DESCRIPTION OF MONEY

1. Money : Nature, Functions and Role
Barter system:
Direct exchange of goods and services for other goods and services
Difficulties in barter system:
 Lack of double co-incidence of wants.
 Lack of common measures of values.
 Difficulties in storing values.
 Deferred of payments / Absence of loaning.
 Indivisibility of certain goods.
Money – stages of evolution
There are three considered basic needs(food, clothing and shelter) These are some essential needs of a
man(and woman too!). In early ancient times, these needs were fulfilled but in vain through barter
system. Money came into existence when it was needed. It fulfilled needs of a man easily but how it
transformed into a credit card that we need to know. There are five stages of evolution –
1. Commodity Money(Goods),
2. Metallic Money(Coins),
3. Paper Money(Bank Notes),
4. Credit Money(Cheques & DDs) and
5. Plastic Money(Credit & Debit Cards).

2. 1) Commodity Money
Money is a common thing used in exchange for purchasing goods and services. In ancient times, barter
system was mostly prevailed in the world. This system started creating difficulties in trade as barter
trade cannot be done between two individuals if one has need for something that another have but the
latter individual has no need of something that former is offering. For eg: There are two farmers named
A and B. A is growing wheat and B is growing rice. A needs rice and he is offering wheat to B but B has
no need of wheat which is offered by A and, that’s why, B didn’t accepted the offer given by A. So, there
cannot be exchange between A and B. Thus, common things like shells, pebbles, salt, came into
existence as common goods used for exchange. Now A can sell his wheat to C and, in return, he gets
shells as money and, with this, he can buy rice from B and thus, his needs could be fulfilled easily
through money. This was the birth of money and ancient economy started to develop.
2)Metallic Money
As people started using commodity as a money, new problems came into being. Commodity money had
three common defects – perishability, indivisibility and heterogeneity. They were perishable so they
couldn’t be kept for a long time and so, people couldn’t repay their loans or they cannot save it for
future needs. It was hardly divisible as commodities like cows, salt, etc are useless if divided. So, it was
difficult to buy a product in a value which is half of currency’s value. Different commodities were used in
different markets or cities as a currency, that’s why, intercity trade was almost impossible. For eg: A
lives in city X and B lives in city Y. A cannot trade with B because the city X accepts shells for currency
and city Y accepts cattle as a currency. So, ancient civilizations devised metallic money to solve these
problems. Metallic money was durable – it can be saved for a long time and can be used for future
repayments or can be saved for future needs. People of ancient civilizations manufactured coins in
different metals to indicate different values – gold coins were used for highest valuable goods and so, it
can be divided into smaller values by exchanging gold coin for two silver or three bronze coins which
have value smaller than gold coin. Coins were acceptable for more than one cities, so A can trade with B
as cities X and Y have accepted same metallic currency system.

3. 3)Paper Money
As people started using metallic money, it was hardly portable. As trade and commerce increased,
people started becoming rich but it was virtually impossible to posses vast amount of coins as they were
very heavy and bulky. So, people, during early medieval time in far east, started developing paper
money as paper is a material lighter than coins and so they could be carried easily from one place to
another and the speed of trade would increased. Now people can posses (somewhat) vast amount of
money.
4)Credit Money
As money became the household’s main needs and greed overtook relationship in its importance, life
was not safe and money had no protection from theft. To solve this, a banking system was developed.
Through this system, people can save their earning in a given account and can ask loans for needs if they
are poor. As moneylenders normally exploited poor people, bank took the responsibility to provide
loans without having danger in their life. It is a systematic institution from which people can purchase
goods or services by transferring money from their account to the seller’s account easily by using an
instrument named cheque. Any amount of money, high or low, can be transferred through cheque by
writing that amount of money on it. Also, many governments have their own bank for saving and
protecting public money and this led control of flow of money in a country’s economy. And thus,
banking became the backbone of household as well as national economy.
5)PlasticMoney
When digitization of information & data process started, banks took advantage and digitized their

