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  • 1. Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.www.funancialquest.com – Online Course Module Online Course Module 1 www.funancialquest.com Vol. 1.1-4n4
  • 2. Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.www.funancialquest.com Module 1 The Story of Finance Duration: 30 Mins Vol. 1.1-4n4
  • 3. www.funancialquest.com Module 1: The Story of Finance Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Contents•The Story Money •General Explanation •Functions of Money •Types of Money•The History of Money •The Barter system •Emergence of money •Commodity money •Currency •Fiat money •History of Rupee Vol. 1.1-4n4
  • 4. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved. The Story of Money Vol. 1.1-4n4
  • 5. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.The Story of Money •General Explanation •Functions of Money •Types of Money Vol. 1.1-4n4
  • 6. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.The Story of Money 100xWhat is Money?Money basically is, any object or record that is generally accepted as payment forgoods and services and repayment of debts in a given socio-economic context orcountry.You use money to buy a thing or a service. Vol. 1.1-4n4
  • 7. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.The Story of Money •General Explanation •Functions of Money •Types of Money Vol. 1.1-4n4
  • 8. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Functions of MoneyFunctions of moneyThe functions of money are as follows: 1. Standard of deferred payment 2. Medium of Exchange 3. Unit of account 4. Store of value 5. Measure of value Vol. 1.1-4n4
  • 9. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Functions of Money1.) Standard of Deferred PaymentA "standard of deferred payment" is an accepted way to settle a debt.In the Indian currency notes, it is represented by the signed declaration of theGovernor of the Reserve Bank of India (as shown above) which promises thebearer of the note to be paid the sum mentioned on the note.This is also the reason, why currency notes with such promises are known aspromissory notes. Vol. 1.1-4n4
  • 10. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Functions of Money2.) Medium of ExchangeWhen money is used to pay for goods and services, it performs the function ofbeing the medium of exchange.In the earlier days, people used to exchange goods (barter system). For thissystem to work, there was a need to have a coincidence of wants, which meansPerson A must have what Person B wants and vice versa for the exchange to takeplace. Vol. 1.1-4n4
  • 11. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Functions of Money Exchange Barter2.) Medium of ExchangeThis basically meant that a fruit farmer in need of a chicken in those times, neededto find a farmer who was interested in having fruits.Sometimes, it became difficult for individuals to find perfect matches. Thus rosethe need to have something which is universally needed and thus exchanged. Vol. 1.1-4n4
  • 12. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Functions of Money2.) Medium of ExchangeThus was the need to have a common function of money which was acceptable byeveryone.So a potter could give his pots to a cattle owner in exchange of money and thenpay money to the farmer to buy rice, who pays back to the cattle owner to get whathe wanted! Vol. 1.1-4n4
  • 13. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Functions of Money Unit of account Medium Store of of value exchange3.) Unit of accountA unit of account is a standard monetary unit of measurement of value/cost ofgoods, services, or assets.A standard unit of account allows meaningful interpretation of prices, costs, andprofits in the economy. Vol. 1.1-4n4
  • 14. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Functions of Money4.) Store of valueTo act as a store of value, money must be able to be saved (or stored) andretrieved (or brought back) at a later time, while being useful.Alternative stores of value include: Real State, Precious Metal and Stones,Collectibles like art, Stock ownership in a company etc. Vol. 1.1-4n4
  • 15. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Functions of Money5.) Measure of valueMoney, essentially acts as a standard measure and common denomination oftrade. it is thus a basis for quoting and bargaining of prices.It has significantly in developing efficient accounting systems. But the mostimportant usage is that it provides a method to compare the values of dissimilarobjects. Vol. 1.1-4n4
  • 16. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.The Story of Money •General Explanation •Functions of Money •Types of Money Vol. 1.1-4n4
  • 17. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Types of MoneyWhat are the types of moneyThere are primarily 5 types of money• Commodity money• Representative money• Fiat money• Currency• Commercial bank money Vol. 1.1-4n4
  • 18. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Types of MoneyCommodity moneyMany items have been used as commodity money such as naturally scarceprecious metals, conch shells, barley, beads etc., as well as many other thingsthat are thought of as having value. Commodity money value comes from thecommodity out of which it is made. The commodity itself constitutes the money,and the money is the commodity. Vol. 1.1-4n4
  • 19. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Types of MoneyRepresentative moneymoney that consists of token coins, or other physical tokens such as certificates,that can be reliably exchanged for a fixed quantity of a commodity such as gold orsilver. The value of representative money stands in direct and fixed relation to thecommodity that backs it, while not itself being composed of that commodity. Vol. 1.1-4n4
