Most of us might know that in the primitive
society currency was not the means for buying and selling things. Goods were bought and
sold for other goods and services. For example a hair dresser might exchange rice for the
service that he is giving. Or a milkman can exchange milk with a carpenter for a wooden
chair. In those good old days this is how people traded with each other. This was called
the barter system. However, this system had certain difficulties that made the rise of
coins and currencies. Welcome to the Sagar Raut channel friends. Let’s talk about “Money”.
This video will explain you, the difficulties in barter system, types of money, functions
of money, paper money and its limitations and what qualities should good money have?
The biggest problem with the barter system was that it lacked common measure of value.
It means it was difficult to compare two commodities. Say for example you have two litres of milk
to sell, in such a case as a person you won’t be able to make out if the 2 litres of milk
are equal to 2kgs of onions or 5 kg’s of potatoes, worth a massage service or what.
Because of such things it was difficult to calculate the value of goods exchanged.
Another problem with the barter system was of double coincidence of wants. Say a person
produces rice and wants wheat in exchange, but the person producing wheat wants milk
in exchange because he doesn’t eat rice. In such a case person A will never be able
to purchase wheat and no trade would exist between them.
Storage problems were another difficulty. Some goods are highly perishable in nature.
Goods like milk, fish or vegetables do not have durability. Plus they need to be stored
carefully which meant additional cost. This made trading pretty difficult.
In barter system you had to buy things as whole. This means a cobbler‘s service might
not be valued the same by a hair dresser in exchange for his salon services. But he cannot
give him half a haircut right? Hence there existed problem of divisibility in the barter
system. Last but not the least providing payments
in the future were also difficult. This means that a person may want cow in return for the
food that he has sold. The buyer may tell him that he would give his cow after two months.
However the cow might get sick and may lose its milk giving capacity. This may serve as
a problem for the person who has given food in exchange of cow. Hence future payments
or deferred payments as they are called in economics were also one of the problems in
the barter system. Before moving on to types of money let us
first define what money is. Professor F.A Walker defines money as “Money is what money
does” whereas Prof. Crowther define money as “Money is anything that is generally
accepted as means of exchange by the people. Money also acts as a measure and store of
value.” What both these economists are trying to tell us in simple language is that anything
that I can use to exchange goods and services with other people is money. Plus it should
have a store value meaning that if you keep that thing with you for long it shouldn’t
lose its value. For example using milk as a medium of exchange can serve very difficult
as it might get spoiled the other day. Whereas using goat skin or pots or rice etc as money
is possible. Types of money
There are five types of money that we’ll learn. Let us start with commodity money.
Commodity money is the oldest of its kind. When humans first started to trade with each
other they exchanges goods for different commodities. Some societies use goat skins to trade with
each other, some use sea shells, some societies even used birds feathers as a means of exchange.
However as we discussed earlier problems of storage durability etc. Made people replace
commodity money with metallic money. Metallic money was made during the time of
anarchy. However metallic coins are used till date. Earlier coins were made out of gold,
silver, copper, iron etc. The rulers of various kingdoms minted these coins with their own
seals. The seals were the certifications of purity. Metallic coins can actually be further
divided into 2 parts. Some coins which are minted have their face value equal to its
intrinsic value. What this means is, say if I have a coin of gold weighing 5 grams. And
the price for 5 grams of gold is equivalent to 100kgs of rice, then the coin weighing
5 grams will only give you 100 kg’s of rice nothing more. Thus, coins which have face
value equal to intrinsic value are called standard coins or full bodied coins. But our
recent time currencies, which are minted under the seal of government, are made out of different
metals like aluminium or nickel which are cheap. So the cost of aluminium used to make
the 5 rupee coin might actually be only 1 rupee. However that coin helps you purchase
things of up to 5 rupees. Such coins whose face value is more than intrinsic value are
called token coins. Guys you must
have surely heard your parents going to bank and
depositing a cheque. What is a cheque? Every person who is an account holder can take cheque
book from his bank and use it as the means of paying money to whoever he wishes to pay.
This helps because he need not carry lots of cash with him everywhere. If person A has
to make a payment to person B a payment of 5000 rupee then all he has to do is give him
a cheque of 5000 which person B can then deposit into bank. Person A’s account gets debited
by 5000 and person B’s account gets credited by 5000, thus making transaction possible
without actually having to pay money in physical form. Instruments like cheque hence are called
as bank money or credit money. Now a day you must have seen people making
payments through debit cards and credit cards. This is also bank money. However as the cards
are generally made out of plastic some prefer calling them as plastic money.
Last but not the least the money that we all use in our day to day life is the paper money.
Across the world people use this money because it is a legal tender of the government. This
means that if no person wishes to accept these notes from you the government promises to
do so. And as everyone trusts the government people readily accept these notes. Paper money
is a substitute to metallic money for two reasons, one is that is reduces costs significantly
which are high in minting coin, second it is easier to print money of higher denominations
rather than minting them. You really don’t want a 2000 rupee heavy coin in your pocket.
Central banks have a history of printing paper currency in different manner. In the earlier
days central banks used to only print that much amount of money as much as they had gold
or silver reserves with them. For example, if the central bank has gold worth 50 crore
with it, it was restricted to print money only worth 50 crore. As the money printed
represents gold or silver reserves of the central bank such money is called as Representative
money. Now a day’s central banks do not print money
which has any sort backing like gold or silver. They print money according to their will after
looking at proper economic conditions. Such money is called as Fiat money. Fiat means
Governments order. It is obligatory for the people of the country to use this money to
buy and sell goods or pay their loans. The limitation that paper currency has is
that it has less durability than metallic coins. Another limitation is that paper currency
can be faked with ease as compared to metallic coins.
I hope you all enjoyed the video. If you did and learnt something useful do share it with
your friends. And you know the drill. Like, comment, Share and subscribe. Until then adios
Hasta La Vista.