Chapter # 1

 Money has been defined differently by different economists:  Crowther in his book defines money “ As anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and store of value”.  In the words of Coulborn “ Money may be defined as a means of valuation and of payment”.

 According to “ The state theory of money” “anything which is declared by the state as money is money”.  Professor Hartley also believes that “Money should be legal tender. It should be declared by the government of a country as a mean of payment and people should be forced to accept it for the purpose of money”.

 The modern economists are of the view that a suitable definition of money should point out not only the four major functions of money but also possess the basic feature of general acceptability. D.C. Colander definition of money appears to be satisfactory.  According to him, “ Money is a financial asset that makes the real economy function smoothly by serving as a medium of exchange, a unit of account and a store of wealth”.

 In the earliest stage of human civilization, there was no use of money.  The families were almost self sufficient.  Each family consumed all it produced.  There was no need to exchange goods and so there was no need for money.  As time passed a need was felt to exchange goods directly for goods possessed by other persons.  A system called barter was developed so the earliest money which came into use and was accepted in exchange of goods for goods was commodity money.  As society developed, many other forms of money were developed in the payment system.

 Commodity money is the money that has a value apart from its use as money.  A large number of items has served as commodity money at different times and places.  In primitive agriculture stage, domestic animals like cattle, goats, horses, cows, sheep, rice, grain etc were used as money.  As time passed on, it was found that these commodities were not best suited as general means of making payments because there were difficulties in storing money.  They also lacked the essentials of durability, transportability, divisibility, homogeneity etc.

 The next form of money was the use of uncoined metals such as gold, silver, copper as medium of exchange. Such coins had an intrinsic value(Value in themselves).  It became difficult for the people to know the weight and value of the piece.  The discovery of mines of gold and silver and their exhaustion caused fluctuations in the supply of money.  Transportation and storage of precious metals also became dangerous.  The metallic coins had now a guaranteed weight of value by a competent authority. They had also intrinsic value and so commended a universal respect. Metallic money consists of various kinds of coins.  in AFGHANISTAN, coins of one, two and five afs. are the example of metallic money.

The next development in the payment systems was paper currency. Initially the paper currency carried a promise that it was convertible into a fixed quantity of precious metallic gold and silver. Before 1914, the bulk of bank notes were convertible into gold. The bank notes of various denominations ($1, $10, $100 ) had a promise by the bank to pay to the bearer a specific amount of gold on demand. The practice of exchanging paper currency for gold was eliminated after 1914 in England and in 1933 in America. In today’s economy, the paper notes are inconvertible notes. They are neither fully nor functionally convertible into gold. This paper money developed into convertible money is called Fiat money.

 Fiat money consists of paper money that derives its status as money from the power of state.  Fiat money is money because government says it is money.  It is not baked by promise to pay something of intrinsic value.  It is accepted because the government declares it a legal tender.  As legal tender money it is accepted as payment for debts.  The paper currency has the advantage that it is lighter than coins.  It is accepted as a medium of exchange because people have trust in the authority that issues it.

II. Paper money includes currency notes issued by the central or state bank of a country.  Paper money circulates in the form of notes of 10, 20, 50 etc.

 The next development in the payment system was the invention of check.  With the development of modern banking, the payments for transactions are mostly received and made through checks.  The use checks or credit money is that it has made it possible and easier to make transactions for large amounts.  Another advantage of checks is that they are easier to transport for making payments.  They are safe and provide receipts for various payments.

 With the development of computers and advanced communication technology.  Paper work in payment system is being gradually reduced and electronic funds transfer system is taking place.  The payments are now increasingly made through magnetic strip cards such as bank debit cards, credit cards, etc.  The ultimate benefits being derived from electronic banking include reduced processing cost, reduced lead times for making payments and increased flexibility.