Evolution and Functions of Money
NCERT Class 10 • Economics • Chapter "Money and Credit" | NCERT Class 12 • Introductory Macroeconomics • Chapter "Money and Banking"
Evolution and Functions of Money
Money is anything generally accepted as a means of payment for goods and services and in settlement of debts. Before money existed, people used barter, the direct exchange of one good for another. Barter worked only in very small communities and failed as soon as trade grew.
Problems of Barter and the Rise of Money
- Barter needs a double coincidence of wants: each side must want exactly what the other offers.
- Barter has no common measure of value, so comparing a cow with cloth is difficult.
- Goods cannot be stored as value easily, since many of them perish.
- Indivisible goods cannot be split for a small purchase, so exact exchange fails.
- Money solved all four problems by becoming a single accepted medium.
- Money evolved from commodity money such as grain and cattle, to metallic money, then paper money, and now increasingly to digital money.
- Modern currency is fiat money, accepted because law declares it legal tender, not because of its metal value.
Functions and Forms of Money
- Medium of exchange — money is accepted by all for buying and selling, which removes the need for double coincidence.
- Measure of value — the value of every good can be expressed in one common unit.
- Store of value — purchasing power can be held and used later.
- Standard of deferred payment — borrowing, lending and instalments become possible.
- Currency means notes and coins; demand deposits in banks are also money because cheques and transfers settle payments.
- Money supply is the total money held by the public, including currency and bank deposits.
| Problem of Barter | How Money Solves It |
|---|---|
| Double coincidence of wants | Money is accepted by everyone |
| No common measure | All values expressed in one unit |
| Difficult store of value | Money can be held over time |
| Indivisibility | Money is divisible into small units |
Double coincidence of wants — a situation where both parties in a barter must want exactly what the other has to offer.
Hindi me samjhein
वस्तु विनिमय में दोहरे संयोग की आवश्यकता होती है, यानी दोनों पक्षों को एक-दूसरे की वस्तु चाहिए होनी चाहिए। मुद्रा इसी कठिनाई को समाप्त करती है, क्योंकि उसे सब स्वीकार करते हैं।
Exam me kaise aata hai
- The main problem of barter is — double coincidence of wants
- Modern paper currency is an example of — fiat money
- Which function lets money be saved for later use — store of value
- Bank deposits withdrawable by cheque are called — demand deposits
UPSC/State PSC ke liye
- Fiat money has value because of trust and legal backing, not intrinsic worth, which is why confidence in the issuer is central to a currency.
- Demand deposits count as money because they are accepted in settlement of payment, which is why money supply is more than just currency.
Yahan confuse hote hain
✗ Only notes and coins are money | Demand deposits in banks are also money | ✓
✗ Money must have metal value | Fiat money has no intrinsic metal value | ✓
✗ Barter means buying with money | Barter is direct exchange of goods without money | ✓
Ek nazar me
- Barter needed a double coincidence of wants and failed as trade grew.
- Money evolved from commodity to metallic to paper and now digital.
- Four functions: medium of exchange, measure and store of value, deferred payment.
- Money supply includes currency plus demand deposits.