4. accounts. Also, the age of computer and internet created a favorable atmosphere for creating plastic
money. Plastic Monies are of two types – credit card and debit card. ATM started to develop and plastic
money could be converted in cash through this machine. Plastic monies are swiped for transaction and
nothing but transaction could be done. It has become a symbol of modernity. Modern shops asks for
credit card except from people who don’t have it. Only bank balance could be transferred and not
plastic card itself. It is portable, durable and divisible.
Definition of Money:
 The word “money” is derived from the Latin word “Monet”
 The origin of money is lost
 Hunting society, skin of wild animals were used as money
 Pastoral society used livestock
 Agriculture society used grain and foods
 The Roman used cattle and salt.
Money is anything which is used as a medium of exchange.
In Economics, money refers specially to assets that are widely used and accepted as payment.
Money is what money does.
Functions of Money:
There are four main functions of money which are summed up in the following couplet:
“Money is a matter of functions four,
A medium, a measure, a standard, a store.”
– Medium of exchange
 Barter is inefficient—double coincidence of wants
 Money allows people to trade their labor for money, then use the money to buy
goods and services in separate transactions
 Money thus permits people to trade with less cost in time and effort
 Money allows specialization, so people don’t have to produce their own food,
clothing, and shelter
– Unit of account
 Money is basic unit for measuring economic value
 Simplifies comparisons of prices, wages, and incomes
 The unit-of-account function is closely linked with the medium-of-exchange
function

5.  Countries with very high inflation may use a different unit of account, so
they don’t have to constantly change prices
– Store of value
 Money can be used to hold wealth
 Most people use money only as a store of value for a short period and for
small amounts, because it earns less interest than money in the bank
– Standard of deferred payment
 Money serves as a standard of deferred payment
 Deferred payments mean those payments which are to be made in the future
 If a loan is taken today, it would be paid back after a period of time. Then
amount of loan is measured in terms of money and it is paid back in money
Forms of Money:
 Money of Account
 Limited and Unlimited Legal Tender
 Standard Money
 Token Money
 Bank Money
Money of Account
Money of account is the monetary unit in terms of which the accounts of country are kept and
transactions settled, i.e., in which general purchasing power, debts and prices are expressed. The Taka,
for instance, our money of account.
Limited and Unlimited Legal Tender
Coins may be limited legal tender or unlimited legal tender. A legal tender currency is one in terms of
which debts can be legally paid. It is an offence to refuse to accept payment in legal tender money. A
currency is unlimited legal tender when debts upto any amount can be paid through it.
Standard Money
Standard money is that in which the value of goods as well as all other forms of money are measured.
Thus in Bangladesh all prices of goods are measured in terms of taka.
Token Money
The token money is that the metallic value of which is much less than the real or intrinsic worth of the
metal it contains. Taka and all other coins in Bangladesh are all token money
Bank Money:
Demand deposits of banks are usually called bank money. Bank deposits are created when somebody
deposits money with them. Banks also create deposits when they advance loans to the businessmen and
traders.
Modern Monetary System or Managed Currency Standard
Paper system has come to occupy a very important place in the modern monetary system of almost all
the countries of the world. The term paper money only applies to Government notes and the notes
issued by the central bank of the country.

