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Module 1

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Module 1
The Story of Finance
Duration: 30 Mins

Vol. 1.1-4n4

www.funancialquest.com Module 1: The Story of Finance

Contents
•The Story Money
•General Explanation
•Functions of Money
•Types of Money

•The History of Money
•The Barter system
•Emergence of money
•Commodity money
•Currency
•Fiat money
•History of Rupee

Vol. 1.1-4n4

www.funancialquest.com Module 1: The Story of Finance | History

The Story of Money

Vol. 1.1-4n4

www.funancialquest.com Module 1: The Story of Finance | Money

The Story of Money

•General Explanation
•Functions of Money
•Types of Money

Vol. 1.1-4n4


The Story of Money

100x
What is Money?

Money basically is, any object or record that is generally accepted as payment for
goods and services and repayment of debts in a given socio-economic context or
country.

You use money to buy a thing or a service.

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Functions of Money

Functions of money

The functions of money are as follows:

1. Standard of deferred payment
2. Medium of Exchange
3. Unit of account
4. Store of value
5. Measure of value

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Functions of Money

1.) Standard of Deferred Payment

A "standard of deferred payment" is an accepted way to settle a debt.

In the Indian currency notes, it is represented by the signed declaration of the
Governor of the Reserve Bank of India (as shown above) which promises the
bearer of the note to be paid the sum mentioned on the note.

This is also the reason, why currency notes with such promises are known as
promissory notes.
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Functions of Money

2.) Medium of Exchange

When money is used to pay for goods and services, it performs the function of
being the medium of exchange.

In the earlier days, people used to exchange goods (barter system). For this
system to work, there was a need to have a coincidence of wants, which means
Person A must have what Person B wants and vice versa for the exchange to take
place.

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Functions of Money
Exchange
Barter


This basically meant that a fruit farmer in need of a chicken in those times, needed
to find a farmer who was interested in having fruits.

Sometimes, it became difficult for individuals to find perfect matches. Thus rose
the need to have something which is universally needed and thus exchanged.

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Functions of Money


Thus was the need to have a common function of money which was acceptable by
everyone.

So a potter could give his pots to a cattle owner in exchange of money and then
pay money to the farmer to buy rice, who pays back to the cattle owner to get what
he wanted!

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Functions of Money
Unit of
account

Medium
Store of
of
value
exchange

3.) Unit of account

A unit of account is a standard monetary unit of measurement of value/cost of
goods, services, or assets.

A standard unit of account allows meaningful interpretation of prices, costs, and
profits in the economy.

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Functions of Money

4.) Store of value

To act as a store of value, money must be able to be saved (or stored) and
retrieved (or brought back) at a later time, while being useful.

Alternative stores of value include: Real State, Precious Metal and Stones,
Collectibles like art, Stock ownership in a company etc.

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Functions of Money

5.) Measure of value

Money, essentially acts as a standard measure and common denomination of
trade. it is thus a basis for quoting and bargaining of prices.

It has significantly in developing efficient accounting systems. But the most
important usage is that it provides a method to compare the values of dissimilar
objects.

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Types of Money

What are the types of money

There are primarily 5 types of money

• Commodity money
• Representative money
• Fiat money
• Currency
• Commercial bank money

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Types of Money

Commodity money

Many items have been used as commodity money such as naturally scarce
precious metals, conch shells, barley, beads etc., as well as many other things
that are thought of as having value. Commodity money value comes from the
commodity out of which it is made. The commodity itself constitutes the money,
and the money is the commodity.

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Types of Money

Representative money

money that consists of token coins, or other physical tokens such as certificates,
that can be reliably exchanged for a fixed quantity of a commodity such as gold or
silver. The value of representative money stands in direct and fixed relation to the
commodity that backs it, while not itself being composed of that commodity.

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Types of Money

Fiat money

Fiat money or fiat currency is money whose value is not derived from any intrinsic
value or guarantee that it can be converted into a valuable commodity (such as
gold). Instead, it has value only by government order (fiat). Usually, the
government declares the fiat currency (typically notes and coins from a central
bank, such as the Federal Reserve System in the U.S.) to be legal tender, making it
unlawful to not accept the fiat currency as a means of repayment for all debts,
public and private.

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Types of Money

Currency

Currency refers to physical objects generally accepted as a medium of exchange.
These are usually the coins and banknotes of a particular government, which
comprise the physical aspects of a nation's money supply.

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Types of Money

Commercial bank money

Commercial bank money or demand deposits are claims against financial
institutions that can be used for the purchase of goods and services.

Banks have the legal obligation to return funds held in demand deposits
immediately upon demand (or 'at call'). Demand deposit withdrawals can be
performed in person, via checks or bank drafts, using automatic teller machines
(ATMs), or through online banking.

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History of Money

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History of Money
•The Barter system
•Emergence of money
•Commodity money
•Currency
•Fiat money
•History of Rupee

Vol. 1.1-4n4


The Barter System

What is Barter System

Barter is a method of exchange by which goods or services are directly
exchanged for other goods or services without using a medium of exchange, such
as money

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The Barter System

What were its limitations?

