صفحه تبادل اطلاعات برنامه یکساله اداره تجارت DBA
Diploma in Business Administration Program Students' Page
صفحه تبادل اطلاعات برنامه یکساله اداره تجارت DBA
Diploma in Business Administration Program Students' Pageمقدمه ای بر بانکداری Introduction to Banking
Introduction to Banking
Chapter No: 1
The Nature and Functions of Money
Instructor: Mr. M. Ajmal Karimi
CONTENTS:
Ø Definition Of Money
Ø Stages In Development Of Money
Ø Barter System
Ø Money And Its Functions
Ø Significance And Importance Of Money In A Capitalistic Economy
Ø Qualities Of A Good Money Material
Ø The Role Of Money
LECTURE I
I - Definition of Money
Money is one of the wonderful inventions of man. Money has been defined differently by different economists.
Ø Descriptive Definitions
Ø Legal Definitions
Ø Generally Acceptability Definitions
1. Descriptive Definitions
Definitions are descriptive in nature and mainly focus on the functions of money not on what money is.
Crowther – An outline of Money
Ø Anything generally acceptable as a means of exchange and that at the same time acts as a measure and store of value.
Coulborn:
l A means of valuation and of payment.
Cole:
l Anything that is widely used as a mean of payment and is generally acceptable in settlement of debts.
l These definitions only describe money which are purely descriptive and functional and are considered partial and narrow.
2. Legal Definitions
Definitions are based on the state theory of money.
According to these definitions, there should be a state force for a thing to be declared and accepted as money.
l Prof Knap: Anything which is declared by the state as money is money.
l Prof Hartley: Money should be legal tender, be declared as a mean of payment force & people should be forced to accept it for the purpose of money.
l The legal tender definitions are considered as narrow because of the fact that government can’t force people to accept money. The general acceptability principle along with the legal support is pivotal for a thing to serve as money. e.g. German Mark on - 1923- was refused as money “By People”.
3. General Acceptability Definitions
Another group of economist defines money in terms general acceptability.
l Seligman: Money is one thing that possesses general acceptability.
l Kents: Anything which is commonly used and generally accepted as medium of exchange or as a standard of value.
l D.H.Robertson: Anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations.
l S. Mishkin: Anything that is generally accepted in payment for goods and services or in the repayment of debts.
Modern Economists
l Modern Economists are of the view that a suitable definition of the money should point out not only the major functions of money but also possess the basic features of general acceptability.
l D. C. Colander ( Satisfactory Definition ) :
Money is a financial asset that makes the real economy function smoothly by serving as a medium of exchange, a unit of account and a store of wealth.
Money is different from wealth and income
l Money is anything which is generally acceptable in payment of goods and services.
l Wealth covers the total resources owned by an individual or business. It includes money, other assets such as land, property, cars, shares, etc.
l Income is the flow of money earnings per unit of time, a day, a week, a month or a year.
LECTURE II
II - Stages in Development of Money
Evolution of money
l In the earliest stage of human civilization, there was no use of money. The families were almost self sufficient. Each family consumed all it produced. There was no need to exchange goods and so there was no need for money. With the passage of time a need was felt to exchange goods directly for goods possessed by other persons. As a result barter system was developed and the earliest money used was named as commodity money.
l Commodity Money: is the money that has its value apart from its usage as money. A large number of items were used as commodity money at various ages and places. In primitive agricultural stages, domestic animals were used as money.
l With passage of time it was found that such commodities were not best suited as means of payment. In addition, people were having difficulties in storing them and lacked essentials of durability, transportability, divisibility, homogeneity etc thus, search was made which led to discovery of precious metals like gold, silver and copper.
l Metallic Money: Uncoined metals such as gold, silver, copper were used as medium of exchange. These coins had intrinsic value which was reflected in their face value. It became difficult for the people to know the weight and value of the piece of the bullion at sight. Debasement of metal further caused inconveniences and complications in exchange. Further development of the metallic money was the replacement of the unstandardized metals with a standardized coinage. The first piece of metal to be considered a coin was invented in Lydia, Turkey, in 670 B.C. However, the idea of money took place long time ago.
