Chapter 5: Money (Class 12th Money and Banking notes)

Table of Contents

1. Introduction

Money is one of the most important creations of human society. It helps people to trade goods and services without difficulty. Before money, people exchanged goods and services through a system called barter, where one item was swapped directly for another. For example, rice for wheat or clothes for sugar. Barter had many problems, like finding someone who wants exactly what you have and who has exactly what you want. Money was invented to solve these problems. (Class 12th Money and Banking notes)

2. Meaning of Money

Money means anything that is widely accepted as a way to pay for goods and services or to pay back debts. So, money is not just coins and notes — it also includes things like the money in your bank account that you can use anytime.

Main Functions of Money

Money serves four main functions:

Medium of Exchange: You can use money to buy things or pay for services.
Measure of Value: Money makes it easy to know and compare the value of different goods and services.
Store of Value: You can save money to use in the future.
Standard of Deferred Payment: Money is used to settle debts that are to be paid in the future.

3. Types of Money

A. Legal Tender Money

Legal tender means the type of money that must be accepted by law to settle any debt. For example, rupee notes are legal tender in India, so everyone must accept them.
- Limited Legal Tender: Coins up to a certain limit (for example, coins up to ₹1000).
- Unlimited Legal Tender: Notes can be used for paying any amount.
Voluntary Payment Instruments: Instruments like cheques, drafts and promissory notes fall under this, which are not legally enforced but commonly trusted and used.

B. Non-Legal Tender Money

These are forms of money that people use because they trust them, not because the law says they must be accepted (for example, cheques).

4. Money Supply

Money Supply refers to the total stock of currency and deposits that people and businesses can use at a given time.

The money held by individuals and businesses (not banks or government).
It is a stock concept, meaning it is measured at one point in time, not over a period.

Important Features:

Only the money available to the public is included (not the funds held by banks or the government).
Does not include money that is only with banks, governments, or the Reserve Bank of India (RBI).

5. Components & Measures of Money Supply

India’s money supply is usually measured in four different ways: M1, M2, M3, and M4, based on how easily the money can be used (liquidity).

a. M1 – The Narrowest Measure (Most Liquid)

Currency with the public: All paper notes and coins held by people and businesses.
Demand deposits with commercial banks: Money in accounts like savings and current that can be withdrawn anytime.
Other deposits with RBI: This includes minor balances from select public institutions with the central bank.

M1 is also called “transaction money” because it is used for everyday spending.

b. M2

M1 plus Savings account balances held in post office savings schemes.
(Post office savings are less liquid because money can’t be withdrawn easily by cheque.)

c. M3 – The Most Commonly Used in India

M1 plus Net time deposits with banks.
(Includes fixed deposits, which are less liquid but still important.)

d. M4

M3 plus All savings and time deposits held with post office savings accounts, not including National Savings Certificates.
(This is the broadest and least liquid measure.)

Summary Table:

Measure	Composition	Liquidity
M1	Currency + demand deposits + other accessible balances	Highest liquidity
M2	M1 + post office savings	Less liquid
M3	M1 + fixed/time deposits with banks	Even less liquid
M4	M3 + post office deposits excluding NSC	Lowest liquidity

6. Why is Money Supply Important?

The total supply of money affects:

Inflation (rising prices)
Interest rates
The speed and growth of the economy

👉((Class 12th Banking notes))👈

To keep the economy stable, the RBI and government regularly monitor and adjust the money supply.

Class 12th Money and Banking notes

7. Bank Money

Apart from physical notes and coins, most money in use is actually digital or “bank money.” When you deposit money in the bank, you can access it by cheque, ATM, or online transfers at any time. Banks also lend out a part of your deposits to others, which helps create even more money in the system.

Conclusion

Money is necessary for all economic activities. It replaced the barter system by acting as a common medium, store, and standard for payments. Knowing about money supply and its measures (M1, M2, M3, M4) helps us understand how much money is available for the public to use, and how the economy is being managed.