Evolution and Definitions of Money
Money is anything that is generally accepted as a mode for payment of goods & services and repayment of loans & debts such as taxes, etc., in a particular nation or country. Money was invented to facilitate trade as the barter system, but it can not express the value and prices of goods & services. The term money covers everything, like currency notes, coins, cheques, etc., to carry out all economic transactions and settle claims. As a currency, money circulates from country to country and person to person to facilitate trade. Different stages of money are Commodity Money, Metallic Money, Paper Money, Credit Money, and Plastic Money.
According to D.H. Robertson, “Anything which is widely accepted in payment for goods or in discharge of other kinds of business obligation, is called money.”
Evolution of Money
Money has evolved through various stages. The stages are as follows:
1. Commodity Money
In the ancient trade or barter system, any commodity that was demanded or selected with the consent of both parties and has some value was used as money. For example, wheat, clothes, fur, metal, salt, etc., were used as money. But after the introduction of commodity money, gold or silver coins were used as money. Gold coins were valuable, as they can be used in exchange for goods & services. However, as gold itself was valued and has other uses also, commodity money gave rise to the next stage of money; i.e., representative money.
2. Metallic Money
With the progress of the trade, commodity money was converted into metallic money. Metals like silver, copper, gold, etc., were commonly used as they are easy to use and their quantity can be easily determined. Metallic money was the main type of money throughout a huge part of recorded history. But everything has both positive and negative aspects, no doubt metallic money helps with easy exchange of goods & services, but it gave rise to some problems also, which lead to next stage of evolution of money.
3. Paper Money
It was very difficult and unsafe to carry gold and silver coins from place to place, therefore, paper money was invented. The invention of paper money was the most important stage of money evolution. It is controlled and regulated by the Reserve Bank of India (the Central Bank). In the present scenario, currency notes or paper money captures a huge part of money issued by the central bank, and most of the transactions are carried out with the help of paper money.
4. Credit Money
Credit money was invented along with paper money, people keep a part of their cash or savings as bank deposits and withdraw them with the help of cheques as per their needs or requirements. The cheque (credit money or bank money) is not money in reality but performs all the functions similar to money.
5. Plastic Money
Plastic money is the latest type of money in the form of debit and credit cards. The main aim of plastic money is to reduce the need of carrying cash everywhere to make transactions. Currently, plastic money is used largely by people, which reduces the risk of carrying a large amount of cash for making transactions.
Definitions of Money
With the passage of time, various definitions of money have evolved. Let’s discuss these definitions of money under various heads:
1. Legal Definition of Money
According to the legal definition, anything accepted and declared by the government as money is money. On a legal basis, there are two kinds of money:
A. Legal Tender Money: Legal tender money is money that can be legally used to make debt and other payments. According to the law, a creditor is obliged to receive such money in respect of the payment of the debt due to him. Legal tender money is further divided into:-
- Limited Legal Tender Money: It is a form of legal tender money, which is used to pay the debt up to a certain limit. Beyond a certain limit, a person may refuse to accept the payment without the fear of any legal action taken against him. In India, coins are a type of limited legal tender money.
- Unlimited Legal Tender Money: It is a form of legal tender money, which is used to pay the debt of any amount. If a person refuses to accept the money then legal actions can be taken against him. In India, paper notes are the type of unlimited legal tender money.
B. Non-Legal Tender Money: Non-legal tender money is that form of money that is generally accepted, but does not create any obligation to accept it. For example, cheques, bills of exchange, bank drafts, etc., do not have any legal backing and can be accepted at the will of the parties.
2. Functional Definition of Money
According to the functional definition of money, money is anything that is generally accepted and performs the basic functions:
- Medium of Exchange: As a medium of exchange, money can be used to make payments to all the transactions related to goods & services.
- Measure of Value: As a measure of value money works as a common parameter, in which the value of every good & service is expressed in monetary terms.
- Standard of Deferred Payments: Standard of deferred payments states that money act as a “standard of payment”, which is to make in the present or in near future.
- Store of Value: Money as a store of value can be used to store wealth in the most economical and convenient way and to transfer purchasing power from the present to the future.
In the words of Crowther, “Money may be defined as anything which is generally acceptable as a medium of exchange and at the same time acts as a measure and store of value”.
3. On the Basis of Liquidity
On liquidity basis, money can be classified into two types:
- Liquid form of Money: Money has the quality of general acceptability, which makes money the most liquid asset. Liquidity refers to the certainty and speed at which an asset can be converted into cash easily. Currency notes, coins, and bank money are the type of liquid money.
- Near Money: Near money includes those financial assets, which are not as liquid as notes or coins, but can be easily converted into cash. These are types of non-legal tender money that can not be directly used in the purchase of goods & services, but can be converted into cash in a short period of time. For example, bonds, fixed deposit receipts, national saving receipts, etc.
4. On the Basis of Scope
On the basis of scope, money is defined in two ways:
- Narrow scope: In narrow scope, only those things are included that function as money and perform the functions of (a) Medium of exchange, (b) Store of Value, (c) Standard for Deferred Payments, and (d) Measure of Value. It includes coins, currency notes, and bank deposits only.
- Broad Scope: In addition to the narrow scope, time deposits in banks and post offices are also included, as they are moneyless to a higher degree, and can be easily converted into chequeable deposits in a short period of time.
Broad Definition of Money = Money Assets + Near Money