MONEY AND FINANCIAL SYSTEMS (PART-1) UNIT- I MONEY (PART-1)

Transcription

1 MONEY AND FINANCIAL SYSTEMS (PART-1) UNIT- I MONEY (PART-1) 1. INTRODUCTION Welcome viewers, now we are starting new subject, subject of money and financial markets which is included in the B.com 3 rd year syllabus, this is the very first program on the subject matter of money, now I don t need to explain to you the importance of money, everybody is well aware in this particular program we are going to take a Historical view of the evolution of money over the ages I may say there is long time span will be covered then we will also be discussing the definition of money, different currencies which are actually prevalent in different countries and towards the end of the program we are going to discuss on the important aspect of different types of money so as a student of commerce you should get yourself acquainted with all important aspects of financial transactions that is called money because we know that it is the money which forms the backbone of any economy and the money which requires transactions in the lieu of any consideration or any product or any such material thing. 2. A BRIEF HISTORY OF MONEY As I have said first we will talk about a brief history of money, you will be knowing that earlier the Barter trade was applicable and in Barter trade the money was not required for the transactions if somebody had to buy certain amount of grain from the other party then he has to give something in exchange something in return may be it might be the equal or the proportionate amount of gram that might be mutually agreed upon by both the parties, so later on gradually the concept of money evolved. 1

2 In the forth coming section of this program we are going to talk about the evolution of money, where it all it begin it began way back in 1790 to 1750 BC (Before Christ) the money and banking originated in Babylonia out of the activities of Temples and Palaces which provided safe places for the storage of cattle s and other precious items, initially deposits of grain are excepted and later other goods including cattle, agricultural implement and precious metals were also excepted so this is what I was telling you that the Barter trade was taking place earlier, so the money and banking activities originated wherein the temples and palaces were considered to be the main depository of these precious things then moving further 640 to 630 BC was the time when the earliest coins were made by Libya Asia minor and consisted of electrum, a naturally occurring amalgam of Gold and Silver so the history of coinage goes back to 640 BC which is a very long time ago, that was the same time when Athens issued Bronze and Silver coins, so now you understand that earlier the metal itself was used in the Barter trade then later on different metals were used and they were moulded into making the coins like in the earlier example wherein the amalgam of Gold and Silver was used and in this particular example the Bronze and Silver metal was used to make the coins. 3. TERM MONEY Now a very interesting phenomenon took place, the public in Athens started holding silver coins and a result of which they quickly disappeared from circulation leaving only the inferior Bronze ones, this is because of the fact that people perceived silver as more precious metal then that of Bronze, so this is the initial problem faced in the use of coins, Term money was discovered in the year 390 BC when the Rome was attacked and the cities reserves of money are kept that was the term money was used and the offenders were interested in catching hold of the last deposits of such precious items considered as money in those days and the defenders were also alerted that the offenders are after this reserve and they started protecting it with more vigour, the grateful romans build 2

3 a shrine to Moneta that is called the Goddess of warning so Moneta is the Goddess of warning and the Roman people were grateful for this gesture and from Moneta the words money and mint are derived. So this interesting evolution what we are talking about tells us how the term money and mint, what is mint? Mint is where the coins are actually made so then this is where the terms money and mint are derived from Moneta the Goddess of warning and the evolution continued further wherein the period 1095 to 1270 the crusaders were there and there was need to transfer large sums of money to finance the crusades and it also provided a stimulus to the re-emergence of banking in West Europe. So there were revolutions going on there were groups of crusaders who were involved in bringing about change in the social setups and then these movements also required financial support, the financial support was provided by the money that was actually given to the crusaders, and they were motivated by the inflow of this money to restart their revolution with a much more renewed vigour, so money throughout the history of the world has taken different forms. In the most ancient form it was in the form of shells, the shells that we come across on the sea shore and all, then livestock the animals and domestic animals which are domesticated by the agriculturist, precious stones, skulls, pearls, pearls was a very important form of money in the earlier days wherein the precious pearls are considered to be much more costly, then has been said earlier that the grains were used in the Barter trade so 6 th form was wheat, then 7 th form was feathers rather rare feathers of the animals, then the focus shifted to metal, brass, silver, gold and last two silver and gold coming under the classification of precious metals and then the last one in the evolution comes out to be the paper money but off course towards the end of this program we will also discuss a special type of money namely the plastic money also. 3

4 So mainly money includes both currency as well as various forms of financial deposits, accounts such as demand deposits, savings accounts, certificates of deposits, demand drafts and various others financial instruments can be also representing the money so it is including both the currency and various financial deposits. 4. DEFINITION OF MONEY Now we have come to the stage where we should take a stock of definition of money, what is money? Money is any good that is widely used and accepted in transactions involving the transfers of goods and services from one person to another, so that is a very wide spread definition widely accepted all over the world that whenever two parties are involved in the transaction of any goods or services then the receiver of goods and services has to pay the money against the consideration received. So that is the first one, second one is it is considered to be a commodity or asset such as gold and officially issued currency coin or paper note that can be legally exchange for something equivalent such as goods and services, so some elaboration of the previous definition has taken place here. To continue with the definition of money, money can also be defined as a token or object that functions as a medium of exchange that is both socially and legally accepted, now this is very important that legal sanction must be there as well as the social sanction must also be there, so money can be defined as a token or object that functions as a medium of exchange as has already been said exchange of goods and services that is socially and legally accepted in payment for goods and services and in settlement of debts, so if somebody has taken loan from someone else than this debt is to be settled through the payment of money. 4

