Money
Class 12 Macro Economics — Definition, Functions, Evolution, Classification, and India's Monetary System
Introduction and Definition of Money
Cryptocurrency: Digital/virtual currency using cryptography. Decentralized, not controlled by central authority. In India, not recognized as legal tender.
Primary Functions of Money
The two most essential functions that define money — often called the primary functions:
Secondary Functions of Money
Beyond the primary functions, money also serves several secondary purposes:
Contingent and Dynamic Functions of Money
Contingent Functions — additional roles money plays in the economy:
Distribution of National Income
Money facilitates distribution of national income among factors of production — rent (land), wages (labor), interest (capital), profit (enterprise) — all expressed in monetary terms.
Static vs Dynamic Functions (per Paul Einzig):
| Aspect | Static Functions | Dynamic Functions |
|---|---|---|
| Role | Help economy function smoothly | Influence level of economic activity and trends |
| Examples | Medium of exchange, measure of value, store of value, standard of deferred payments | Basis for credit creation, liquidity leading to changes in income/output/employment/price levels |
| Without them | Economy cannot operate | Economy loses growth and adaptability |
Evolution of Money
Money evolved through five distinct stages over thousands of years:
Classification of Money
Money is classified into three major categories based on the relationship between face value and intrinsic value:
Convertible Paper Money
Freely exchangeable for full-bodied money (gold/silver) at holder's option. Full backing not always necessary.
Inconvertible Paper Money
Cannot be converted into full-bodied money. Circulates based on government regulation and trust (e.g., Indian one-rupee note historically).
Token Coins
Metal value < face value (modern Indian coins ₹1, ₹2, ₹5, ₹10, ₹20).
Representative Token Money
100% backed and redeemable in gold/silver, but market value of commodity < paper's face value.
Circulating Promissory Notes
RBI notes — promises to pay bearer the stated sum; commodity value (as paper) much less than face value.
Demand Deposits in Banks
Withdrawn/transferred by cheque. Claims against the bank, not backed by bullion. Commodity value (of cheque) low vs transaction value.
Monetary System in India
Key features of the Indian monetary system:
Monetary Authority
Reserve Bank of India (RBI) manages the system.
Paper Currency Standard
India operates under Inconvertible Paper Currency Standard with 'rupee' as standard currency.
Legal Tender Rules
Coins = limited legal tender (small payments). Paper notes = unlimited legal tender (any amount).
Issuing Authority
RBI issues ₹2 and higher denomination notes. Ministry of Finance issues ₹1 notes and all coins.
Minimum Reserve System
RBI must maintain a minimum reserve of gold and foreign exchange worth ₹200 crores, based on which it can issue any amount of currency notes.