l Paper Currency: The next development in the payment system was paper currency. Exact date and year of the invention of paper money is hard to determine, but it is believed that the paper money was first used in 600AD in China. Initially, they were issued locally and it was only during the reign of Song Dynasty in 960 that it came as a generally circulating mode of money. Initially the paper currency carried a promise that it was convertible into a fixed quantity of metallic gold and silver. Before 1914, the bulk of bank notes were convertible into gold.
l The paper money became inconvertible to gold after 1914 in England and in 1933 in America.
l The statement written on the bank notes “ I promise to pay the bearer on demand..” is worthless thus inconvertible money was named Fiat Money.
l Fiat Money: consists of paper money that derives its status as money from the power of the state. It is not backed by the promise to pay something of intrinsic value. It accepted because the govt declares it a legal tender and is accepted as payment for debts. Paper currency is lighter than coins.
l Drawbacks: Payment in a large amount difficult to count, expensive to transport and can easily be stolen. Moreover, there is always the danger of over issue of currency notes etc.
l Credit Money: Development in Payment system was the invention of check. In Modern banking the payment of transactions are mostly received and made through checks. Easier to make large amount of transactions and to transport of large payments.
l Drawbacks: Checks are not money but merely representation of money in a bank account and are not legal tenders which cannot be enforced in payment of debts.
l Electronic Banking Stage: Development of computers and advanced communication technology reduced the paper work in payment system, instead the electronic funds transfer system is taking its place.
l The payments are increasingly made through magnetic plastic strip cards such as bank debit card, credit card, smart card etc.
l Ultimate benefits: E. B reduced processing costs, lead times for making the payments and increased flexibility in choosing a payment mechanism.
l Checks, bills of exchange, plastic cards etc help in the transfer of money but they are not considered as money because they are not legal tender and cannot be enforced in payments of debts.
III - Barter System
Contains:
l Meaning of Barter
l Inconveniences or Difficulties of Barter System
l How money has removed the difficulties of Barter system
Meaning of Barter: It means direct of exchange of goods for good. This system was prevalent at an early stage of man’s economic life when the wants were very limited in number.This direct exchange of surplus commodity for commodity with another person without the use of money is termed as Barter economics.
Inconveniences of Barter System
l The exchange can only be effective if a person is able to spare what the other person wants and at the same time needs what the other can spare.
l For instance a person has surplus wheat with him and wishes to exchange it with cloth. He will have to find a person who not only possesses sufficient cloth but also desires wheat.
l The transactions cost of double coincidence of wants are very high.
2. Lack of common measures: Another difficulty in Barter system is the absence of common measure which can help in the estimation of relative values of the two commodities.
l For instance a man who has a horse with him and the other a cow and both are willing to trade. A man who has a horse assigns the value of one horse as two cows. The other who has a cow designs the value of one cow as one horse. In the absence of common measure of value, the exchange b/w the two parties cannot take place unless both assign the same value to different commodities.
3. Lack of Sub- divisions: One serious drawback of barter is that even when double coincidence of wants exists b/w the two parties, the exchange may not take place even then. This is particularly the case in those commodities which cannot be sub-divided.
l For instance a person has a cow and wishes to attain 40 Kilos of wheat. Cow is more valuable than 40 kilos of wheat. What part of the cow should be given in exchange for 40 kilos of wheat?
4. Lack of Store of Value: Another serious inconvenience of barter system is that goods particularly perishable ones cannot be stored for a longer period. They lose their value ad time passes on.
How money has removed the difficulties of barter system?
The use of money has converted a barter economy in monetary economy.
1. Medium of exchange. The goods and services are now purchased and sold with the help of money.
2. Common measure of value. The problem of comparing prices of goods and services in the market is now simplified.
3. With the help of money, the exchange of present goods on credit has been made easier.
4. Money as a liquid store of value has facilitated its possessor to purchase an other asset at any time.
5. Through money value can be easily and quickly transferred from one place to another.
4. Market Mechanism: In a monetary economy, market mechanism operates. The demand and supply are brought into balance by the movement of prices. The decision of what, how and for whom to produce are determined in accordance with market conditions or dictates of price mechanism.
