What is Money? Definition, History, Supply, Types, Characteristics, Supply & Income Mode

What is Money?

  Money, one of the most important thing in human life is a medium of exchange that accepted in transactions for goods and services. It can be in many forms, including physical cash, coins, bank deposits, credit cards, and digital currencies. The function of money is to serve as a means of exchange, allowing individuals and businesses to trade goods and services without the need for bartering or other forms of direct exchange. Money also serves as a store of value, allowing individuals to save their wealth for future use & requirement. The value of money is determined by a variety of factors, including supply and demand, government policies, and economic conditions.

The History of Money: –

The concept of money has been about for thousands of years and has evolved over the time to meet the needs of societies, families, businesses & individuals. Following is a brief history of money:

1. Bartering: Before money existed, people traded goods and services with each other through bartering. This system involved exchanging one good for another, such as trading a basket of fruit for a basket of vegetables.
2. Commodity money: Commodity money is a system where a commodity, such as gold or silver, is used as currency. This system developed because certain commodities were widely accepted and had a stable value. For example, gold was used as currency because it was rare, durable, and could easily be divided into smaller units.
3. Coinage: The use of coins as currency dates back to around 700 BCE when the Lydians in present-day Turkey began minting coins. Coins were made of valuable metals such as gold, silver, and bronze and had a standardized weight and size.
4. Paper money: The first paper money was developed in China during the Tang Dynasty (618-907 CE). The use of paper money spread to Europe during the 17th century and became widespread in the 18th century. Paper money is a form of currency that is backed by a government or central bank and can be exchanged for goods and services.
5. Electronic money: With the development of technology, electronic money has become a popular form of currency. This includes credit cards, debit cards, and digital currencies like Bitcoin. Electronic money is a convenient way to pay for goods and services without the need for physical cash.

Throughout history, money has played a vital role in the development of civilizations, facilitating trade & commerce and enabling economic growth across the world. Its evolution has been shaped by multiple technological advancements, political and social changes, and shifted in cultural attitudes towards value and exchange.

Money in Economics: – Money has several functions in the economy, some major functions are:

1. A medium of exchange: Money facilitates trade by acting as a means of exchange. Buyers and sellers can use money to purchase goods and services without the need for barter.
2. A unit of account: Money is used to measure the value of goods and services in the economy. Prices of goods and services are quoted in terms of money.
3. A store of value: Money can be stored and used later to purchase goods and services. This function of money allows individuals to save and invest in the economy.
4. A standard of deferred payment: Money is used to settle debts and obligations over time. Contracts and agreements can be made using money as the medium of payment.

What is Money Supply?

  Money supply is the total amount of money in circulation in an economy at a given time. It includes all forms of money, such as physical currency (coins and banknotes), demand deposits (checking accounts), and time deposits (savings accounts and certificates of deposit).

The money supply is an important economic indicator because it influences the overall level of economic activity in an economy. The amount of money in circulation affects the inflation due to price level of goods and services as well as the level of interest rates and the availability of credit.

The money supply is controlled by the central bank of a country, which has the power to influence the supply of money through monetary policy. The central bank can increase the money supply by buying government bonds, reducing the reserve requirements for banks, or lowering the interest rate it charges banks for borrowing of money. Conversely, the central bank can decrease the money supply by selling government bonds, increasing the reserve requirements for banks, or raising the interest rate it charges banks to borrow money.

Economists and policymakers closely monitor changes in the money supply to understand the overall health of the economy and to make informed decisions about monetary policy.

Types of Money: – There are several types of money that exist in the economy of different countries. Some of the common types of money are:

1. Commodity money: Commodity money is a physical item that has value of itself and is used as a medium of exchange. Examples of commodity money include gold, silver, and other precious metals.
2. Fiat money: Fiat money is a type of money that is declared by the government as legal tender and has no intrinsic value. Fiat money is not backed by a commodity but is accepted as a means of payment by the government.
3. Digital money: Digital money is a type of money that is purely digital and exists only in electronic form. Examples of digital money include cryptocurrencies like Bitcoin and Ethereum, as well as digital currencies issued by central banks.
4. Bank deposits: Bank deposits are a type of money that exists in the form of deposits in banks or financial institutions. Bank deposits can be used as a means of payment and can be withdrawn as physical currency.
5. Traveller’s checks: Traveller’s checks are a type of money that is used for travel and can be exchanged for local currency at banks or exchange bureaus.
6. Plastic Money: Plastic money is a form of payment that does not involve physical cash but instead uses plastic cards, such as credit cards, debit cards, and prepaid cards. These cards are made of plastic and have a magnetic stripe or a chip that contains information about the cardholder and their account.

Characteristics of Money: – The characteristics of money can vary depending on the type of money and financial system in place. some of the common characteristics of money are:

1. Acceptability: Money must be widely accepted as a medium of exchange in transactions for goods and services.
2. Portability: Money should be easily transferable and transportable from one location to another.
3. Durability: Money should be able to withstand wear and tear over time, so it can remain a reliable means of exchange.
4. Divisibility: Money should be easily divisible into smaller units so that it can be used to purchase goods and services of varying values.
5. Fungibility: Each unit of money should be interchangeable with any other unit of the same value.
6. Scarcity: Money must be scarce enough that it has value and can be used to facilitate exchange.
7. Stability: Money should have stable purchasing power over time so that it can retain its value as a means of exchange.

Income Types of Money:  There are mainly two types of income that are earned through different means and have different implications, that are black money and white money.

Black Money: Black money is an income earned through illegal activities, such as corruption, tax evasion, smuggling, and other criminal activities. This type of income is often hidden from the government and tax authorities; therefore, it becomes difficult to track and tax. It is called black money because it is not accounted for, and henceforth, it is not subject to taxation. The term “black” is used to describe the unaccounted nature of the income, which is not recorded in any official records.

The use of black money is often associated with criminal activities and is a serious problem for governments around the world. It leads to a loss of tax revenue, which affects the government’s ability to fund public services and infrastructure projects with more money infusion. Black money also creates an uneven playing field for businesses that operate legally and pay their fair share of taxes.

Governments around the world have taken various measures to curb the use of black money, such as implementing strict anti-money laundering laws, increasing transparency in financial transactions, and offering tax amnesty programs to encourage people to come forward and declare their previously undisclosed income. The use of digital transactions and the demonetization of high-value currency notes have also been used as measures to reduce the use of black money.

White Money: White money is an income earned through legal way and is fully accounted for and reported to tax authorities. This type of income is subject to taxation as per the laws of the country, and the tax liability is paid by the individuals or businesses earning this income.

White money is earned through legitimate process, such as salaries, wages, business profits, and investments. The income earned is usually recorded in official documents like tax returns, bank statements, and financial statements. It is usually stored in bank accounts or other financial instruments, which can be traced and accounted easily.

The use of white money is essential for the proper functioning of the economy because it allows the government to collect taxes, which are then used to fund public services like education, healthcare, infrastructure, and defence. White money also promotes fair competition among legal businesses and helps to maintain a level playing field.

Essence of Money: The essence of money lies in its ability to facilitate exchange between parties engaged in economic transactions. It serves as a medium of exchange that enables people to trade goods and services without the need for a direct barter system. Money has value because people believe in its ability to be exchanged for goods and services, making it a store of value. The value of money is determined by various factors, such as its scarcity, demand, and supply. Money also acts as a unit of account, allowing people to measure the value of goods and services and compare them to one with another. It serves as a standard of deferred payment, enabling people to make transactions that will be settled at a later date. The essence of money is its ability to provide a stable and widely accepted medium of exchange that allows economies to function efficiently and effectively.

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