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/ 1030
KOTA {Ray }
Students can retain library books only for two
weeks at the most
BORROWER'S DUE DTATE SIGNATURE MONETARY ECONOMICS
MA (Econ & Phil), PhD
Post Graduate Department of Economics,
5D Government College, Ludhiana.
TS,
fs
KALYANI PUBLISHERS
IE DRELWT LLAMAS! eA A AU PY
HYDERABAD + MADRAS + CALCUTTA » CUTTACK KALYANI PUBLISHERS
Head Office
Ll Reyeder Mager indhors 141 008,
Branch Officer
4863/28 Bhant Ren Road,
24 Daryagmy Sew Delh 100 002
B 16, Sector § KODA CUP)
52, Shinn Coreplea 26/2 Rarganathan Suect,
T Nagar Stadrar-60) O17
Tools Satr Cuntack (Orissa)
34-1108 Nartyseigads, Hydeahed SOG MG (AP)
No 1WW2B Remsnd Wamemdar Street,
Caccts 700 OF
Fue qd
Cory RIGHT € 1992, RR PAUL
“te,
Chaora Bazar ‘igger Mend,
Ladans
PRINTED IN INDIA
At Kalyary Pronags BIS Sector 8 SODA
and gublushed by Mier. Usha Ray Komur for
Kalyam Pobishers New Def 100 092. TO
THE MOTHER
The Divine Force
Behind All Work PREFACE
Tis book presents a systematic and analytical study of monetary
economics It has been designed to meet the requirements of the students of
economics and commerce at graduate, honours and post graduate levels in
various universities and also of those preparing for different competstive and
professional examinauons, such as, [AS ,IES,CA,MBA,CAIIB , etc
The book analyses various aspects of monetary economics, it contains
detailed discussions of monetary theory, monetary policy and monetary
insututions with special reference to their relevance to developing countnes,
particularly India.
Wuh a view to provide clear understand:ng about the fundamentals of
Monetary economics, special efforts have been made to present a simple,
systematic and critical study to the students without involving them into the
ininicaciés and pnnecessary detanls of the subject To enable the readers an easy
and quick grasp of various tdeas, the subject matter has been properly
divided inte sections, sub sectrons and further into small headings and points,
of course, not at the cost of losing the Jogical link and continusty of thought.
Other unportant features of the book are comprehensive coverage, simple
style, lucid language, use of diagrams, tables and slustrations, mathematical
treatment wherever considered necessary, select references and relevant
questions at the end of each chapter
For the sake of conventence to the readers, the book has been divided into
fourparts Part Acontarns various topics relating to money, itincludes discussion
on monetary theory, Monetary policy, money and capital markets, and a
comprehensive treatment of inflation and deflation, Part B discusses the subyect-
matter of banking, including Indian banking Part-C deals with the theory of
income and employment, tncluding comparauve smdy of the classical,
Keynesian and monctanst views on the subject and 4 discussion on the fiscal
policy Part D provides an extensive analysis of mnicmauonal aspect of monetary
economics, 1 includes topics on the theory of internauonal trade, balance of
payments, forergn exchange intemayonal financial and economuc instztutions,
and intemational monetary system
No author of a text book can isolate humself 1 em, therefore, greatly
indebted to a large number of wnters and authorities on the subject whose
publications I have referred while wntng ths book. | am also grateful ta my
various friends and colleagues for providing me opportunites to have occasional
dsscussions on the subject and giving valuable suggestions Moreover, credit
must go to M/s Kalyani Publushers for moe get up and printing of the book. Last bet not the least, [ must appreciate the cooperative spint shown by
my wile, Santosh, and my sons, Rayat and Sachin, during the enure penod of
wring the book It 1s hoped that the book will prove useful both to the students
a3 well as to the teactiers Comments and suggesuons for improvement from the
readers of the book will be gratefully accepted and given due consecration
1992 RR Paul 2
3.
4.