•Absence of common measure of value
•Indivisibility of certain goods
•Lack of standards for deferred payments
•Difficulty in storing wealth

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Emergence of Money


Due to the problems being faced in the barter system – man started searching for
a different system which would make sense for un ending economies. the things
with the most desirable; useful and their reliability in terms of the confidence a
person would have had in the re-use and re-trading of these things

With the start in the trade of copper and silver

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Emergence of Money


According to Aristotle, When the inhabitants of one country became more
dependent on those of another, and they imported what they needed, and
exported what they had too much of, money necessarily came into use

According to Economist Carl Menger, money emerged spontaneously through the
self-interested actions of individuals. No single person sat back and conceived of
a universal medium of exchange, and no government compulsion was necessary
to effect the transition from a condition of barter to a money economy.
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Commodity money

The Idea

Bartering has several problems, most notably that it requires a 'coincidence of
wants'. For example, if a wheat farmer needs what a fruit farmer produces, a
direct swap is impossible as seasonal fruit would spoil before the grain harvest. A
solution is to trade fruit for wheat indirectly through a third, "intermediate",
commodity: the fruit is exchanged for the intermediate commodity when the fruit
ripens. If this intermediate commodity doesn't perish and is reliably in demand
throughout the year (e.g. copper, gold, or wine) then it can be exchanged for
wheat after the harvest.
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Commodity money

What is Commodity Money

Commodity money is money whose value comes from a commodity of which it is
made. It is objects that have value in themselves as well as for use as money.

For example: Gold, Silver, Copper, Shells etc.

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Currency

History of minting coins

The first known ruler who officially set standards of weight and money was
Pheidon.

The first manufactured coins seems to have taken place separately in India,
China, and in cities around the Aegean sea between 700 and 500 BC.

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Currency

History of minting coins

While these Aegean coins were stamped (heated and hammered with insignia),
the Indian coins (from the Ganges river valley) were punched metal disks, and
Chinese coins (first developed in the Great Plain) were cast bronze with holes in
the center to be strung together. The different forms and metallurgical process
implies a separate development.

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Currency

Coins to trading bills

As the economy progressed, the volume of trade flourished, carrying a large
quantity of coins became cumbersome.

Traders gradually started using bills of reputable buyers to exchange among
themselves.

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Currency


Some traders also started using these bills to get even early credit, thereby
making these bills the medium of exchange and medium of value.

Some of these reputable merchants which releases such bills were goldsmiths,
who later also started lending money and providing the service of safekeeping of
money or gold. These individuals later graduated into early banking institutions.

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Currency


Some of the banks, started issuing paper notes in exchange for deposits which
went on to be called bank notes.

Bank notes gradually started circulating as currency. These banknotes were a
form of representative money which could be converted into gold or silver by
application at the bank.

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Currency


Generally, these bank notes carried a promise to pay the sum mentioned to the
bearer – which lead to these notes also being called promissory notes.

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Fiat Money
Song Dynasty Jiaozi, the
world's earliest paper
money
Yuan dynasty banknotes
were the earliest fiat
money

What is it?

Fiat money refers to money that is not backed by reserves of another commodity.

Fiat money originated in 11th century China, and its use became widespread
during the Yuan and Ming dynasties.

By World War I most nations had a legalized government monopoly on bank notes
and the legal tender status thereof. In theory, governments still promised to
redeem notes in specie on demand.
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History of Rupee

Rupiya released by Sher Shah Suri, 1540-1545
CE, was the first Rupee
Indian Rupees

Ancient India, presently northern part of the modern Indian sub-continent, was
one of the earliest issuers of coins in the world (circa 6th century BC)

The origin of the word "rupee" is found in the Sanskrit rūpya "shaped;
stamped, impressed; coin" and also from the Sanskrit word "rupa" meaning silver.

The original rūpaya was a silver coin weighing 175 grains troy (about 11.34
grams).
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History of Rupee

British Indian 1 rupee, 1917
Indian Rupees

Among the earliest issues of paper rupees were those by the Bank of Hindustan
(1770–1832), the General Bank of Bengal and Bihar (1773–75, established by
Warren Hastings), the Bengal Bank (1784–91), amongst others.

Formerly the rupee was divided into 16 annas, 64 paise, or 192 pies

During British rule, and the first decade of independence, the rupee was
subdivided into 16 annas. Each anna was subdivided into either 4 pices, or 12
pies. Vol. 1.1-4n4


History of Rupee

Indian Rupees

In 1957, decimalisation occurred and the rupee was now divided into 100 Naye
Paise (Hindi for new paisas). After a few years, the initial "Naye" was dropped.

However many still refer to 25, 50 and 75 paise as 4, 8 and 12 annas respectively

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History of Rupee

Reserve bank of India

The Reserve Bank of India was formally inaugurated on Monday, April 1, 1935 with
its Central Office at Calcutta. Section 22 of the RBI Act, 1934, empowered it to
continue issuing Government of India notes until its own notes were ready for
issue. The bank issued the first five rupee note bearing the portrait of George VI in
1938. This was followed by Rs. 10 in February, Rs 100 in March and Rs 1,000 and
Rs 10,000 in June 1938. The first Reserve Bank issues were signed by the second
Governor, Sir James Taylor.

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History of Rupee


After Independence of India, the government brought out the new design Re. 1
note in 1949. Initially it was felt that the King's portrait be replaced by a portrait of
Mahatma Gandhi. Finally however, the Lion Capital of Asoka was chosen. The new
design of notes were largely along earlier lines. In 1953, Hindi was displayed
prominently on the new notes. The economic crisis in late 1960s led to a reduction
in the size of notes in 1967. High denomination notes, like Rs. 10,000 notes were
demonetised in 1978.

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History of Rupee


The "Mahatma Gandhi Series" was introduced in 1996. Prominent new features
included a changed watermark, windowed security thread, latent image and
intaglio features for the visually handicapped.

Vol. 1.1-4n4

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