Types of money Standard

Types of money Standard

1.    Commodity Standard

Commodity was first standard adopted by the world; however, it could not survive for number of limitation like durability, divisibility, storage issues.

2.    Metallic Standard

Metal were used as money standard and coins of copper & iron were designed and created by different countries. Scarcity on this metal was the basic governing idea to use as standard of money, but later with the development of mining scarcity was removed and it resulted in devaluing those coins.

3.    Bimetallism

Under bimetallism both Gold & silver coins were introduced and price of silver was established in relation to gold. It means silver and gold standard value was established and in accordance of this value either golf or silver coin were developed.

4.    Gold Standard

Under Gold Standard only gold coins were used for transaction both at domestic & international level. There were number of disadvantages associated with gold coins transport ability, chance of stolen, scarcity of gold.

5.    Representative Money

The age of representative money & currency notes started. In modern world representative money is used.

Characteristics of Keynes Theory of Money

Characteristics of Keynes Theory of Money

1.    Money can Store Value

Keynes theory of money put light on another function of money i.e. money can store value. Keynes explained that due to this quality of money, there is linkage between current & future demand of money.

2.    Speculative Demand of Money

Keynes also explained that in addition to transaction demand, money also has speculative demand, which depend on the rate of interest.

3.     Supply of money & interest rate

Keynes establishes a link between supply of money and interest rate, as supply of money increases, rate of interest decrease. There is inverse relationship between supply of money and interest rate.

4.    Money supply Generate economic activity

Money has role in generating economic activity, in case money supply increase, it will boost the investment in the economy, which would create employment.

5.    Inflation & Deflation

There may be equilibrium of national income above the full employment level (inflation) and there equilibrium of nation income below full employment. (Deflation)

6.    Money Generate employment

Public expenditure by the government or increase investment level in the economy due to lower interest rate generates economic activity & employment in the country. Therefore money has role other than monetary role.

Classical Theory of Money

Classical Theory of Money Concept

Classical theory of money describes money as medium of exchanges and denies any real role of money in the economy i.e. impact or influence over income & employment.

1.    Medium of Exchange

Classical theory of money says money works as medium of exchange i.e. moneys is used to perform transaction. It means classical theory only recognize only transaction demand i.e. money is just needed to perform transactions.

2.    No Role in Economic Activity

Classical theory says that money has no role in generation of economic activity. Moreover money has no influence over the real factor of economy i.e. income, employment.

3.    Money is just facilitator

Classical theory of money says that money is just a facilitator in the market. It facilitates the transaction to be happen i.e. exchange of goods & services. Classical economist say money is like road which facilitates but does not create anything.

4.    No influence over Quality

Classical theory of money also denies money role in the quality of product. It means increase or decrease in price has no relevance with the quality, rather increase and decrease in prices relates to supply of money.

5.    Monetary Role

Classical theory recognizes monetary role of money i.e. impact on price & wage rate. It says that prices will increase with increased supply of money; similarly prices would decrease with decreased supply of money.

Types of Money Demand

 Types of Money Demand

Money demand types or motives can be classified into three classes i.e. Transaction motive, precautionary demand, speculative Demand.

1.    Transactional Demand

People need money for day to day transactions, because money is a medium of exchange. People need money both for personal consumption and for business exchanges.

2.    Precautionary Demand

Precautionary demand for money included the future accidental expenditure i.e. health etc. precautionary demand of money is both for personal and business reasons, there are number of unexpected event can happen in real life.

3.    Speculative Demand

Speculative demand is to get benefit or profit from an opportunity and for such benefit one must have liquid cash in hand

Disadvantages of Money

Disadvantages of Money

Disadvantages of money or monetary system can be expressed in terms of artificial shortage created in the market, unequal distribution of income, and trade cycles at regular intervals, fluctuation in the money value, and creation of speculative market etc.

1.    Artificial Hike in Price

Artificial price hike by creating artificial shortage is possible in Monterrey system. Producer can store value in money for future production, and thus current production level may be reduced to create artificial shortage.

2.    UN Equal Income Distribution Issues

UN equal distribution of wealth is another disadvantage of monetary system. People are able to accumulate wealth in monetary system, moreover, in monetary system investment opportunities are only available to wealthy people, and thus they can create more wealth by using money.

3.    Trade Cycles at regular interval

Economy is not in a stagnant position, and changing its position regularly. Economy takes many positions i.e. Trade cycle. The economy is moving from one trade cycle to another i.e. boom, decline, recession, recovery.

4.    Value of money Changes

Though money stores the value, however, it is not a perfect medium of storage and money value tends to fall over the period of time. This is primarily due to inflation in the economy.

5.     Speculation is created

Money has ability to create a speculative demand for the product. This is especially is case, where the interest rate is low and money can be invested in speculative markets. Speculation has many disadvantages.

6.    Black Economy

Money has encouraged the establishment of black economy in the world. Due to easy transfer ability of money, the illegal activity can be easily funded by the money.

Advantages of Money

Advantages of Money

Advantages of money include value storage, production at large scale, luxury goods or products, credit transaction, standard pricing or price mechanism, advance payment, and concept of investment & saving.

1.    Value Storage

Value storage is one of the important quality or advantage of the money. A large amount of value can be stored in a small space for future use. Value storage quality was lacking in the old systems.

2.    Production at Large Scale

Production at large scale is another important advantage of money or monetary system. In barter system only essential goods were used for immediate consumption.

3.    Luxury Products

There was no concept of luxury product in the barter system and only those product were produced, which were easy to market & sale (Essential Goods). The concept of luxury & innovative product were introduced by the money.

4.    Credit Transactions

Credit transaction or transaction on credit is facilitated by the monetary system. In barter system, it was difficult to operate credit transaction, because goods cannot store value, moreover, it is difficult to establish future price.

5.    Standard Pricing

Standard price or standard pricing concept came to existence due to money. This is one of the fundamental advantages of money, which has made possible the creation of market. In barter system, there was difficult to establish the standard price for a product.

6.    Advance Payment

Like credit transaction, advance payment is also only possible in the monetary system and there is no concept of advance payment in the barter system due to difficulty in storing the value.

7.    Investment & Savings

Concept of investment and saving was introduced by the monetary system. People can save money for the future investment; in barter system people could not store goods for future investment (producing more goods)