5,
CONTENTS
PART-A
MONEY
Page
Barter and Evolution of Maney 3-24
- Barter System
Evolunon of Money
Classification of Money
Money and Near-Money
Qualines of Good Money Matenal
Monetary Economy
‘unctions and Significance of Money 25-50
Meaning of Money
Empincal Definition of Money
Functions of Money
Changing Role of Money
Role of Money in a Capitalist Economy
Role of Money in a Socialist Economy
» Role of Money in 2 Developing and Mixed Economy
Money 18 a Mixed Blessing
Monetary Standards 51-86
1, Monetary Standard
2. Metallic Standard
3, Gold Standard
4 Types of Gold Standard
5 Paper Standard
~ Value of Money 87-102
1, Concept of Value of Money
2 Measurement of Value of Money
3 Dufficultes in Measuring Changes in Valac of Money
4. imponance of Index Numbers -
S Types of Index Numbers
Quantity Theory of Monty 103-149
1. Introduction
2. Fisher's Transactions Approach
s Tamortge Tain inirare ppruun
4 Fisherran and Cambndge Approaches Compared
5 Keynes" Theory of Moncy and Prices
6 Bnedman’s Moderh Quantity Theory of Money 6
8.
9.
10.
Ik.
Income Theory of Money
i, Introduction
2, Income-Expenditure Approach
3, Saving-Investment Approach
4, Supenonty of Income Theary of Money
Rate of Interest
. Concept of Interest
Classica! Theory of Interest
Neo-Classical Loanable Funds Theory of Interest
Keynes’ Liquidity Preference Theory of Interest
. Companson between Classical, Neo-Classical
and Keynesian Theories of Interest
6 Modern Theory of Interest
7, Term Structure of Interest Rates
Demand for Money
1 The Classical Theory of Demand for Money
2. Keynes’ Theory of Demand for Money
3. Portfolio Balance Approach
4, Fnedman's Wealth Theory of Demand for Money
5 Demand for Money in Underdeveloped Countries
Supply of Money
Consutuents of Money Supply
Approaches to the Definizon of Money Supply
Velocity of Money
Theory of Money Supply
. Money Supply in Indra
Indian Currency System
Money and Capital Markets
lL. Financial System
2° Money Market
3 London Money Market
4, New York Money Market
5. Capital Market
Monetary Policy
1. Meaning and Obyectu.cs of Monetary Policy
2) Monetary Policy in Developing Countnes
3. Effecuveness of Monetary Policy
4, Targets of Monetary Policy
Inflation and Deflation
1, Meanng -
2, Types of Inflauon
3. Inflauonary Gap
~
Un fe ue bo oe
\
Awhwpr
141-156
157-208
209.234
235-264
265-290
291-332
333-382 13.
14,
15.
16.
« Demand-Pull and Cost-Push Inflation
. Inflation in Underdeveloped Countnes
Causes of Inflation
. Effects of Inflation
. Control of Inflauon
, Deflauon
Phillips Curve and Stagflation 383-408
1 Phillips Curve
2. Shuft nm Philips Curve—Effect of Cost of Living on Wages
3 Stagflation
4. Fnedman Phelps Model of Stagflation
Inflationary Cycle and Supply-Side Economics - 409-434
ft. Inflauonary Cycle—The Monetanst View
2 Theones of Expectations Formation
3. Supply-Side Economics '
Liquidity Theory of Money 435-444
l, Statement of the Theary
2 Radcliffe Report,
BO PN
3. Gurley-Show Thesis ‘
4, Evaluation
Neo-Classical Theory of Money 445-472
1. Neutrality of Money
2. Dichotomtsation of Pricing Process
3. Real-Balance Effect
PART -B
BANKING
Commercial Banking 3-46
. Ongin and Growth
Meaning and Functions of Bank
. Role of Commercial Banks in a Developing Economy
Types of Banks
Banking Systems
Balances Sheet of a Bank
Portfolio Management
Credit Creation
New Trends in Commercial Banking
Central Banking
1 Introduction
2, Funcudns of Central Bank
3. Role of Central Bank in Developing Countries
WP AIAW whe
47-88
‘
\ won ain hb
Credit Control
Methods of Credit Control
Bank Rate Policy
Open Market Operayons
Vanable Cash Reserve Rabo
Quantitanve Methods Compared
10 Selective Credit Controls
Indian Money Market 81-98
1
2
3
4
Structure of Indian Money Market
Defects of Indian Money Market
Measures to Improve Indian Money Market
Bill Market an India
Indigenous Bankers and Money Lenders 99-106
1
2
Cc
Arua wpe
AUPE Ww aAAu ah
3
6
7
Indigenous Bankers
Money Lenders
ommercial Banking sn India 107-130
Indian Commercial Banks
Natonalisation of Banks
Achievements of Nationalised Banks
Critical Appraisal
Deposit Insurance and Credit Guarantee Scheme
Banking Legislanon in India
ooperative Banking in India 131-154
Introducuon
Structure of Cooperanve Bankang
Land Development Banks
Evaluauon of Cooperative Banking
Reserve Bank and Cooperative Banking
Regional Rural Banks
National Bank for Agnculture and Rural Development
eserve Bank of India 155-184
Introduction
Funcuons of Reserve Bank
Monetary Policy of Reserve Bank
Review of Working of Monetary System
— Chakaravanty Commuttee Report
Reserve Bank and Rural Finance
Reserve Bank and Industnal Finance
Achievements and Failures of Reserve Bank
State Bank of India 185-196
1 Establishment and Organisation
2. Obyectives and Funcuons
3
Achievements L
3.
