Forms of Money
The different forms of money are classified into the following:
(a) Commodity Money
Refers to a form of money as per the classical approach. The commodity form of money involves commodities, such as cattle, grains, leather, skins, utensils, and weapons. However, in the present time, commodity money is not preferable as it lack certain important characteristics of money, such as uniformity, homogeneity, standard size and weight, portability, and divisibility.
(b) Metallic Money
Includes money made up of metals, such as copper, brass, silver, gold, alloys, and aluminium. The need for metallic money was realized due to the limitations of commodity money. However, the exact period when metallic money was invented is unknown.
It is supposed that metallic coins were traded in India around 2500 years ago. Initially, the pieces of metals, such as gold, silver, copper, and aluminum, served the purpose of money. However, in later years, these pieces took the form of coins.
(c) Paper Money
Refers to the form of money printed, authenticated, and issued by the government of a country. Paper money is regarded as the most common form of money and constitutes a large part in the money supply of a country. Some of the countries adopted the dual system of currency notes.
For example, in India, both, five rupees notes and coins are issued by Reserve Bank of India (RBI). The currency notes issued by RBI are promissory notes, but they get a status of legal money. For example, on every currency note, it is written, “I promise to pay the bearer a sum of…. Rupees.”
Paper money was invented as the supply of metallic coins, such as silver and gold, was very less as compared to its demand. In addition, a large amount of metallic money is not easily portable and the value of metallic coins depreciates with time.
(d) Bank Deposits
Refers to money that is in the form of current account deposits, saving account deposits, and time deposits. This form of money was invented with the evolution of the banking system. Unlike metallic money and paper money, this form of money cannot be passed hand to hand for purchasing goods and services.
Deposit money is considered as entries in the ledger of the bank to the credit of the holder. These deposits can only be transferred through checks.
Since time immemorial, money has retained some value; therefore has demand.
Demand for Money
The demand for money is different from demand for a commodity. Demand for money refers to the amount of money to be held by individuals and businesses. On the other hand, demand for a commodity is the demand for the continuous flow of goods and services. Therefore, the difference between the demand for money and demand for commodity is that the former focuses on the holding, while later focuses on the flow. Earlier, the demand for money was defined as the amount of money required for making business transactions.
In simple terms, the demand for money was dependent on the number of transactions done in an economy. As a result, there was a rapid rise in the demand for money in the boom period, whereas the demand for money fell at the time of depression. On the other hand, modern view on demand of money given by Keynes, demand for money is the demand for money to hold.
There are three broad motives on the basis of which money is required by people, which are as follows:
(a) Transaction Motive
Refers to the demand for money to fulfill the present needs of individuals and businesses. Individuals require money to fulfill their current requirements, which is termed as income motive. On the other hand, businesses need money for carrying out their business activities, which is known as business motive.
These two motives of money are discussed as follows:
(i) Income Motive
Refers to the motive of individuals who demand money for fulfilling the needs of themselves as well as their family. Generally, individuals hold cash for bridging the gap between the receipt of income and its expenditure.
The income is received once in a month but the expenditure takes place every day. Therefore, it is required to hold some part of income to make current payments. The holding amount depends on the amount of an individual’s income and interval of receiving income.
(ii) Business Motive
Refers to the requirement of money by businesses in liquid form to meet the current requirements. Businesses require money for procuring raw material and paying transport charges, wages, salaries, and other expenses. The money demanded by businesses depends on their turnover. The higher turnover indicates the requirement of higher amount of money to cover up expenses.
(b) Precautionary Motive
Refers to the longing of individuals to hold money for various contingencies that may take place in future. These contingencies can include unemployment, sickness, and accidents. The amount of money need to be held for the precautionary motive depends on the nature of a person and his/her living conditions.
(c) Speculative Motive
Refers to the motive of individuals for holding cash to make out benefit from the movements of market regarding the change in interest rate in future. The precautionary and speculative motive acts as the store of value with different purposes.
Supply of Money
As discussed above, the demand for money is demand for money to hold. Similarly, supply of money refers to the supply of money to hold. Money needs to be held by individuals, else it does not exist. Supply of money refers to the total amount of money (in any form) that is held by a community in a given period of time.
In earlier times, the metallic money was the most common form of money that constituted the major part of money in an economy. In modern times, metallic money has been replaced by currency notes and checkable bank deposits.
The money supply is categorized as M1, M2, M3 and M4. M1 refers to the money stock that includes coins, currency notes, and demand deposits. M2 refers to the money stock that includes coins, currency notes, demand deposits, and time deposits. M3 refers to the money stock includes coins, currency notes, demand deposits, time deposits, and post office deposits.
M4 refers to the money stock includes coins, currency notes, demand deposits, lime deposits, post office deposits, savings bank, and term deposits. The credit control policies imposed by the banking system of a country- help in determining the total supply of money.