Best Money And Banking Class 12 Notes (AHSEC Economics)

This article will cover the complete 3rd unit that is Money and banking of class 12 (AHSEC syllabus). This note will be more than enough for AHSEC Class 12. Previous year questions and the guess question for the upcoming examination will be updated time to time. Read the notes thoroughly and revise it as more as possible.

Meaning of Money — Money and Banking Class 12 Notes

Origin:- The word 'Money' is derived from the Latin word 'Moneta' which means coin.

Standard Definition (Prof. Crowther)

"Anything that is generally acceptable as a means of exchange and at the same time, acts as a measure and a store of value."

Meaning / Others

Walker Def. "Money is that money does."

Seligman Def. "One thing that possesses general acceptability."

Robertson Def. "Anything which is widely accepted in payment for goods or in discharge of other kinds of business obligation..."

Functions of Money — Money and Banking Class 12 Notes

FUNCTIONS OF MONEY

1. Primary Functions

Function A

Medium of Exchange

It is the most important function of money. It solves the problem of the lack of the double coincidence of wants that was faced under the barter system.

Money permits people to trade at less cost in time and effort. A man who wants to sell wheat in exchange for rice can sell it for money and purchase rice, which was not easy under the barter system.

Function B

Measure of Value

Money has also removed the difficulty of the barter system by serving as a common measure of value. The values of various commodities are expressed in terms of money.

Money as a measure of value has made transactions simple and easy. In India, the unit of account is the Rupee, and in the USA, it is the Dollar.

Secondary Functions of Money — Money and Banking Class 12 Notes

2. Secondary Functions

Function A

Store of Value

Money as a store of value is its ability to be saved and exchanged in the future as a purchasing power. People store money generally to meet unforeseen contingencies.

Unlike the barter system, where there was a problem of perishability, money provides durability and portability.

Function B

Standard of Deferred Payments

As a result of this function, it has become possible to express future payments in terms of money, enabling the current and present transactions to be discharged in the future.

For example, a borrower who borrows a certain sum in the present undertakes to pay in the future in terms of money.

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Function C

Transfer of Value

Money is used to transfer the value of commodities from person to person. For example, a landowner will sell the land to another person and get the equivalent value in terms of money.

So by this process, value is transferred from one person to another effortlessly.

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📌

Money facilitates the distribution of national income among the various factors of production such as wages, interest, rent, and profit in terms of money .

The Demand for Money: Keynesian Liquidity Preference — Class 12 Notes

The demand for money refers to the total amount of financial wealth people and businesses prefer to hold in highly liquid forms—like cash or bank deposits. According to the Keynesian Approach (Liquidity Preference Theory), there are three primary motives for holding money:

Motive 1

Transactions Motive

In order to meet the needs of day-to-day transactions during the time gap, some money is kept aside. The smaller the gap between a person’s receipt and payment, the lesser will be the transaction demand for money.

(a) Income Motive: Individuals hold cash to "bridge the interval between the receipt of income and its expenditure."

(b) Business Motive: Businessmen need money all the time to pay for raw materials, transport, wages, salaries, and current expenses.

Motive 2

Precautionary Motive

This refers to the desire of the people to hold cash balances for unforeseen contingencies. It is the tendency of people to hold a certain amount of money to provide for the risk of unemployment, sickness, accidents, and other uncertain perils.

The amount of money held under this motive depends heavily on the nature of the individual and the conditions in which they live.

Motive 3

Speculative Motive

This relates to the desire to hold one’s resources in liquid form to take advantage of market movements regarding future changes in the rate of interest (or bond prices).

People desire to gain by purchasing financial assets at a low price and selling them when their prices rise.

Important: Speculative demand for money is highly interest-elastic.

Barter Exchange System and Its Drawbacks — Class 12 Notes

Economic exchanges without the mediation of money are referred to as the Barter Exchange System.

C-C Economy

It is also called a C-C Economy, where C-C stands for Commodity-to-Commodity exchange economy.

Drawbacks & Shortcomings of Barter System

Lack of Double Coincidence of Wants

It is the main disadvantage of this system. It refers to an economic situation where two parties each hold an item or service that the other wants, allowing them to trade directly.