Exchange Banks 197-204
1. Exchange Banks
2. Indian Banks Abroad
Non-Bank Financia! Intermediaries and
Development Banks 205-234
1, Non-Bank Financial Intermediaries
. Development Banks -
industnal Finance Corporation of india
State Finance Corporations
Industnal Development Bank of India
Indastnal Credit and Investment Comoranuon of India
Unut Trust of India
industnal Reconstrycuion Bank of India
. Cntcal Evaluation of Development Banks
-“
ON AUR wt
PART-C
INCOME AND EMPLOYMENT THEORY
National Income 3-30
1. Meaning of National income
2, Vanous Concepts of National Income
3. Measurement of National Income
4, Difficulties rn the Calculation of National Income
5. Importance of National Income Studies
Theory of Employment ~ 31-76
1, Classical Theory of Employment
2. Say’s Law of Markets
3. Keynesian Theory of Employment
4. Punciple of Effectve Demand
Consumption Function 77-402
1. Consumpuon Function and Psychological Law
2. Technical Aunbutes of Consumpton Functen
3. Saving and Saving Function
4, Equations of Consumpuon and Saving Functions
5. Importance and implications of Consumption Function
6. Factors Affecting Consumption Function
7, Measures to Increase Propensity to Consume
Investment Function . 103-120
1. Investment
2, Marginal Efficiency of Capital (HEC)
