Overview
This lecture introduces the evolution and functions of money, covering the transition from barter systems to modern forms of currency, the drawbacks of earlier systems, and key concepts in banking and financial markets.
Introduction to the Unit
- The focus is on the Indian economy's second unit: Banking and Financial Markets.
- Today's main topics include money, money supply, currency, barter system, and the evolution of currency.
Understanding Currency and Money
- Currency is anything accepted as a medium of exchange within a society.
- It can be physical (coins, notes) or virtual (Bitcoin, digital currency).
- Acceptance and the ability to serve as a medium of exchange are key properties of currency.
- Bitcoin and other cryptocurrencies are examples of virtual currencies not backed by government support but accepted by the public.
Barter System and Its Drawbacks
- Barter system is the exchange of goods and services without using money.
- Major drawbacks: lack of double coincidence of wants, no common measure of value, indivisibility of some goods, difficulty in deferred payments, and trouble storing value.
- These flaws led to the invention and adoption of currency to simplify trade.
Evolution of Currency
- Commodity money (e.g., cows, salt) was the first form of currency.
- Progressed to cowrie shells, then to metal coins (damri, dhela, paisa, anna, rupee).
- Introduction of paper currency solved storage and transport issues of metal coins.
- Plastic money (debit/credit cards) and digital currency (e.g., e-Rupee, cryptocurrencies) are modern developments in currency.
Types and Functions of Currency
- Currency types include commodity money, metal coins, paper notes, plastic money, and digital/crypto currency.
- Primary functions: medium of exchange and measure of value.
- Secondary/contingent functions: store of value, deferred payments, asset transfer, and facilitating credit.
Merits and Demerits of Currency
- Merits: divisibility, easy transport, stability, facilitates trade, and helps measure/store value.
- Demerits: may promote greed, corruption, economic inequality, and impacts spending habits (especially with digital money).
Key Terms & Definitions
- Currency — anything widely accepted as a medium of exchange.
- Barter System — direct exchange of goods/services without money.
- Double Coincidence of Wants — requirement where both parties desire each other's goods/services in barter.
- Commodity Money — objects with intrinsic value used as money (salt, cattle).
- Fiat Money — currency without intrinsic value, established as money by government decree.
- Cryptocurrency — digital or virtual currency secured by cryptography.
Action Items / Next Steps
- Make notes on properties, merits, and demerits of currency.
- Prepare to study Gresham's Law and money supply concepts in the next class.
- Review today's lecture for better understanding of money evolution and functions.