The Barter System
Barter system refers to the direct
exchange of goods for goods without the use of money. People preferred Money
Economy over Barter Economy due to the inconveniences in the Barter
system.
- Need for double coincidence of wants
- Lack of common measure of value
- Indivisibility of certain goods
- Lack of store of value
- Difficulty in transferring wealth
- Difficulty in making deferred payments
Evolution
of Money
Money is anything which is generally
acceptable in exchange for goods and services and in the settlement of
debts.
Present day Money Economy came into
existence in three different stages.
1.
Commodity Money
In the primitive societies, some
commodities such as animal skin, beads, shells, arrows, tobacco, wheat etc were
used as commodity money. But, soon it they were abandoned as they did not
possess some essential qualities of money such as acceptability, divisibility,
portability etc.
2.
Metallic Money
After sometimes, people started
using some metals such as bronze, nickel, copper, silver, gold etc in their
transactions. Difficulties faced in weighing and scarcity of these metals led
to the development of Coinage. Later, the ruling authorities replaced unstandardized
coins with standardized coins. Still there were problems of trimming and
debasing.
3.
Paper Money
Early goldsmiths used to accept the
deposit of gold and silver. They issued receipts for the precious metals
deposited with them. These receipts were paper claims to gold. It can be
exchanged for gold at any time. People realized that these receipts were far
easy for the payments of debt and other transactions than carrying gold. As
these receipts were accepted by people in the process of exchange, these
receipts became the first paper money in the history of money. At present, each
country issues its own paper notes, but they are not convertible into
gold.
Features
of Money
1. Acceptability (money must be generally acceptable)
2. Durability (it must be last longing but not
perishable)
3. Divisibility (it must be divisible without losing its
value)
4. Uniformity (it must be similar in quality and its
intrinsic value)
5. Portability (it must be easy to carry)
6. Scarcity (it must be limited in supply)
7. Stability (it must be stable in value)
Functions of Money
1. Medium of Exchange
Money is acceptable by everyone. It has removed the difficulties of
barter economy.
2. Measure of Value
The value of goods and services are now measured in terms of
money.
3. Store of Value
Money helps to store wealth for a longer period. But it is
not a good store of value during
inflation.
4. Standard for Deferred Payments
Goods and services can now be obtained and payment of debt
can be settled sometimes later.
Types
of Money
Money is generally classified into
three forms;
1. Metallic Money
Metallic money consists of coins made up of gold, silver,
copper etc. It varies in weight and value.
a)
Full bodied money (face value of the
coin equals its intrinsic value, that is the value of metal contained in it)
b)
Token Money (the face value of the
coin is greater than its intrinsic value. Modern coins are examples)
2. Paper Money
Receipts (paper claims) issued by the goldsmiths were the
first form of paper money. The modern paper money is called as Legal Tender. It
means that the paper money is recognized by law, issued by the central bank and
authorized by the state. Modern paper money is not backed up by gold and is
referred as Fiat or Fiduciary money.
3. Bank Money
Bank
money consists of cheques, drafts, traveler’s cheques, bills of exchange
etc.