
D. fiat money
1. MATALLIC MONEY
Money is made particular metal (Gold, Silver, copper, Nickle etc)
Classified in three Categories:
A. Standard Money
:Also called Principle Money
;Or Full-Bodied Money
• Standard coins are made of GOLD & SILVER
• These Coins are made of well-defined weight & Fitness
• Internal value = external value
B. Token Money
• is the money used to making smaller payments
• subsidiary of Standard Mone
• Generally made of Inferior & lighter metals such as (copper&
Nickle)
• Internal value > External Value
C. Subsidiary money
• Issued to facilitate smaller payment
• Low value coins
• Facility of exchange • Issued by Govt
• Limited Legal Tender Money
2. PAPER MONEY
• CHINA First Country to Use of Paper Currency • Bank of Bengal first Bank in India to have
issued paper currency in
1806
Classifies in 4 categories
A. Representative paper money
•Fully backed up by GOLD & SILVER reserve
• Main Objective to avoid Wastage of Metal
• Hilton Young Commission in 1925 the Introduction of
Representative paper Money
•Unsuitable for POOR Countries B. Convertible paper money
B.Convertible money
• that type of which is convertible into standard coins at the Option
of the holder
C. Inconvertible paper money
•When the monetary authority gives no Guarantee to convert the
paper Notes into coins or other valuable Metals
D. Fiat Money
• Issued at the Time of CRISIS • That is why it is also known as
EMERGENCY CURRENCY
• No Reserve are kept bekind Fiat Money
• Not Backed up by Metallic Nor the fiduciary cover
• Monetary Authority gives No Guarantee to convert Fiat
money into Metallic Coins
Issued in limited Quantity
• Metallic
* ON THE BASIS OF INTEREST
1. ECONOMICAL (available less rate of Interest)
2. COSTLY (available at High rate of interest)
* ON THE BASIS OF FOREIGN EXCHANGE
1. SOFT MONEY Demand < Supply)
2. HARD MONEY Supply < Demand)
MATION
SOME OTHER TYPES
1.FIDUICIARY MONEY - refer to that money which is accepted as
a medium of exchange because of TRUST between Payer & Payee
Ex. Cheque
2. CREDIT MONEY- (money value > commodity value)
3. FULL BODIED MONEY- (money value = commodity value)
4. CHEAP MONEY-money which is available to the borrower at low
rate of interest.
5. NEAR MONEY- highly liquid assets that are quickly and easily
converted into coins Ex. Bills of Exchange