6. Representative money:
Representative money is an item such as a token or piece of paper that has no intrinsic value but can be
exchanged on demand for a commodity that does have intrinsic value, such as gold, silver, copper, and
even tobacco.
Convertible Paper Money
A currency that can be readily bought or sold without government restrictions, in order to purchase
another currency. A convertible currency is a liquid instrument when compared to currencies tightly
controlled by a central bank or other regulating authority.
Inconvertible Paper Money
Paper or coin currency issued by a government that is not convertible into standard money metal such
as gold or silver. The currencies of most countries have been declared as inconvertible in order that they
can be regulated by the government.
Fiat money or fiat currency
Fiat money is any money that the government declares as legal tender. Also, this type of money is not
backed by a physical commodity such as gold or silver. In other words, fiat money has no intrinsic
value. Market forces determine the value of fiat money.
Minimum Reserve System:
But as time passed even proportional reserve system was thought to be inadequate for the monetary
needs of a growing economy. Therefore all scheduled banks in bangladesh have to maintain cash
reserve ratio (crr) and statutory liquidity ratio (slr) in compliance with the instructions given in clause (1)
of article 36 of bangladesh bank order, 1972 (as amended upto 2003) and clause (1) of section 33 of
‘Bank Company Act, 1991(Revised to 2013) respectively.
Managed Paper Currency Standard: Its Advantages
 The quantity of money can be easily increased according to economic needs of the country.
 In time of depression there is need to increase the aggregate demand in the economy so that
the country of full employment is reached.
 Unlike the gold and silver standard, paper currency is not a fair weather friend. This standard is
very helpful to the government in situations of crisis such as war, drought, etc. when it needs
extra quantity of money.
 Paper currency standard is very economical. As compared to the prices of metals, the price of
paper is very low. Even those countries can adopt this standard who have no or few resources of
gold and silver.
 Under the paper currency standard , rate of foreign exchange automatically changes according
to the conditions of demand and supply and therefore disequilibrium in the balance of trade is
automatically removed.
Managed Paper Currency Standard: Its Disadvantages
 It creates foreign exchange instability.
 It is also asserted that even internal economic stability cannot be achieved with paper currency
standard. The over- issue of paper currency can lead to inflation in the economy.

7.  If the adoption of paper currency systems causes instability in the economy, the Government is
responsible for it and not the paper currency system.
Role of Money in Economic Development of the Developing Countries
Apart from performing the conventional functions, i.e., as a medium of exchange, as a measure of value,
as a standard of deferred payment and as a store of value, money, through the expansion of monetary
economy and the development of money market, plays an active and developmental role in a
developing and mixed economy.
Money acts as a great mobilising agent in these economies in a number of ways by increasing resources,
generating new resources and channelising resources into productive uses.
1. Mobilisation of Saving:
In the developing economies, saving and investment habits of the people are very poor. Expansion of
money market promotes liquidity and safety of financial assets and thus encourages saving and
investment.
2. Allocation of Resources:
Money market allocates savings into productive investment channels and thus helps in achieving an
equlibrium between the demand for and supply of loanable funds. In this way, it leads to rational
allocation of resources.
3. Resource Mobility:
Expansion of money economy increases the mobility of financial resources by enabling the transfer of
funds from one sector to another. Such flow of funds is essential for the growth of the economy and
commerce.
4. Increase in Investible Profits:
Expansion of money, through its inflationary effect, redistributes income and wealth in favour of the
entrepreneurial classes who have high propensity to save.
With this redistribution, the profits and savings in the economy increase. The increase in savings is used
for investment purpose.
5. Resource Generation through Deficit Financing:
Deficit financing or inflation tax (i.e., covering the budget deficit through printing new money) can
provide adequate fundi to the government for financing development programmes in underdeveloped
countries.
In an underdeveloped country, where there is little scope for additional taxation due to low income of
the people and public borrowing is limited due to low levels of saving, the government can resort to
deficit financing to cover the deficit in the budget.

8. 6. Mobilisation of Human Resources:
Monetisation of the economy by facilitating system of payments encourages the mobilisation of human
resources.
Money, through its inflationary role, increases the aggregate demand and thus permits fuller utilisation
of manpower. This leads to quicker achievement of the objective of full employment.
7. Implementation of Monetary Policy:
A well-developed money market is a precondition for the effective and successful implementation of the
monetary policy of the central bank aiming at mobilisation and channelisation of essential resources for
economic development.
8. Role in Private Sector:
Money, through market mechanism, influences the decisions regarding production and resource
allocation in the private sector of the developing mixed economies because these decisions are solely
guided by profit motive.
9. Monetisation of the Economy:
An important feature of a less- developed economy is the prevalence of a vast non-monetised sector. As
the economy develops, more and more money and monetary institutions are needed for the
monetisation of the economy.