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Evolution of Money

Barter System

Positives Negatives
  • Simplest in form
  • No foreign Exchange regime
  • No concentration of wealth
  • Double coincidence of wants was must
  • No division of labor
  • Exchange of perishable goods
  • No saving capital
  • No circular flow of income
  • No Divisibility or Fungibility of same value

 

Function of Money

Primary Function Derivative Function
Measure of Value + Medium of Exchange as it is –

  • Readily acceptable
  • Durable, Portable, Recognizable
  • Divisible, Fungible
  • Hard to Counterfeit

 

  • Store of Value – Savings Investment
  • Transfer of Value – Same value from Kashmir to Kanyakumari
  • Deferred Payment – Time value of Money Credit card, EMI etc.

 

  • 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

 

Evolution of Money

Evolution of Money

Commodity Money

  • Intrinsic value of commodity was used to make exchanges viz.
  • 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
  • Face value was not same for outsiders
  • 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
  • Forged in Gold (Muhr)                            High value
  • Forged in Silver (Rupaiya)                      Moderate value
  • Forged in Copper/ Bronze (Dam, Paisa) For day to day purchases

 

Positives of Metallic Money
  • Intrinsic value + Non-perishable
  • Divisible, Fungible
  • Foreign trade possible (without exchange rate)
  • Production was low Prices stable No Hyperinflation

 

Negatives of Metallic Money
  • Mansabdari payment system 50% in Gold +25% in Silver + 25% in Copper
  • Copper Dam Debasement 20 gm copper in Akbar time in a coin | 13 gm copper in Aurangzeb time 
  • People became vary of coin values Again started barter system
  • Tax collection & revenue system started declining
  • People started using East India company coins
  • Bulky to carry
  • Smuggling for intrinsic value to other Kingdoms (Main reason for debasement)

 

Paper Money (Fiat Money)

  • Fiat Money Used by the command of the government
  • Examples include US dollar, Indian Rupee, Euro, Yen, Yuan
  • Legally recognized to settle all debts & payments within territorial jurisdiction
  • Initially Fiat Money was pegged to Gold viz.
  • 1 US $   22 grains Gold
  • 1 British Pound 113 grain gold
  • 1 Pound 113/22 8 US $
  • But during world war 2 this system collapsed
  • After WW2 Fiat Money was formatted as Paper standard viz.
  • Central Bank free to print currency without gold backing
  • Exchange Rates Fixed Exchange rate + Floating Exchange rate + Managed Exchange rate

 

What is not Fiat Money?
  • Money without government legal backing
  • Superstores plastic coins, cards & coupons
  • Shares, Bonds, Debentures, G-Sec, T-bill
  • DD, Cheques, Credit Card, ATM card
  • Bitcoin & other Digital currency

 

Problems of Fiat Money
  • Debasement Over printing Hyper inflation
  • Still Bulky to carry + Theft + Counterfeit
  • Change problem Rounding off problem
  • Imagine a petrol pump not returning 60 paise per customer due to change problem
  • For Every 1 lakh customers pump is earning 60,000 rupees

 

India → Paper Standard
RBI

  • RBI Act 1934 Notes Printed from Rs. 2 to 1000 
Government

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

 

 

Bank Money

  • Backed by Central bank of the country viz.
  • Cheque, Bank Draft, NEFT, RTGS
  • Credit card, Debit cards, Visa Card, Master card, Rupay card
  • Benefits of Bank money
  • Spot payment + Deferred payment + Time saving
  • Easy to transfer over long distance
  • Exact amount can be transferred (No change problem)
  • Hard to counterfeit
  • Can be freezed if card is stolen via. KYC norms
  • Legally recognized for high value payment

 

Crypto Currency / Virtual Currency → Bitcoin

  • Major reasons for birth of crypto currency
  • Subprime crisis US QE Increased dollar supply Dollar’s purchasing power decreased
  • Banks charge fees on online transfer, credit card, ATM
  • Anarchist groups (a person who believes that government and laws are not necessary)
  • Birth of Bitcoin
  • Started in 2009 by Satoshi Nakomoto
  • 1 BTC 10(^8) Satoshi – Virtual money
  • Reward distribution for solving algorithm + Exchange by Fiat money + Selling goods & services

 

RTGS NEFT BITCOIN
  • Retail        2L to 5L
  • Corporate → 5L
Less than 2 L No ceiling
Processing fees Processing fees None
Instant Transfer Transfer within 1 hour cycle Transfer upto 10 minutes
Specific Timing & days Specific Timing & days None Can do 24/7
Central monitoring by RBI Central monitoring by RBI None
Can recover account via. password Can recover account via. password Once gone then gone forever
Requires Account number + IFSC code for transfers Requires Account number + IFSC code for transfers Only public address of wallet is required
KYC norms applies KYC norms applies None

 

RBI Stand on Decentralised Digital Currency / Virtual Currency (Bitcoin)

  • No central bank has authorized Bitcoins
  • Not Traded through BSE, NSE or Commodity exchange (SEBI, FMC)
  • No Forex dealers under FEMA can convert Fiat currency into Bitcoin or vice versa
  • Bitcoin Exchange websiteLegal status unclear
  • Danger Hacking, Phishing, Malware, Password lost
  • Consumer courts cannot help
  • High speculation & volatility
  • Mere digital code, no intrinsic value, not backed by Gold, silver or crude oil
  • Media reports on illegal drug, money laundering, terror-financing.
  • Unintentionally breaching anti-money laundering / Anti-terror laws
  • Same for all Digital currencies / virtual currencies
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4 Comments

  1. easy to understand…thanks iasmania

  2. This is called notes otherwise all websites so far i have visited were just copy paste material but here to the point answer.Absolutely as mentioned by above written statement it is -Easy To Digest Material.

    And quick to study during exam time,when we have shortage of time.Thanks Iasmania for this.

  3. very simplified …easy to digest..thank you

  4. awesome notes for IAS preparation

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