Evolution of Money

• At the beginning, there was no money.
• People engaged in barter, the exchange of merchandise for merchandise, without value equivalence.

Barter System

Function of Money

• In barter system, it was difficult to determine how much each of the labour should earn from the total production
• But money’s primary function viz. measure of value makes it possible to determine the share of individual worker in the total production and pay him accordingly
• Helps in Distribution of National income
• Anyone who provides any of the four factors of production viz. land, labour, capital, entrepreneurship; will earn money as rent, wage, interest or profit
• Less chances of exploitation (compared to the Barter system, feudal system, Zamindari system)
• Thus, money helps in distribution of income among various factors of production

Commodity Money

• USA   – Tobacco, Corn, Iron nails were used to make exchanges
• Aztec – Cocoa beans were used to make exchanges
• India  – Cowries were used to make exchanges
• Fiji    – Whale teeth were used to make exchanges

Problems of commodity money

• Face Value was not same throughout region
• Don’t promote international trade
• Generally commodity used were perishable in nature
• could cause inflation
• Generally bulky to carry
• No fungibility or divisibility
• No division of labour

Metallic Money

• Started by Kings & Traders with uniformity & precision
• Intrinsic value
• Non-perishable
• Divisible, Fungible
• Foreign trade possible (without exchange rate)
• Production was low → Prices stable →No Hyperinflation

Full Bodied Coin

• Value of metal > Face value

Token Coin

• Value of Metal < Face value

Paper Money

Non Legal Tender

• Bill of exchange, Cheque, bank draft
• Its also called Optional money – acceptance is optional

Legal Tender (Fiat Money)

• Limited – Coins
• Unlimited – Currency
  

Evolution

Non Fiat Money

• Superstores plastic coins, cards & coupons
• Shares, Bonds, Debentures, G-Sec, T-bill
• DD, Cheques, Credit Card, ATM card
• Bitcoin & other Digital currency

Government

• Rs. 1 note + All coins
• Coinage Act 2011 Rs. 1 note to hold Financial Secretary bilingual signature

Currency standard in India

1935-56

• 40%gold to the value of currency issued
• IMF fixed exchange rate

1956

• Keep 115 cr. Worth Gold + Rs. 400 cr. Worth Foreign security

1995

• Rs. 115 cr. Worth gold
• Print as much as you want (backed by financial assets, T.bill, G-Sec)

Demonetization in India

• 1946 – Demonetize 500
• 1978 – Demonetize 1k, 5k, 10k
• 2016 – Demonetize 500,1k