3 Investment Function or Inducement to Invest 4, Factors Affecting MEC or Inducement to Invest
5, Measures to Stumulate Private Investment
Multiplier and Accelerator 121-144
1. Mulupher
2. Accelerator
3. Interaction of Muluplier and Accelerator
Classicism, Keynesianism and Monetarism 145-182
1. Introduction
2. Classical and Keynesian Models Compared
3. Keynesuanisin Versus Monetarsm
4. Rules Versus Discretion
Fiscal Policy 183-220
1. Meaning and Objectives of Fiscal Policy
2. Fiscal Pobcy Dunng Inflanon and Deflation
3. Fiscal Policy in a Developing Country
4, Effecuveness and Limmauons of Fiscal Policy
5, Monetary and Fiscal Policy Mix
6 Interefauon and Coordinauon of Monetary and Fiscal Policies
PART -D
INTERNATIONAL TRADE
Classical Theory of International Trade 3-26
Internal and International Trade
. Comparanve Cost Theory
Critical Evaluauon of Comparauve Cost Theory
Modhficauons of Comparauve Cost Theory
. Theory of Comparanve Cost and Underdeveloped Countries
Gains from Trade and Terms of Trade 27-50
L. Gains from International Trade
2. Terms of Trade
3. Factors Influencing Terms of Trade
4. Equibrium Terms of Trade or Theory of Reciprocal Demand
3. Terms of Trade and Economic Development
Modern Theory of International Trade
a
a mu
51-72
1. Heckscher-Ohlin Theory
2 Factor-Pnee Equilisation Theory
3. Other Related Theorems
4, Comparison between Classical Theory and Modem Theory
- Empincal Evidence
~ 4. Free Trade and Protection TIAL
1, Free Trade
2. Protection
3. Protection and Underdeveloped Countries
4, Forms and Methods of Protection
5. Effects of Protection
5. Balance of Payments 111-126
1. Introduction .
2. Structure of Balance of Payments
3. Disequilibrium im Balance of Payments -
4. Methods of Correcting Disequtlibnum
6. Foreign Exchange 127-170
1, Introduchon
2. Fortign Exchange Market
3. Rate of Exchange _
4, Mmt Panty Theory
5. Purchasing Power Parity Theory
6. Balance of Payments or Modem Theory
7. Factors Influencing Rate of Exchange
8 Fixed and Flexible Exchange Rates
9, Debate over Fixed and Flexible Exchange Rates
10, Forward Exchange Market
11 Arbitrage
7. Exchange Control 171-186
1. Introduction
2. Objectives of Exchange Control
3, Methods of Exchange Conwol
4 Defects of Exchange Control
8. International Monetary Fund. - 187-260
1. Internauional Monetary Fund (IMF) and tts Werking
2 Cnucal Apprasal of IMF
9. Other International Financial Institutions 201-222
J. International Bank for Reconstruction and Development
Q(BRD) or World Bank
Evaluation of the Working of IBRD
. Intemational Finance Corporanon (IFC)
. International Development Association (IDA)
Asian Development Bank (ADB)
10. —International Economic Organisations 223-242
1. General Agreement on Tariffs and Trade (GATT)
2. United Nations Conference on Trade and Development (UNCTAD)
~3 European Economuc Community (EEC)
way i.
iz.
13.
14,
International Liquidity 243-264
1, Introduction
2. Problem of Intemational Liquidity
3, Solution to the Liquidity Problem
4, International Liquidity Problem in Developing Countries
5. Special Drawing Rights (SDRs)
Foreign Trade of India 265-294
Trends and Features of India's Trade
, Balance of Payments -
Foreign Trade Policy of India
Export Promotion
Trade Policy 1991
nternal Trade of India 295-316
. Growth of Intemal Trade
Trarsportauon and Communications for Intemal Trade
. Transport Facilities for Internal Trade
Communication Facilites for internal Trade
. Public Distribution System
Finaneimg of Intemal Trade
International Monetary System H7-340
1, Breton Woods System (1945-1973)
2. Floating Exchange Rate System (Since 1973)
3. Reform of Internauanal Monetary System
4, European Monetary System (EMS) ,
Neo
SoA Bw
At Boh = PART-A
MONEY 1
BARTER AND EVOLUTION OF MONEY
1.
N
3.
Barter System
Difficulties of Barter System
Eveclution of Money
Invention of Moncy
Development of Money
Classification of Money
(A) Maney Proper and Money of Account
{B) Commodity Money and Representive Money
{C) Legal Tender and Optional Money
(D} Metallic Money
(E) Paper Money
(F) Credit Money
Money and Near-Money
Types of Near Money
Distincuon between Money and Near Moncy
~ Similarmes between Money and Near Money
Significance of Near- Money
Qualities of Good Morey materral
Monetary Economy
Features of Monetary Economy 1
Barter and Evolution of Money
1. BARTER SYSTEM
Money 1s something which 1s generatly accepted as a medium of exchange
Tus one of the most bastc and significant inventions of mankiknd Before money
came into use, exchange took place throug. barter system, +e goods were
exchanged for goods Barter means direct exchange of goods In other words,
barterrefers to exchanging of goods without the use of money Forexample,com
may be exchanged for cloth, house for horses, bananas for organges and soon
The barter system has certain advantages
ft) This a simple system devoid of the complex problems of the modern
monetary system
(u) — There 1s no question of over or under production (or of unemployment
or over full employment) under the barter system since goods are
produced just to meet the needs of the society
(it) ‘The problems of mtermational trade such as, foresgn exchnage crisis,
adverse balane of payments, do not exist under barter system
{iv} Theress no problem of concentration of economic power into the hands
of a few nch persons under the barter system because there 1s no
possibility of stormg the commodities
(v) Personal and natural resources are tdeally utilssed to meet the needs of
the socicty without involving any wastage
(vi} The barter system also reaps the benefits of division of labour because
itrepresents agreat step forward from a static of self suffictency in which
every man has to be a yack of all trades and master of nene
Barter system was in existence inthe primitisc communities emerging from
subsistence economy tocxchange ccononty Inthesecommuntties theeconomic
units were mostly self sufficrent and there was very hive trade activities Even
today, n some parts of African countries and even in some backwand rural areas
of India barter exchange prevanls Barter system works well ma uriditronal
\ 6 Barter and Evolution: of Money
society in which human wants arc basic and a few, the Level of economic
‘ development is very low, the scale of production 1s small and the exchange ‘
lumted As the society develops exchange through barter becomes mote ani
more difficult and the need for moncy 3s increasingly felt.
