What is money? Describe different forms of money with examples. Why is paper money advantageous?
Money is an economic unit which is recognized as a medium of exchange for transactional purposes in an economy. It is widely accepted as a means of payment. Money serves three basic functions:
A medium of exchange
The exchange of goods and services has been a progressive event in human life. Human civilization has used various instruments and models to facilitate such exchanges. We used Barter as a standard for exchange, now we use money that serves as a medium of exchange.
An unit of account
Money serves as a unit of account which means we measure our activity or we value things using money. When we consider buying something, we value that thing in units of money.
A store of value
Money serves as a store of value which suggests that money holds value over time. An Rs. 100 bills will have the value equals to Rs. 100 overtime. The market will treat Rs. 100 bill as Rs. 100 bills no matter when you have it. Similarly, in any transaction you make, money reflects the value of that product or service.
Characteristics/Features of Money
Money has wide acceptability and people are willing to complete the transaction in terms of money rather than any other medium. For example, when you buy a biscuit and try to pay the shop using gold, he might be hesitant. Even though gold is much valuable and has an intrinsic value, gold is not widely accepted. Instead of gold, if you offer a Rs. 10 or Rs. 1000 to the shop, the shop will accept the note.
Money should be portable i.e. it should be convenient to deal with money. Imagine Re. 1 coin which is of 1 Kg. Therefore, another characteristic of money is that you should be able to travel with your money as we do now, we keep money in our pocket or wallet.
Exchange or divisibility is another feature of money which means it should be exchanged for other denominations i.e. the value should not be lost while transacting. A note of Rs. 20 can be exchanged with 2 notes of Rs. 10 or 4 notes of Rs.5 or 20 coins/notes of Re. 1.
Making something as valuable as money incurs some cost therefore, money material should have some durability. The notes and coins should be built out of materials that have quality and life both. Money is circulated in an economy and is frequently exchanged.
Money has some form and the form needs to be consistent. There should be uniformity in design, color, shape, and size. All the notes of Rs. 100 need to be the same in all respects.
Money is a widely used instrument and it is an essential instrument in any economy. The value it possesses and wide acceptability makes it liquid and more vulnerable if not controlled. Therefore, money needs to be regulated and the supply of money should be economy-based.
Forms of Money in Modern Monetary System
Money can be found in different forms in today’s monetary system as per their function and physical appearance. Some of the widely used forms of money are described as follows
As the name suggests, metallic money is made of any metal such as gold, silver, copper, iron, etc. Metallic money was widely used in ancient times. Currently, the coins of Re. 1, Rs. 2, Re. 5, and Rs. 10 are metallic coins. As metallic money is heavy, incurs a higher cost of production, and is difficult to handle, it is difficult to use the money in large quantities.
- Full-Bodied coins: The value of a coin is equal to the value of the metal. Example: Gold and Silver Coin
- Token Money: Value of coin is greater/lower than the value of metal: Example: All the currently available coins
Advantage of Metallic Money:
- It has all the features of good money.
- Metallic money is durable as it is made up of metals.
- It has ornamental and decorative value.
- Metallic money can be stored and preserved due to its metallic feature.
- Metallic money is widely accepted.
- Such money has a steady demand and supply in the market.
Paper money refers to all the notes of different values made of paper issued by the Central bank or related governing body. The paper money can be classified into the following types:
- Representative Money: Money backed by the equal metallic reserve. Such reserves can easily be converted into gold and silver form when required.
- Convertible Money: Money can be converted into metallic reserves but not necessarily backed up by precious metals.
- Inconvertible Money: The notes which we use in our daily life are fiat money or inconvertible money. Such money has purchasing power equivalent to the value of that money. It is generally used as a medium of exchange.
Advantages of Paper money:
- Paper money is economical (cost of producing) when compared to metallic money
- Due to its nature, paper money is convenient to handle and transfer.
- Paper money is more elastic as it is well regulated by the central bank or government.
- Paper money has standard and uniform value and hence such standards manage the mechanism of monetary policy. This creates price stability.
- Paper money is legal tender money hence it is widely accepted by all.
- Paper money is easy to handle therefore, it can be easily stored and managed.
Bank money refers to the liquid instruments used in the modern banking ecosystem. Credit is referred to as a modern form of bank money. Basically, cheques, bills of exchange, and drafts are widely used bank money.
- Cheques: It is a request to the bank by the client to pay the certain mentioned money against the written cheques.
- Bills of Exchange: It is an order by the drawer to the drawee to pay a sum of money to drawer or to any other party
- Draft: Draft is a cheque drawn by a bank on its own branch or the branches of another bank requesting it to pay on demand a specific amount to a person named on it.
- Plastic Money: Plastic money refers to banking facilities like debit cards, credit cards, smart cards, etc. Plastic cards have a printed set of characters and hold value.
- Near Money: Near money represents all the instruments that can be easily converted into money such as government bonds, bills, bonds, etc.