Money and its forms, Importance, and characteristics
Money is anything that is generally acceptable as a medium of exchange, common measure, and store of value. Money refers to the currency consisting of notes and coins. Money is what money does. Money is a token. It has various forms such as animals, metals, paper, deposits, electronic means, etc. The term money covers bank deposits besides currency and coins. General acceptability in the purchase of goods and services and in debt settlement, legal tender, etc., is the unique feature of money.
Forms or Kinds of Money:
1. Commodity Money:
At first, various commodities were used as the medium of exchange like leather, bones, stones, fish book, food grains, etc.
2. Metallic Money:
Money made up of metal is called metallic money. There are two types of metallic money, they are:
- Standard or full bodied coins: This type of metallic money is made from valuable metals like gold, silver, etc. Face value of standard coins is equal to its intrinsic value. Its value does not decrease of it is melted.
- Token or subsidiary coins: This type of metallic money is made from inferior metals like copper, aluminum, etc. Face value of token coins is more than the intrinsic value. Its face value disappears when it is melted.
3. Paper money: Money made up of paper is called paper money. China was the first country to use paper money in the world in the 17th century. Government or Central Bank of a country issues paper money. Face value of paper money is more than its intrinsic value. There are four types of paper money, they are:
- Representative Paper Money: One hundred percent reserve of gold or silver is kept in order to issue representative paper money. This type of paper money can be converted into gold or silver because it is fully backed by gold or silver.
- Convertible Paper Money: This type of paper money is convertible into standard coins at any time at the choice of the holder. But, there may not be 100 percent backing of gold or silver.
- Inconvertible Paper Money: The paper money which cannot be converted into standard coins as the holder wants is called inconvertible paper money.
- Fiat Money: Fiat money is an inconvertible paper money which is issued without any backing of gold and silver or other securities. Such type of paper notes are issued in some critical economic situations like war, starvation, etc.
4. Bank Money/ Credit Money:
The cheque drawn on demand deposit is called bank money. Mediums of exchange like bank draft, traveler’s cheque, credit card, etc., are also included in bank money. No one are forced to accept this type of money so it is called optional money.
Role or Importance of Money:
Money facilitates production by stimulating savings and investment. It helps in capital formation and in mobilizing capital. The accumulated capital is mobilized in the production of various goods and services through money.
Money plays an important role in the field of distribution of national income because wage, rent, interest, and profit are determined in terms of money. Money enables to distribute national income in favor of poor people.
Money enables a consumer to maximize his satisfaction. People use money to buy various goods and services and then purchased goods and services are used to satisfy their desires.
Money facilitates exchange and helps in the development of trade and commerce, both national and international. Money possesses the purchasing power and serve as medium of exchange.
5. Public Finance:
Government receives revenue, such as tax, fees, fines, etc., in the form of money. The revenue so collected is spent in economic development.
Money has important role in all types of economic system. It is said that money is a master in a capitalist economy and it is a servant in a socialistic economy. Money also plays significant role in a mixed economy.
Features or Characteristics of Money:
1. General Acceptability:
General people accept money as a payment and settlement of deposit. The essential feature of money is that it should be acceptable without any hesitation in exchange for goods and services.
Money should be stable in value. If the value of money fluctuates swiftly then it is useless because money is the standard by which we measure the value of all other commodities.
Money should be easily transferable from one place to another for making payments of goods and services. The paper money is easier to carry than the metallic money.
Money should be durable. It should not lose its value with the passage of time. Metallic money possesses this quality, but paper money also cab be stored for a long time.
Money should be divisible in small units without losing its value. It makes easy to purchase smaller units of commodity. For example, we can divide Nepalese currency Rs100 into smaller units like Rs50, Rs10, Rs2, etc.
Money should posses the quality of homogeneity. It should be uniform and capable of standardization. Therefore, same valued money should have the same shape, size, weight, picture, etc. So that it can win the faith of the people.