NCERT · Class 10 · Social Science · Economics: Money and CreditWhat is money? Explain the evolution of money from the barter system to modern forms of currency, highlighting how modern money is accepted as a medium of exchange.

Introduction to Money\nMoney is anything that is generally accepted as a medium of exchange, a unit of account, and a standard for deferred payments. In day-to-day transactions, goods are bought and sold with the help of money. The introduction of money has simplified economic transactions by eliminating the cumbersome requirement of a double coincidence of wants.

1. The Barter System and its Limitations

• Definition: Before money was invented, people practiced the barter system, where goods were directly exchanged for goods without the use of money.
• Major Limitation: The biggest drawback of the barter system was the 'double coincidence of wants'—both parties had to agree to sell and buy each other's commodities. For instance, if a shoe manufacturer wanted wheat, they had to find a farmer who wanted shoes and also had surplus wheat. This was extremely difficult and time-consuming.

2. Evolution of Early Forms of Money

• To overcome the flaws of the barter system, societies began using objects of common value as a medium of exchange.
• Commodity Money: Grains and cattle were widely used in early civilizations.
• Metallic Money: With the discovery of metals, coins made of gold, silver, and copper came into use because of their durability and standardized value. These formed the basis of currency systems for centuries.

3. Modern Forms of Currency

• Paper Notes and Coins: Modern currency includes currency notes and coins. Unlike gold or silver coins, modern currency is neither made of precious metal nor has any intrinsic use of its own.
• Why it is Accepted: Modern money is accepted as a medium of exchange because the currency is authorized by the government of the country. In India, the Reserve Bank of India issues currency notes on behalf of the central government.
• Legal Tender: No individual in India can legally refuse a payment made in rupees. The law legalizes the use of rupee as a medium of exchange that cannot be refused in settling transactions.

4. Deposits with Banks as Money

• Another form in which people hold money is as deposits with banks. People deposit extra cash in bank accounts, which can be withdrawn on demand (Demand Deposits).
• Cheques and Digital Money: Demand deposits offer the facility of cheques and electronic transfers. Since cheques are widely accepted for settlements without the physical handling of cash, they constitute an essential part of modern money.