Difficulnes of Barter System
'
Barter sysiem involves various difficulties and inconveniences which are
discussed belaw
1. Double Comeidence of Wants Under barter sysiem, a double
comedence of wants 1s required for exchange In other words, the wants of the
two persons who desire to exchange goods mustcomneide For exampic if person
A wants1o acquire shoes in exchange for wheat, then he must find another person
who wants wheat for shoes Such a double coincidence of wants involves great
difficulty and wastage of ume , ina modem society, wt rarely occurs In the
absence of a double comceidence of wants the dividuals under barter system are
compelled either to hold goods for long periods of ume, of to make numerous
intermedrary exchanges m order to get finally the goods of their choice
2 Absence of Common Measure of Value. Even if stas possible tohave the
double coindence of wants the absence of a common measure of value ercates
great problem because a ict of times wasted to strike a bargam Since there sno
common measure in terms of which the value of a commodity can be expressed,
the problem arises haw much wheat should be exchanged for how many pairs
of shoes
In fact, under the barter system, every good must be expressed in terms af
every other good If, for example, there are 1000 goods in the economy, then, in
the absence of monetary unit,every good can be exchanged forthe Temaiming 999
goods Whats truc for onc good will be true for al! other 999 foads This, the
number of unique exchange rates or pnces in this 1000 foods economy can be
found by the formula
R = NDI
2
witere K = number of exchange rates , N = number of Boods to be exchanged
Using the above example
. R= me = 499500
‘This shows that if a person tries to make a transacu :
on, be will be f:
almost one half million pices On the other sy wah
wien x *T 1000 unitof measurement, the number of exchange rates
wil = N—ls= 1=999 only Thus, the use of a mon
accoumung (whichis absent in banter syste: : Clary unit of
and facilitates trade 7 ystem) makes the economic lifeless costly
hand, ina modern economy with Barter and Evolution of Money 7
3 Lack of Divisibiltty Another difficulty of barter system relates to the
fact that all goods cannot be divided and subdivided In the absence of a
common medium of exchange, a problem arises, when a big indivisible
commodity 1s to be exchanged for a smaller commodity For example, if the
price of a horse as equal to 10 shirts, then a person having one shirt cannot
exchange 2t for the horse because i118 not possible to divide the horse in small
pieces vw hout destroying its utility
4 ‘he Problem of Stormg Wealth Under a barter system, there 1s
absence of a proper and convenient means of stormg wealth or value (a) As
opposed to etoring of generalised purchasing power (1n the form of money) ina
monetary conomy the mdividuals have to store specific purchasing power (in
the form a: trorses, shoes, wheatetc ) underthe barter system which may decrease
im value in the duc course of time duc to physical detenoration or a change in
tastes (b) It 1s very capensive to store specific goods fora fong nme (c) Again
the wealth stored in the form of specific goods may create jealousy and enmity
among the neaghbours er relatives
5 Difficulty of Deferred Payments The barter system does not provide
a satisfactory unit im terms of which the contracts about the deferred (future)
paymients are to be wnitten In an exchange economy, many contracts relate to
future activities and future payments Under barter system, future payments are
written in terms of specific goods It creates many problem Chandler has
mentioned three such problems ‘
‘@ It may create controversy regarding the quality of goods or services to be
tepard in futuce
(b) The two pienes may be unable to agree on the specific good te be used
for repayment
(c) Both prtics run the risk that the goods to be repaid may increase or
decrease in vlaue over the poriod of contract
6 Problem of Transportation Another difficulty of barter system 1s
that goods and services cannot be transported conveniently from ore place to
another Forexample,itisnoteasy and withoutrisk foranindividual totake heaps
of wheat or herd of cattle to a distant market to exchange them for other goods
With the use of money, the inconveniences or risks of transportation are rem: oved
' The above discusston clearly mdicates thatthe casts of barter are much more
than «ts benefits parucularly in a modem society The barter system may be
sunable for the socrenes nm which individuals have limited wants and sumpie
living and asa result asmali range of goods and services 18 produced and there
1 LV Chandler The Economics of Money and Banting p.4 8 Barter and Evolution of Money
is Latte rade Butina modem society, ¥ 1th the expansion of volume and variety
of production and increase in the frecuency of tmde, barter ts tightly inefficient