Farmer A

Produces: Wheat

Wants: Rice

Gives Wheat →

← Gives Rice

Person B

Produces: Rice

Wants: Wheat

In practical terms, it is very difficult to find individuals whose wants and timings match perfectly.

💡 How Money Solved It: Money separated the acts of sale and purchase by acting as a universal Medium of Exchange.

Perishability (Store of Value Problem)

Under the barter system, it was difficult to store the value of goods for future use because many commodities are perishable. For example, goods like tomatoes, milk, or fish cannot be stored for a long time without decaying, leading to wealth loss.

💡 How Money Solved It: Money solved this by working as a durable Store of Value, providing long-term portability and stability.

Lack of Common Standard of Value

All goods to be exchanged are not of the same value, and there was no common unit of measurement. It was highly complicated to calculate how much rice or wheat equaled the value of one cow. Evaluating thousands of commodities relative to each other was nearly impossible.

💡 How Money Solved It: Money acts as a Measure of Value. In India, it provides a standard monetary unit called the Rupee (₹). For example, the value of a hen can easily be expressed as ₹300.

Problem of Divisibility

Certain goods cannot be physically divided into smaller pieces without losing their utility. If a person owns a cow and wants to buy a smaller item like a hen or a piece of cloth, they cannot trade a fraction of a living cow, resulting in a severe transaction loss.

Barter Problem

🐄 Live Cow

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Impossible to Divide into Fractions!

Money Solution

₹500 Note

➔

₹100 ₹100 ₹100 ₹200

💡 How Money Solved It: Money is perfectly divisible into smaller units of account, such as ₹5, ₹10, ₹100, and ₹500 notes or coins, allowing low-value trades without loss.

Lack of Standard of Deferred Payment

In a barter economy, making payments in the future (contracts, loans, or credit transactions) is highly challenging. Future payments made in goods face severe disagreements regarding matching quality, structural conditions, and shifting values over time.

💡 How Money Solved It: Money serves as a reliable Standard for Deferred Payments, offering a fixed, universally accepted unit of account for secure future transactions.

The Evolution of Money: From Barter to Digital Era

The evolution of money is one of the most significant developments in human history. To understand modern economics, we must look at how the medium of exchange transitioned from a simple barter system to today's advanced digital currencies.This topic comes under the 3rd unit that is Money and banking class 12 notes of board AHSEC

1. Barter System (C-C Economy)

Economic exchanges without the mediation of money are referred to as the barter exchange system. It is also called a C-C economy, where 'C-C' stands for commodity-to-commodity exchange (e.g., exchanging rice for salt).

⚠️ Drawbacks of Barter System:

Lack of Double Coincidence of Wants: Both parties must need what the other has.
Lack of Common Measure of Value: No standard unit to price goods.
Problem of Storage & Portability: Goods suffer from perishability and are hard to carry.

2. Commodity Money

The disadvantages of barter necessitated the introduction of commodity money. A certain commodity was fixed as a measure of value. For example, rice or shells were considered money. This was prominently seen in the Mesopotamian civilization around 3000 BC. However, it still faced issues like portability, durability, and divisibility.

3. Metallic Coins

With the progress of time, coins made of precious metals such as gold and silver were introduced. While highly durable, this created new problems regarding the safety of transport and the scarcity of precious metals.

4. Paper Money

Paper money revolutionized the concept of currency. It solved the problems of portability, durability, and divisibility, offering a much more convenient form of exchange that is widely accepted globally.

5. Banking, Credit, and the Gold Standard

As economies grew, the banking system emerged. Cheque facilities were introduced, and promissory notes were widely used. The Gold Standard system was adopted during this phase to back the value of paper money.

💳 Plastic Money

The introduction of credit cards and debit cards made transactions safer, easier to carry, and highly durable without needing physical cash.

📱 Digital Currency

Cryptocurrencies (like Bitcoin) emerged. Recently, central banks have introduced official digital currencies, such as the RBI's e-Rupee in India.

Next Topic: Supply of money and its measures 👉