  • 20. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Types of MoneyFiat moneyFiat money or fiat currency is money whose value is not derived from any intrinsicvalue or guarantee that it can be converted into a valuable commodity (such asgold). Instead, it has value only by government order (fiat). Usually, thegovernment declares the fiat currency (typically notes and coins from a centralbank, such as the Federal Reserve System in the U.S.) to be legal tender, making itunlawful to not accept the fiat currency as a means of repayment for all debts,public and private. Vol. 1.1-4n4
  • 21. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Types of MoneyCurrencyCurrency refers to physical objects generally accepted as a medium of exchange.These are usually the coins and banknotes of a particular government, whichcomprise the physical aspects of a nations money supply. Vol. 1.1-4n4
  • 22. www.funancialquest.com Module 1: The Story of Finance | Money Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Types of MoneyCommercial bank moneyCommercial bank money or demand deposits are claims against financialinstitutions that can be used for the purchase of goods and services.Banks have the legal obligation to return funds held in demand depositsimmediately upon demand (or at call). Demand deposit withdrawals can beperformed in person, via checks or bank drafts, using automatic teller machines(ATMs), or through online banking. Vol. 1.1-4n4
  • 23. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved. History of Money Vol. 1.1-4n4
  • 24. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Money •The Barter system •Emergence of money •Commodity money •Currency •Fiat money •History of Rupee Vol. 1.1-4n4
  • 25. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.The Barter SystemWhat is Barter SystemBarter is a method of exchange by which goods or services are directlyexchanged for other goods or services without using a medium of exchange, suchas money Vol. 1.1-4n4
  • 26. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.The Barter SystemWhat were its limitations?•Absence of common measure of value•Indivisibility of certain goods•Lack of standards for deferred payments•Difficulty in storing wealth Vol. 1.1-4n4
  • 27. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Money •The Barter system •Emergence of money •Commodity money •Currency •Fiat money •History of Rupee Vol. 1.1-4n4
  • 28. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Emergence of MoneyWhat were its limitations?Due to the problems being faced in the barter system – man started searching fora different system which would make sense for un ending economies. the thingswith the most desirable; useful and their reliability in terms of the confidence aperson would have had in the re-use and re-trading of these thingsWith the start in the trade of copper and silver Vol. 1.1-4n4
  • 29. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Emergence of MoneyWhat were its limitations?According to Aristotle, When the inhabitants of one country became moredependent on those of another, and they imported what they needed, andexported what they had too much of, money necessarily came into useAccording to Economist Carl Menger, money emerged spontaneously through theself-interested actions of individuals. No single person sat back and conceived ofa universal medium of exchange, and no government compulsion was necessaryto effect the transition from a condition of barter to a money economy. Vol. 1.1-4n4
  • 30. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Money •The Barter system •Emergence of money •Commodity money •Currency •Fiat money •History of Rupee Vol. 1.1-4n4
  • 31. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Commodity moneyThe IdeaBartering has several problems, most notably that it requires a coincidence ofwants. For example, if a wheat farmer needs what a fruit farmer produces, adirect swap is impossible as seasonal fruit would spoil before the grain harvest. Asolution is to trade fruit for wheat indirectly through a third, "intermediate",commodity: the fruit is exchanged for the intermediate commodity when the fruitripens. If this intermediate commodity doesnt perish and is reliably in demandthroughout the year (e.g. copper, gold, or wine) then it can be exchanged forwheat after the harvest. Vol. 1.1-4n4
  • 32. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Commodity moneyWhat is Commodity MoneyCommodity money is money whose value comes from a commodity of which it ismade. It is objects that have value in themselves as well as for use as money.For example: Gold, Silver, Copper, Shells etc. Vol. 1.1-4n4
  • 33. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Money •The Barter system •Emergence of money •Commodity money •Currency •Fiat money •History of Rupee Vol. 1.1-4n4
  • 34. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.CurrencyHistory of minting coinsThe first known ruler who officially set standards of weight and money wasPheidon.The first manufactured coins seems to have taken place separately in India,China, and in cities around the Aegean sea between 700 and 500 BC. Vol. 1.1-4n4
  • 35. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.CurrencyHistory of minting coinsWhile these Aegean coins were stamped (heated and hammered with insignia),the Indian coins (from the Ganges river valley) were punched metal disks, andChinese coins (first developed in the Great Plain) were cast bronze with holes inthe center to be strung together. The different forms and metallurgical processimplies a separate development. Vol. 1.1-4n4
