Ch 3- Money and Credit- Extra Questions and Notes

According to Herodotus, the Lydians were the first people to introduce the use of gold and silver coins. It is thought by modern scholars that these first stamped coins were minted around 650 to 600 BC. Commercial money is a claim against a bank for the purchase of goods and services . They create more money through a process called fractional-reserve banking. In this, only a certain percentage of money the bank “has” is held within it. The other percent is given to others in the form of loans, in doing so, the bank makes back more money from the interest and fees charged to customers.

  • In 600 BCE, Lydia’s King Alyattes minted what is believed to be the first official currency, the Lydian stater.
  • They are issued by the Government of India, while all other notes are issued by the Reserve Bank of India.
  • According to MMT, the issuing of government bonds is best understood as an operation to offset government spending rather than a requirement to finance it.
  • The right of minting coins is the monopoly of the State.
  • It connotes something deposited for safekeeping, like currency in a safe-deposit box.

Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy. But for the banks, there would be no demand deposits and no payments by cheques against these deposits. The modern forms of money — currency and deposits — are closely linked to the working of the modern banking system.

Store of value

Legal tender describes any official medium of payment recognized by law that can be used to extinguish a public or private debt or meet a financial obligation. Although cryptocurrencies are rarely used in everyday transactions, they have achieved some utility as a speculative investment or a store of value. Some jurisdictions have recognized cryptocurrencies as a payment medium, including the government of El Salvador.

modern forms of money include

In addition, the functions of money are not only confined to medium of exchange and measure of value rather it performs a large number of functions. The development of computer technology in the second part of the twentieth century allowed money to be represented digitally. By 1990, in the United States all money transferred between its central bank and commercial banks was in electronic form. By the 2000s most money existed as digital currency in bank databases. In 2012, by number of transaction, 20 to 58 percent of transactions were electronic .

A Medium of Exchange

However, banks eventually started using paper banknotes for depositors and borrowers to carry around in place of metal coins. These notes could be taken to the bank at any time and exchanged for their face value in metal—usually silver or gold—coins. This paper money could be used to buy goods and services. In this way, it operated much like currency does today in the modern world. However, it was issued by banks and private institutions, not the government, which is now responsible for issuing currency in most countries. The four most relevant types of money are commodity money, fiat money, fiduciary money, and commercial bank money.

  • The government declares it as legal tender and it must then be accepted as a form of payment everywhere.
  • They are held by banks in accounts that they have at the central bank.
  • They could also set the terms at which they would redeem notes for specie, by limiting the amount of purchase, or the minimum amount that could be redeemed.
  • However, the commodity money had various drawbacks such as there could be no standardization of value for money, lacks the property of portability and indivisibility.

Traditional forms of money included silver, gold & copper. It includes currency – papernotes – coins and deposits with the bank. Metallic money refers to the coins which are used for small transactions. Examples of coins are 50 paise coins, and 1, 2, 5 and 10 rupee coins.


Invention of money has overcome all the difficulties of barter system. There is no need to find double coincidence of wants and value can be measured easily in terms of money. It exchange funds every day without the physical movement of any paper money. This would eliminate the use of cheques and reduce the need for currency.

  • Currency money is a legal tender and has general acceptability, whereas bank deposits are conventional money and lack general acceptability.
  • Now the value of labour will never be constant and it will also vary from place to place.
  • You just swipe the card and enter your PIN number on a key pad.
  • The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash.
  • The Indian rupee was at one time made of silver weighing 180 grains and was 11/12 fine.

The department of government minting coins is called the Mint. Money—in some form or another—has been part of human history for at least the past 5,000 years. Before that time, historians generally agree that a system of bartering was likely used. Meanwhile, further west during this era, the sixth-century BCE Greek poet Xenophanes, quoted by the historianHerodotus, ascribed the invention of metal coinage to theLydians. In 600 BCE, Lydia’s King Alyattes minted what is believed to be the first official currency, the Lydian stater. The world’s oldest known, securely dated coin minting site was located in Guanzhuang in Henan Province, China, which began striking spade coins sometime around 640 BCE.

When Were Coins Replaced by Paper Money?

With their increased incomes, they could grow crops, do business, set-up small-scale industries, etc. This could free them from the clutches of moneylenders, traders or landlords and increase their status in the society. Explain the social and economic values for which it is necessary to expand formal sources of credit in India. Credit at low rate of interest i.e., cheap and affordable credit would increase the incomes of the poor. SHGs have a lower interest rate than that of moneylenders or traders.

modern forms of money include

Commodity money is that money whose value comes from a commodity, out of which it is made. The commodities that were used as medium of exchange included cowrie shells, bows and arrows, gold, smart contract dictionary silver, food grains, large stones, decorated belts, cigarettes, copper, etc. Fiduciary optional money is non-legal tender money as it is generally accepted by the people in final payments.

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