Money : Definition

Money is something which is too difficult to define since it is one of those concepts which are capable of being defined in different ways.

Different economists have defined money differently.

Hawtrey puts it “money is one of those concepts which, like a teaspoon or an umbrella, are defined primarily by the use or the purpose which they serve.”

Some economists have taken different functional definitions of money:

According to Prof. Walker, “Money is what money does”.

Money performs a variety of functions, but this definition does not specify any particular significant function of money.

Robertson defines money as ” anything which is widely accepted in payments for goods or in discharge of other kinds of business obligations.”

According to G. D. H. Cole, “money is anything which is habitually and widely used as a means of payment and is generally accepted in the settlement of debts.”

According to Kent, ” money is anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.”

Seligman has defined money as “anything that possesses general acceptability.”

These definitions of money are too narrow as they lay emphasis only on one or the other function of money. An appropriate definition of money must emphasise not only the important functions of money, but also its basic characteristic, namely general acceptability.

From this point of view, Crowther, defines money as “anything that is generally acceptable as a means of exchange and, at the same time, acts as a measure and store of value.”

This definition emphasises on the all the three functions of money – medium of exchange , measure of value and store of value.

It lays emphasis on the features of money – general acceptability, general purchasing power etc.

Kinds of Money :

Various types of money and their definitions are:

1. Token Money:

Token money is the money, the face value of which is more than its intrinsic (metallic) value.

All metallic money like coins of 1, 2, 5 and 10 rupee coins refers to token money.

They are generally of lower denomination and made up of cheap metals like nickle, copper or bronze.

The right of minting coins is the monopoly of the government.

Coins are useful for making transactions of small value. Main purpose of token money is to facilitate transaction of small value.

2. Currency Notes:

Currency notes refers to paper money, for example, 5, 10, 20, 50, 100, 500 and 2000 rupee notes that we carry around to make everyday purchases.

Currency notes have a very small intrinsic value of their own.

Now a day, they are inconvertible as there is no compulsion for the Central Bank to exchange it for gold.

Currency notes are also referred to as Fiat money, because they are issued on the fiat (order) of government.

In modern economy paper money or currency notes are widely used because it is economical, it is very convenient to carry and store paper money. Supply of paper money or currency notes can be easily changed as per the needs of the economy.

3. Convertible Money:

The convertible money is the form of money, which The Central Bank is under obligation to convert into the equal value of metallic reserve like gold and silver.

Initially the paper currency notes were convertible, but after World War I, almost all the countries abandoned gold convertibility.

From that time onward, paper money became inconvertible.

4. Inconvertible Money :

It is a form of money that is not convertible into gold or silver.

The Central Bank has no obligation to convert it into metallic reserve like gold or silver.

At present, all paper currency is inconvertible.

A currency note (say a hundred rupee note) carries the legend: “I promise to pay the bearer the sum of hundred rupees”, (signed by the Governor of RBI). This legend simply means that it can be converted into other notes or coins of equal value, but still it can not be converted into metallic reserve of the central bank. So the paper money is inconvertible.

5. Paper Money:

Paper money are the currency notes of 5, 10, 20, 50, 100, 200 and 500 and 2000 rupee notes.

They have very small intrinsic value.

They are inconvertible into metallic reserve of the central bank, but still they act as money because people have confidence in it.

Paper money are also called Fiat Money – because they are issued on the fiat (order) of government.

Paper money are also called Legal Tender means that the individual is bound to accept it in exchange for commodities and services, it can not be refused in settlement of payments of any kind.

Paper money is widespread because they are economical, convenient to carry and easy to store.

6. Deposit Money or Bank Money :

Deposit money refers to the money held with the commercial banks on the basis of which cheques could be drawn.

Customers of the banks deposit paper notes and coins with the banks for safekeeping. Each deposit is recorded as credit to the account of the bank’s customer.

These deposits are payable on demand and they can be transferred from one person to another.

