Money
Money is a medium of exchange for goods and value which is approved by law and is considered as a legal tender.
Fiat Money: It is a government-issued currency that is not backed by a commodity such as gold. Eg – Paper notes and coins
Characteristics of Money (or Currency)
1. Fungibility: Money in various denominations of currency must be fungible, meaning that each unit is of equal quality and can be interchanged. Non-fungible currency is unreliable for transactions due to its inconsistent value and quality.
2. Durability: A good currency must be durable and capable of being used multiple times. It should not be perishable, as perishable goods cannot be reused or stored for future transactions. Durability is essential to preserve the currency’s value for future use.
3. Recognisability: Users must be able to easily ascertain the authenticity of the currency. It must be universally recognized to prevent disputes during exchanges. A recognized currency fosters trust and acceptance within the monetary system.
4. Stability: Money should maintain a stable value. It should either remain constant or appreciate over time. An unstable currency, whose value fluctuates significantly, poses risks such as sudden drops in value, undermining the trust and reliability of the monetary system.
5. Portability: Currency must be portable and easy to transport. It should be divisible into smaller units to facilitate transactions of varying amounts. If not portable, the cost of transporting the currency could become prohibitive. Therefore, money should be both easily transferable and divisible to ensure efficient and convenient transactions.
Functions of Money
1. Medium of exchange: It enables the user to make payments for all the transactions of goods and services.
2. Measure of value: Money expresses the value of every service as well as goods. Therefore, it is a common denomination.
3. Store of value: It implies a store of wealth. It transfers the purchasing power from today to the future. E.g.- Depositing the money in a savings account to buy new house.
4. Standard of deferred payments: It means that money acts as a ‘standard’ for making future payments. It is related to the concept of lending and borrowing.
Money Supply
The total stock of money in circulation among the public at a particular point of time is called money supply. It does not include stock of money held by governments.
Measures of Money Supply
| Type | Description |
|---|---|
| M0 (Reserve Money or Monetary Base) | Currency in circulation + Bankers’ Deposits with RBI + ‘Other’ deposits with RBI. |
| M1 (Narrow Money) | Currency with Public + Net Demand Deposits held by Commercial Banks |
| M2 (Narrow Money) | M1 + Savings deposits with Post Office Savings Banks |
| M3 (Broad Money) | M1 + Net Time Deposits with the Banking system |
| M4 (Broad Money) | M3 + Total deposits with Post Office Savings Organisations (Excluding National Savings Certificates) |
Note:
I. Currency in circulation: Notes and coins in circulation which has been issued by the Reserve Bank of India. Thus, it is the total liability of the RBI.
II. Currency with public: Currency in circulation minus cash with banks (which is with banks in their vaults to process day-to-day transactions)
III. Demand Deposits (or Demand Liabilities): Banks have to pay as and when the pay is demanded by the depositor. Examples: Current Account, Savings Account, Demand Drafts, Unclaimed Deposits etc
IV. Time Liabilities: Banks pay depositors after a specific time period. Examples: Fixed Deposits, Recurring Deposits, Margins etc
V. Other Liabilities: Those which are miscellaneous and are not covered by the above two. Examples: unpaid dividend, accrued interests on deposits etc.
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