Maharashtra Board Class 11 Economics Chapter 2 Money PDF Download

Chapter 2: Money

Introduction

Man is an intellectual animal. The invention of money is one of the important and fundamental inventions in the world. According to Crowther, there is a basic invention in each branch of knowledge. For example, invention of fire in science, invention of wheels in mechanical science. The concept of money is an important concept which has brought about a revolutionary change in the economic life of human beings. Various goods and services are bought and sold with the help of money, to satisfy human wants. Modern economy is dependent on money. Money which is in circulation today was created to reduce the difficulties in Barter System.

Barter System

Barter system refers to exchange of goods for goods.

Difficulties in Barter System

1) Problem of double coincidence of wants: Lack of double co-incidence of wants was one of the major limitations of barter system. For instance, person 'A' has cloth and he wants rice in exchange and person 'B' has rice but he does not want cloth in exchange. In this case exchange between 'A' and 'B' would not take place as their wants do not coincide with each other.

2) Lack of common measure of value: While exchanging goods for goods, there was no standard unit of account to determine the value of a commodity. For example, it was difficult to compare two litres of milk with two kilograms of rice.

3) Difficulties in storage of goods: It is necessary to store goods for future consumption. Sometimes due to perishable nature of certain goods it was difficult to store them for future. Perishable commodities like milk, eggs, fish, vegetable etc. were difficult to store. Difficulties were also experienced due to lack of space required to store heavy and bulky goods.

4) Indivisibility of certain goods: In barter system it was inconvenient to divide animals, house etc. into small parts, so it was difficult to fix proportion of one commodity in exchange for another commodity. For example, Individual 'A' has a sack of wheat and he wants a goat in exchange. Individual 'B' has a goat and he wants only half a sack of wheat. In this situation exchange between the two commodities is impossible due to indivisible nature of goat, for it being a live stock.

5) Problem of making deferred payments: Deferred payment means payments to be made in future. Repayment of loan was difficult due to exchange of commodities. For example, it was difficult to repay the perishable goods in the same condition in future.

Teacher's Note

In India, before we had money, people used to exchange things. A farmer with rice could trade it for cloth from a weaver. But this was very difficult when wants did not match.

Exam Trick

Remember the 5 difficulties: Double wants, no value measure, storage problem, cannot divide animals, cannot repay loans. Think of them like problems in old Indian trade.

Points to Remember

Barter means exchanging goods directly without money.
Double coincidence of wants means both people must want what the other has.
Perishable goods like milk cannot be stored for long.
Animals and houses cannot be divided into small pieces.
Repaying loans with goods was very difficult in barter system.

Definitions of Money

1) Prof Crowther: "Money is anything that is generally acceptable as a means of exchange and at the same time acts as a measure and a store of value".

2) Prof Walker: "Money is what money does".

Evolution of Money

Money has come into existence by evolution and not by revolution. With passage of time, the commodities which were used as money have changed depending upon the need of time and development of civilization. Money used in modern times is a result of many evolutionary changes that took place over a long period of time. Following are the types of money which very well explain the evolution of money.

Types of Money

1) Animal money: In protohistoric period, 'animal money' was used as a means of exchange. For example, cow, sheep, goat etc. However, due to their indivisible nature, commodity money came into existence.

2) Commodity money: In olden days, the commodities to be used as money were dependent upon climatic conditions and culture. For example, animal skin, grains, shells, feathers, tusk, salt, rare articles and stones were used as a medium of exchange. Due to the problem of storage of such commodities, metallic money came into existence.

3) Metallic money: Metallic money used durable metals such as gold, silver, copper, aluminum, nickel etc. However, scarcity of precious metals and lack of uniformity in metallic pieces gave rise to the use of metallic coins.

4) Metallic coins: In ancient times, rulers of various kingdoms used small pieces of metals and affixed their seals on them. With the passage of time, the monetary system was taken over by the government authorities with a view to give uniformity and legal status to metallic coins. Coins can be classified as under:

a) Standard or full bodied coins: Full bodied coins are those whose face value is equal to their intrinsic value. Face value indicates the exchange value fixed by issuing authority. These coins are made out of precious metals like gold, silver etc. Standard coins were used for some days during the British period.

b) Token coins: Token coins are those whose face value is higher than their intrinsic value. These coins are made of cheaper metals like aluminum, nickel etc. These coins are of lower denominations and are generally used for settling smaller transactions. In India, all coins in circulation today are token coins. Difficulties in transportation of token coins gave rise to paper money.

Teacher's Note

In India, we use coins and notes today. Long ago, people used animals and shells. Our rupee coin today is a token coin, not made of pure silver like old coins.

Exam Trick

Remember: Animal money → Commodity money → Metallic money → Metallic coins. Each one solved problems of the previous one. Token coins came because they are easier to carry than heavy full coins.

Points to Remember

Animal money was the first type of money used in ancient times.
Commodity money like shells and grains were used in different cultures.
Metallic coins had the king's seal on them for safety.
Standard coins were made of pure gold or silver.
Token coins today have less value in metal than their printed value.

5) Paper Money: Paper Money was a substitute for metallic money. In course of time, issue of currency notes was monopolized by the Central Bank. Paper money consists of paper currency issued by Government and Central Bank of the country.

In India, one rupee note and all coins are issued by the Government of India. Currency notes of higher denominations are issued by the Central Bank (Reserve Bank of India). Inconvenience in handling and risk of storing paper money gave rise to bank money.

6) Bank Money or Credit Money: Bank money refers to deposits which are in the form of cash saved by the people. It is used to create credit money. This can be withdrawable and transferable on demand, by means of cheque, demand draft etc. Cheque, demand draft are not actual money but credit instruments through which deposits are transferable. Credit money plays an important role in economic development. On the background of global economy, cashless transaction gained importance thereby giving rise to plastic money.

7) Plastic Money: Plastic Money is easy to use in transaction due to advanced technology. Debit cards and credit cards are used as plastic money. Further innovation in smart transactions led to the introduction of electronic money.

8) Electronic Money: E-money or Electronic money is a monetary value that is stored and transferred electronically through a variety of means. For example, a mobile phone, tablet, smart cards, computer etc. It is backed by the Central Bank. Electronic money is used for purchases and transactions globally. Digital wallets are also a form of stored electronic money.

You Should Know

a) Legal Tender Money: It is the money which is backed by law and cannot be refused in transaction by anybody on any ground. In India, all coins and currency notes are legal tender money.

b) Non-Legal Tender Money: It is the money which is generally used by people in final payments but there is no legal compulsion of acceptance. It can be refused. Cheques, bills of exchange are examples of this money. It is also known as optional money.

Teacher's Note

In India, when you go to a shop, the shopkeeper must accept rupee notes and coins. This is legal tender money. But if you give a cheque, the shopkeeper can say no. This is non-legal tender money.

Exam Trick

Remember: Legal tender = government forced to accept (like rupee notes). Non-legal tender = can be refused (like cheques). Digital money is the newest form that is growing in India.

Points to Remember

Paper money is made of paper and issued by the government.
Bank money or credit money uses cheques and demand drafts.
Plastic money means debit cards and credit cards.
Electronic money uses computers and mobile phones for transactions.
Legal tender money cannot be refused by anyone in India.

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