system of exchange tis because of the vanons difficulues of the barter system,
money was invented and sore kind of meneiary system was evolved in every
society,
2, EVOLUTION OF MONEY
Invention of Money
Increasing difficulties and imvonyemences of the barter system led to the
invention of money As the society developed, the division of labour and
speciahsation mereased and, as a result, volume of production and trade
expanded. In such conditions, the barter system of direct exchanye Letween
various commodities created difficulues, such es, the problem of double
coincidence of wants, the probletn of common measure of valuc, etc In order to
overcome these difficulues, money was invented According to Crowther,
“Money 1s one of the most fundamental of all man’s invenuons Every branch of
knowledge has its fundamental discovery In mechaniesitis the wheal, in science
fire, in polises the vote Sumilarly, in Economics, in the whole commertial side
of mn s social existence, money 1s the essential invention of which all the rest
8
Money was an invention an the sense that “
power of man to make the step from simpt
Money was first used asa umtt of account or
other things were to be measured and comp
aumutofaccount was a simple but a signifi
of goods to be expressed in terms of a co
itneeded the conscious reason ng
€ barter ta moncy-accounung”*
a Numerare in terms of which all
ared The mtroduction of money as
cant invention It allowed the process
mmon unit of account , made the non-
terms of one standard Commodity (e p , goat)
The use
difficulues of bares 2 unit of account did not, however, remove all the
logether Thus difficulty was : $ sull the difficulty of bnngtng the two partes
became a medium of e€Xchan oN when the money, the umt of account, also
gs Com was no fonger exchanged for meat 3 it was
ard Mportant use mn
wh
With the Mventon of money vo
1° G Coun
2 shat pag 4% lie of Money (1940)
of viaue MONCy Was put was to act as a store
nothing except money was needed to be
P 16-17 Barter and Evolution of Money 9
stored because money, being the general purchasing power, could purchase
anything atany time Inthisway, the three functions: ¢, umtof account, medium
of exchange and store of value performed by a commodity (called money)
together constitute the invention of money
Development of Money
The argin of money 1s not known because of the non availatulity of recorded
information , its deep rooted mantiquity As Lord Keyneshas putt, “Its origins
are lost ra the mists when the 2ce was melting, and may well stretch back into the
paradtsac intervals in human history of the inter-glactal pentods when the
weather was delightful and the mind free td be fertile of new 1deas—sn the islands
of Hespendes of Alanus or some Eden of Cental Asia’ No doubt, the evolution
of money has been a secular process and shall continue to remain so, but the
development of money in the present form can be histoncally traced as st has
passed through different stages m decordance with the growth of human
civiltsqucn These stages are discussed below
1, Animal Money. In pnmiuve agricultural communes, domestic
anunals were used as money Cattle were considered the common instrument
of exchange Different things were valved in terms of the number of cattle they
can command ia exchange In ancient India, according to Arth Veda, Go Dhan
(cow-wealth) was aecepicd as a form of money Surilarly, upto the 4th
century BC , cows and sheep were officzally recognised forms of moncy to
be used for collecting fines and taxes in the Roman State In Homenc poems
(written in probably 9th century B C )the prices of commodities were expressed
ta terms of ox
2. Commodity Morey. In many countries, prumtive money took the form
of commodity money A number of commodities Like, bows, arrows, ansmat
skins, shells, precious stones, nce, tea, etc , were used 2s money ‘The selection
of a commodity to serve as money depended upon different factors bike, the
locaton of the communty , climate of the region , cultural and economic
developmentof the society etc For example, communines hving by the sea shore.
chose shells or fish hoks as money In the cold regions like, alaska and Sibena,
people adopted animal skins and fursas money In the tropical regions of Ainca,
elephant tusks and uger jaws were used as moncy
Anmmaland commodity money had many senous disadvantages (a) Inlacks
umformity and standardisation , all cows and goats are notidentical (b) Antmais
and commodities are an inefficient store of value , there 1s always a possibility
of loss of value over a period of tsme ; moreover, the cost of storing animal and
commodiuy money 3 very high (c) Animals and commodiues are not cashy
1 JM Keynes A Treatise on Money, Vol Lp 3 4 10 Barter and Evolunon of Mone»
transferable because of difficulnes of portabiiny (6) There 15 the problem of
indivisibility (e} The supply of animals.and commodities may not be easily and
quickly changed.
