Introduction of Monetary System• Monetary system includes the following points:• Meaning of money• Functions of money• Kinds of money• Types of money• The money supply• What assets are considered as money?
Meaning of money• A medium that can be exchanged for goods and services and is used as a measure of their values on the market, including among its forms a commodity such as gold, an officially issued coins or note. OR• The officially issued coins, paper notes and currency by government.
Functions of money• Medium of exchange: An item buyers give to sellers when they want to purchase g & s. Moneys most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange.
Functions of money• Unit of account: The yardstick people use to post prices and record debts. Provides a common measure of the value of goods and services being exchanged. Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.
Functions of money• Store of value: An item people can use to transfer purchasing power from the present to the future. As a store of value, money is not unique; many other stores of value exist, however, money is more readily accepted everywhere. Furthermore, money is an easily transported store of value that is available in a number of convenient denominations.
Kinds of money• Metallic Money: Metallic money today consists of the various coins in circulation.• Paper Money: Paper money primarily consists of currency notes issued by the Central Bank of a country.• Private Bank Money: Private bank money is sometimes called check book money as well as demand deposits.
Types of Money• Commodity Money: Whenever any commodity is used for the exchange purpose, the commodity becomes equivalent to the money and is called commodity money.• Fiat Money: The word fiat means the "command of the sovereign.” It is the type of money that is issued by the command of the sovereign. The paper money is generally called as the fiat money.
Types of Money• Fiduciary Money: Whenever, any bank assures the customers to pay in different types of money and when the customer can sell the promise or transfer it to somebody else, it is called the fiduciary money. Fiduciary money is generally paid in gold, silver or paper money.• Commercial Bank Money: Commercial Bank money or demand deposits are claims against financial institutions that can be used for the purchase of goods and services.
Money supply• The money supply is the amount of financial instruments within a specific economy available for purchasing goods or services.• The money supply is usually measured as three escalating categories M1, M2 and M3.• The other two categories are M0, & M4.
Measures of money supply in IndiaMeasure What’s included M0 Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits(Reserve with the RBI = Net RBI credit to the Government + RBI credit to the money) commercial sector + RBI’s claims on banks + RBI’s net foreign assets + Government’s currency liabilities to the public – RBI’s net non-monetary liabilities. M1 Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the RBI). M2 M1 + Savings deposits with Post office savings banks. M3 M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits). M4 M3 + All deposits with post office savings banks (excluding National Savings Certificates).
Assets considered as money• Bills of exchange: A Bill of exchange is a promise to pay a specified sum of money on a specified date, generally after 3 months or 90 days. Bills of exchange may be treasury bills or commercial bills or financial bills :(a) Commercial bills are drawn in connection with the commercial transactions,(b) Finance bills are drawn when a person lends money to other person,(c) Treasury bills are the finance bills through which the government raises short-period funds.
Assets considered as money• Bond: Bond is an instrument of borrowing for relatively long periods. It is a promise to pay a fixed sum of money by way of interest annually for a specified number of years and to repay the capital sum borrowed at the end of the period. This method of borrowing is adopted by the government and the industrial units. Bonds issued by the firms are known as debentures. Bonds issued by the government without a maturity date but with interest payable for the indefinite period are called irredeemable bonds or consols or perpetuities.
Assets considered as money• Equity shares: Equity shares offer their owners a claim to a share in the profits of the firm declared as dividend. They are marketable in the stock exchange.