What is Money? 

Definition: Money is anything that is generally accepted as a medium of exchange, a measure of value, a store of value and a standard for deferred payments.

Functions of Money 

Money performs the following four basic functions. 

• Primary Functions 
  • Medium of Exchange 
    • Money is used to buy and sell goods and services. 
    • It overcomes the limitations of barter (double coincidence of wants). 
  • Measure of Value 
    • Money expresses the value of goods/services in terms of price. 
• Secondary Functions 
  • Store of Value 
    • Money can be stored and used in the future. 
    • It preserves value over time (if inflation is low). 
  • Standard of Deferred Payment 
    • Money is used for credit transactions and future payments. 

Evolution of Money 

• Barter System: Direct exchange of goods/services without money. 
• Commodity Money: Goods like salt, grains, metals used as money. 
• Metallic Money: Coins made of precious metals. 
• Paper Money: Government-issued notes. 
• Credit Money: Promissory notes, cheques, etc. 
• Plastic and Digital Money: Credit/debit cards, UPI, e-wallets. 

Types of Money 

Money Supply: Money supply refers to the total stock of money circulating in an economy at a given point in time.

Measures of Money Supply in India (as per RBI) 

RBI uses four standard measures: 

High-Powered Money (H) 

• Also known as Reserve Money. 
• It includes:  
  • Currency held by the public 
  • Cash reserves of banks with the RBI 
• H = C + R, where 
  C = currency with public, 
  R = cash reserves with the central bank.

Money Multiplier: It refers to the number of times the money supply increases due to an increase in high-powered money. 

Formula: 

Where, 

M = Total Money Supply 

H = High-Powered Money 

A higher multiplier means more money is being created by the banking system.

Factors Affecting Money Supply 

• Cash Reserve Ratio (CRR): Higher CRR → lower money supply. 
• Statutory Liquidity Ratio (SLR): Higher SLR → less money for lending. 
• Open Market Operations: Buying/selling of govt securities by RBI. 
• Bank Rate: Higher rate discourages borrowing → reduces money creation. 
• Public Demand for Cash vs Deposits: More cash hoarding reduces multiplier.

What is Legal Tender?

• Legal tender is money that must be accepted for payments by law. 
• In India, it includes RBI-issued notes and Government-issued coins. 
• Creditors cannot refuse it as payment. 
• It is defined by law and authorized by the RBI Act and related legislation.

Note & Coin Issuers in India