3 MetalheMoney. Wuhthe growthof socicty from pastoral tocommercial
siage, ihe compssiion of moncy also changed from animal and commodity
money 0 metallic money Gold and silver wore the metals mostly used to form
metallic money Due to thetr scarcity, usefulness and attractiveness gold and
silver were regarded as natural money The use of metals as moncy ulumatcly led
to the developrrent of comage system According to AJ Toynbee, the comage
began i Lydia, a Greek Cuty State around 700 B C The coinage continued tli
the 17th century
Metalic money (uncomed metals and coms} overcame most af the
diffeulites of animal and commodity money But, i had its own
disadvantages (a) Quick transacuions are not possible through coins (b) On
actountof ns weight late quantites of coins are not easthy portable (c) Metallic
money can be easily lost and stolea (dj Shor weighing and adulleranon
problems make the transaction casts of uncowied metallic money higher Every
ume the quantity and quality of the metal 1s ro be tested
4 Paper Money Paper Moncy formed the next stage in the evolution of
money It was introduced in the 17th and 18th centunes and has now become the
most popular from of money Initially due to the safety problem of caring
costher mentals, like gold and silver from one place to another, the marchants
used (0 Cary paper receipts against metatlic money With the passage of ume,
the scarcity of metals ed the state autHonties to mooduce convenible paper
CUrTeNcy , paper monty was onvertible mlo metals in the later stages, howescr,
paper money developed into flat money or inconveruble fegal tender , paper
money was not convertible into metals
Merits The following are the advantages of paper moncy
Q) Was economeal Paper is much cheaper then any other metal
(i) Iteconomuses the use of valuable metals, like gold and silver
(ui) There 2s no depreciation of metals in system of paper money
Gv) ftis convententto Carry paper money from one place to the other
(v) Itas easy to store large amounts of Paper money ina small yault,
(1) It can be easily replaced.
(vu> Changes in the supply of money c
an be casi made 1n accordan,
the requirements of the economy , mane ce wath Barter and Evolution of Money et
Demernts ; Paper money afso has some disadvantages
() There 1s always the danger of over tssue of curtency notes because the
changes in money supply can b¢ made at the will of the goverment
Over issue of paper Currency results in inflationary situation in the
country
(u) Paper money lacks public confidence because mostly 11s not backed by
metallic reserves
(iu) Paper money 1s less durable than metallic money
ftv) Paper money ts acceptable only with in the domestic economy and not
for making foreign exchange payments
{vy} Smce the supply of paper money 1s Lrable to quick changes there is lack
of stability in 11s value
(v1) Flactuatzans m the value of paper money gonerates an atmosphare of
uncertainty in the economy which, m tum promotes speculative
acuvities
r
(vu) Paper money has no intrinsic value of tts own Thus when paper money
1s demonetised, its value falls to zero
To conclude, the ments of paper money are more than us demerits In
reality, in almost every country, papcr money ts extensively used Its so called
demerits arise mainly due to meffective management by monetary authority
Proper and effective control of paper moncy 18 conducive to economic prosperity
inthe county
§ Credit Money. Along with the papet money, credit money or bank
money also emerged dune to the development of banking insttntions and Ucar
credit Creation activities Credit money (1, cheques 1ssued against demand
deposits), in fact, 1s not money, it only performs the functions of money Credit
moncy Js, therefore, regarded as hear moncy
The credit money 1s becoming more and moie popular becuase of the
following advantages {a} Bank money 1s not so fable to foss or theft as other
types ofmoney (b}Ttcan be transported very cheaply, no matter how large ts the
amount of payment and how great 15 the distance from paycr to the payce. (¢c)
Cheques can be written for the exact amount and there 1s no need of making
change and counting bills and coins (4) When endorsed by the payee, cheques
serve a8 a Convement receipt for payment.
' & Electrome Banking Stage The US A and many other developed
Countries have now entered into an era of electronic banking Instead of using
cash or cheques people can make deposits and purchases simply by electromc 12 Barter and Evolution of Money
signals Does this mean thal moncy 1s no longer being used or that monty has
become obsolete? The answer is certainly 8 Electrome banking doesnot mean
the death of money It only means that the method of transfernng moncy 3s
changing Indisiduals std] must decide what amount of money they should
hold ? What partaf money should be spent immediately and w hat part should be
saved? How much shou'd be wsed to purchase a1 income-yielding asset? In fact,
electronic banking isonly one step ona long path in the evolution ofmoncy And,
af history 15 any guide, 1t will not be the last step
In short, dunng the long process of evolution, the character of moncy has
undergonea drastic change Inthe modem bmes coins paper currency and credit
money are the popular forms of money used everywhere Anrmaland commodity
money due to their drawbacks, have been obsolete and are rarcly in existence in
the preseta world But im