On the basis of these deposits, people can draw cheques for making payments.

7. Fiat Money:

Fiat money is the form of money, which is issued on the order or fiat of the government. Example, paper money are fiat money.

Although paper money is inconvertible but still they act as money because people have confidence in it as it is issued on the fiat of government.

Since paper money has legal sanction or backing of the government they are also called as Legal Tender.

8. Cheque:

The cheque is an instruction to the bank to make payment or to make transfer equal to the amount mentioned in the cheque.

Cheques themselves are not money. It is the bank deposit money on the basis of which cheques are drawn that is considered to be money.

Cheques are widely accepted as mode of payment these days, for trade and business transaction because cheques are easy to use for large transaction and much safer, they are widely used as money in every economy.

Cheques are not legal tender, a person can legally refuse to accept payment through cheques and he can insist on payment in cash.

There is no guarantee that a cheque will be honoured by the bank in case of insufficient deposits with it.

9. Legal Tender Money:

The form of money which is issued by the order (fiat) of State. They have legal sanction or backing of the government are called as legal tender.

The individual is bound to accept it in exchange for commodities or services, it can not be refused in settlement of payments of any kind.

Example, coins and currency notes are legal tender money. But cheques are not legal tender money.

Legal tender can be divided into two classes : limited legal tender and unlimited legal tender.

Limited legal tender: limited legal tender is the money which is accepted only up to a certain defined limit, in exchange for commodity or services, beyond limit the receiver can refuse the payments. Example, in India coins of small denomination like 5, 10, 20, 25 paise are limited legal tender only up to rupees 25. The receiver may refuse to accept it beyond that limit.

Unlimited legal tender: This is the money in which the payment can be made up to any extent, there is no maximum limit. Currency notes of all denomination and coins of 50 paise and higher denominations are unlimited legal tender.

10. Optional Money:

This type of money has no legal backing of state, the acceptance of this as a medium of exchange depends on mutual trust of the parties involved.

Banking instruments like cheques are the example of optional money.

Give Difference between :

1. Convertible Money and Inconvertible money

SN

Convertible
money

Inconvertible
Money

1.

The form of money
which an order of the Central bank can be fully converted into metallic reserve
of gold or silver is called
convertible money.

The form of money,
for which there is no compulsion for the Central bank to exchange it for gold
or silver is called inconvertible money.

2.

Example, the
currency notes issued by the Central bank before the World War I, were convertible
into gold.

Example, the
currency notes issued by the central bank after World war I, were
inconvertible into gold.

2. Limited Legal Tender and Unlimited Legal Tender :

SN	Limited Legal Tender	Unlimited Legal Tender
1.	The money which is accepted only up to a certain defined limit in exchange for commodity or service, beyond this limit the receiver can refuse the payment is called limited legal tender.	The money in which the payment can be made up to any extent, there is no maximum limit.
2.	Example, the coins of small denomination like, 5, 10, 20, 25 paise are limited legal tender up to Rs 25. The receiver can refuse to accept it beyond that limit.	Currency notes of all denomination and coins of 50 paise and higher denomination are unlimited legal tender.

3. Currency and Deposit Money :

SN	Currency	Deposit Money or Bank Money
1.	Currency refers to the notes and coins which are issued by the central bank of the country.	The money deposit in the bank on the basis of which cheques could be drawn is called deposit money.
2.	Currency is tangible concept it can be felt, touched and has physical value.	Deposit money is intangible concept, it cannot be felt, touched and does not have physical vale.
3.	Currency is legal tender, they serve as money because it has legal backing of the government. A person can not refuse to take payment through cash.	Deposit money is not a legal tender, a person can legally refuse to accept payment through cheque and he can insist on payment in cash.
4.	Currency is fiat money, it is issued by the fiat (order) of the central bank.	Deposit money in the form of cheque is issued by the person who draws the cheque, it is not a fiat money.

Money : Definition and Kinds of Money Class 12 Economics

Money : Definition

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