5 Money also serves as a standard of value for measuring the relative worth of different goods and services and as a store of value, for example if the customer has gone to the market place and he can see two products let us say the example of mobile handsets so one mobile handset may be worth Rs. 25,000 while the other mobile handset might be worth Rs only, so the difference basically is in the perceived value of the product, by both the producer and the customer, so money represents the relative bench mark that this particular product is much better because it is much more costlier, similarly the concept of money can also be applied in the context of a particular country. What happens there that if we are handling Indian Rupees in our transactions in India and suppose if you happen to visit any other country abroad then if you are continuing to carry your Indian currency there then that currency will not be valid why? Legal problem is not there but the main problem is that it is not socially acceptable in the transactions there and so when the procedure you will have to follow is to convert your Indian currency into the domestic currency of the country which you are visiting and then you can continue to spend that currency as long as you are in that particular country. So this table here it s not an exhaustive one, it just illustrates the name of some of the countries and the kind of currency which is prevalent in those countries, Australia has Dollar as its currency but it is called Australian Dollar and is different than that of the US Dollar, Brazil has currency named Real, China has Yuan, Czech Republic has koruna, Denmark has Krone, Ethiopia has birr, France has Euro, Germany also has Euro and you know very well that all the members of the European Union has gone for the common unified currency that is the currency called Euro while in Germany earlier Deutsche Mark was the currency used and with the exception of England which is member of the European union but is continuing to stick to its original currency of pound, that is in full form called Great Britain Pound also but it does not mean that if you are a member of the European Union suppose for example a citizen of Germany visits England then the Euro that he is carrying will be accepted 5

6 by the various traders in their transactions, Greece also has Euro, Haiti is very small African country has the currency called gourde, India very well known to all of us has the Indian currency Rupee, Israel has a currency called as shekel, Italy has Euro again Japan has Yen. As I have said earlier that this list is not exhaustive just an illustration to tell you that what is the name of the currency in different counties. 5. TYPES OF MONEY Now we focus our attention on the types of money, you know very well that there are different types of money and by now you have also understood that how the money has evolved and how the money has replaced the Barter trade which was earlier very prevalent but now it has more or less become obsolete and I have also tried to give you various definitions of money and its relevance in usefulness in various transactions, now we focus our attention on different types of money primarily we will talk about two types of money first is paper money, second is plastic money. Paper money basically originated in two forms, drafts which are receipt for value held on account and bills which were issued with the promise to convert at a later day, so the paper money originated in the forms of either drafts which was the case when the money was deposited and then the drafts was issued to the tune of the money deposited, while on the other hand the second one was bills that is which were issued with a promise to convert at a later date and so it holds the promise that if it is produced on such and such date then the payment will be actually made so the cheques that we issue to the parties and particularly the postdated cheques will come under this category of bills. 6

7 When we are talking about the paper money we can also consider the currency, paper currency that is involved in the various transactions, earlier coins were used but then it was felt that coins are of lower denomination and therefore they may serve limited value only, in case if any goods and services is a costly one then payment of that goods and services in the forms of coins will neither be practical nor logical so to replace the use of money in such large size transactions the paper currency was used that is considered as our currency notes and these currency notes are in different denominations starting from one rupee note to as much as Rs notes. There are different situations pertaining to the paper currency so much so that in different countries where you go the different paper currency notes you come across and they carry some of the significant images of that particular country, for example if you happen to go to England and you see that Great Britain Pound then invariably you will find the photograph of her majesty on the currency notes, similarly in our Indian currency we will find the photograph of Mahatma Gandhi, the problem the economies are facing is that some of the anti-social elements are making false currency and putting that false currency into the circulation can damage the economy greatly, so then the shift has been towards that of plastic money in recent times wherein it is an effort to substitute if not fully then compliment the applications of paper money, so what is plastic money, it is a term that is used predominantely in reference to the hard plastic cards, now we are living in that era where all of you are well aware about the plastic money that I am referring to here, they could be of different types, plastic money can be in the form of the cash cards wherein you pay receive the card and then you return the transactions and it will be having a bar code sticker also so scanning this bar code sticker then your account will be updated that is the particular transactions payment will be deducted. 7

8 Next two are very common forms of plastic money namely credit cards and debit cards, both of them are issued by the financial institutions where you are supposed to be having at least a saving bank account the credit card will have certain advantages and disadvantages over that of debit card, the major advantage is that you can pay now and you will be required to repay to the financial institution after 25 days or a month, so credit card when you are using you are not using your own money you are using money of the financial institution, on the other hand the debit card that the banks issues to their customers and this debit card can be used only in the instances where the money is already available in the account and you can go and withdraw money from the account by using the debit card and in ATM s these debit cards are used, similarly special types of plastic money is available wherein store cards and cash cards are issued by different industrial organization. 6. SUMMARY In conclusion it can be said that in this particular program we have talked about the evolution of money over very long period of time starting from the Barter trade to different forms of the transaction instruments that are used, we also try to define money itself then what role and relevance money has in any economy was discussed we talked about different currencies applicable in different countries and finally towards the end of the program we discussed two types of money namely paper money and plastic money. Thank you! 8