  • 36. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.CurrencyCoins to trading billsAs the economy progressed, the volume of trade flourished, carrying a largequantity of coins became cumbersome.Traders gradually started using bills of reputable buyers to exchange amongthemselves. Vol. 1.1-4n4
  • 37. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.CurrencyCoins to trading billsSome traders also started using these bills to get even early credit, therebymaking these bills the medium of exchange and medium of value.Some of these reputable merchants which releases such bills were goldsmiths,who later also started lending money and providing the service of safekeeping ofmoney or gold. These individuals later graduated into early banking institutions. Vol. 1.1-4n4
  • 38. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.CurrencyCoins to trading billsSome of the banks, started issuing paper notes in exchange for deposits whichwent on to be called bank notes.Bank notes gradually started circulating as currency. These banknotes were aform of representative money which could be converted into gold or silver byapplication at the bank. Vol. 1.1-4n4
  • 39. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.CurrencyCoins to trading billsGenerally, these bank notes carried a promise to pay the sum mentioned to thebearer – which lead to these notes also being called promissory notes. Vol. 1.1-4n4
  • 40. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Money •The Barter system •Emergence of money •Commodity money •Currency •Fiat money •History of Rupee Vol. 1.1-4n4
  • 41. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.Fiat Money Song Dynasty Jiaozi, the worlds earliest paper money Yuan dynasty banknotes were the earliest fiat moneyWhat is it?Fiat money refers to money that is not backed by reserves of another commodity.Fiat money originated in 11th century China, and its use became widespreadduring the Yuan and Ming dynasties.By World War I most nations had a legalized government monopoly on bank notesand the legal tender status thereof. In theory, governments still promised toredeem notes in specie on demand. Vol. 1.1-4n4
  • 42. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Money •The Barter system •Emergence of money •Commodity money •Currency •Fiat money •History of Rupee Vol. 1.1-4n4
  • 43. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Rupee Rupiya released by Sher Shah Suri, 1540-1545 CE, was the first RupeeIndian RupeesAncient India, presently northern part of the modern Indian sub-continent, wasone of the earliest issuers of coins in the world (circa 6th century BC)The origin of the word "rupee" is found in the Sanskrit rūpya "shaped;stamped, impressed; coin" and also from the Sanskrit word "rupa" meaning silver.The original rūpaya was a silver coin weighing 175 grains troy (about 11.34grams). Vol. 1.1-4n4
  • 44. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Rupee British Indian 1 rupee, 1917Indian RupeesAmong the earliest issues of paper rupees were those by the Bank of Hindustan(1770–1832), the General Bank of Bengal and Bihar (1773–75, established byWarren Hastings), the Bengal Bank (1784–91), amongst others.Formerly the rupee was divided into 16 annas, 64 paise, or 192 piesDuring British rule, and the first decade of independence, the rupee wassubdivided into 16 annas. Each anna was subdivided into either 4 pices, or 12pies. Vol. 1.1-4n4
  • 45. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Rupee British Indian 1 rupee, 1917Indian RupeesIn 1957, decimalisation occurred and the rupee was now divided into 100 NayePaise (Hindi for new paisas). After a few years, the initial "Naye" was dropped.However many still refer to 25, 50 and 75 paise as 4, 8 and 12 annas respectively Vol. 1.1-4n4
  • 46. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Rupee British Indian 1 rupee, 1917Reserve bank of IndiaThe Reserve Bank of India was formally inaugurated on Monday, April 1, 1935 withits Central Office at Calcutta. Section 22 of the RBI Act, 1934, empowered it tocontinue issuing Government of India notes until its own notes were ready forissue. The bank issued the first five rupee note bearing the portrait of George VI in1938. This was followed by Rs. 10 in February, Rs 100 in March and Rs 1,000 andRs 10,000 in June 1938. The first Reserve Bank issues were signed by the secondGovernor, Sir James Taylor. Vol. 1.1-4n4
  • 47. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Rupee British Indian 1 rupee, 1917Reserve bank of IndiaAfter Independence of India, the government brought out the new design Re. 1note in 1949. Initially it was felt that the Kings portrait be replaced by a portrait ofMahatma Gandhi. Finally however, the Lion Capital of Asoka was chosen. The newdesign of notes were largely along earlier lines. In 1953, Hindi was displayedprominently on the new notes. The economic crisis in late 1960s led to a reductionin the size of notes in 1967. High denomination notes, like Rs. 10,000 notes weredemonetised in 1978. Vol. 1.1-4n4
  • 48. www.funancialquest.com Module 1: The Story of Finance | History Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved.History of Rupee British Indian 1 rupee, 1917Reserve bank of IndiaThe "Mahatma Gandhi Series" was introduced in 1996. Prominent new featuresincluded a changed watermark, windowed security thread, latent image andintaglio features for the visually handicapped. Vol. 1.1-4n4
  • 49. www.funancialquest.com Module 1: The Story of Finance Copyright © 2012 National Stock Exchange of India Ltd. All rights reserved. -End of Module 1- When ready, test your knowledge and receive a score! Note: The test contains 15 Objective Type Questions to be finished in 20 mins duration. For more interesting updates and information, visit us on www.facebook.com/funancialquest Vol. 1.1-4n4