L3/P7: Money- Evolution, Types and functions

Summary

This video explores the concept of fiat money, explaining its evolution from the gold standard to paper money and its implications in modern finance. It covers the historical context behind various forms of currency, such as paper notes, coins, and digital currencies, and highlights their challenges, including inflation and security risks. The video also delves into bank money, detailing mechanisms like credit cards, checks, and online transfers, illustrating how they function in today's economy. The discussion emphasizes the importance of trust and regulation in maintaining the stability of fiat money systems.

Takeaways

• 😀 Fiat money is currency that is not backed by a physical commodity like gold but is accepted because a government declares it as legal tender.
• 😀 Government securities, bonds, and stocks are not considered fiat money because they cannot be used directly for transactions unless both parties agree.
• 😀 The gold standard was a system where the value of currency was directly tied to the amount of gold a country had in reserve.
• 😀 The gold standard was abandoned after World War II as it couldn't support the increasing financial needs for military and other expenses.
• 😀 The paper standard replaced the gold standard, where currency is not backed by gold but by the government's authority to print it.
• 😀 In India, the Reserve Bank of India (RBI) prints most currency notes, while the government issues coins.
• 😀 The latest update in India is that the government began issuing one-rupee notes again in 2015, with bilingual signatures.
• 😀 Fiat money can cause problems like overprinting, leading to inflation and a loss of value, as seen with Germany after World War I.
• 😀 Cryptocurrencies like Bitcoin and digital currencies are not considered fiat money because they lack legal backing from a government.
• 😀 Bank money, such as checks, drafts, and credit cards, is linked to a bank account, and it facilitates payments and transfers.
• 😀 Bank money systems allow for secure transactions and money transfers, and if lost or stolen, they can be frozen and recovered under legal frameworks.

Q & A

What is fiat money, and why isn't it accepted for debt repayment?

Fiat money refers to currency issued by a government, which is not backed by a physical commodity like gold. While it holds value because of government decree, it cannot be used for debt repayment unless agreed upon by the parties involved. This is because it lacks legal backing as a guaranteed mode of payment in settling debts.

Why can't government securities like Treasury bills be classified as fiat money?

Government securities such as Treasury bills are not considered fiat money because, despite being issued by the government, they cannot be used directly for debt repayment. Their value depends on agreements, but they do not legally function as a universally accepted medium of exchange.

What was the gold standard, and how did it affect currency issuance?

The gold standard was a monetary system where the value of a country's currency was directly linked to a specific amount of gold. For example, the U.S. dollar was backed by 22 grains of gold. This system limited the amount of money a country could print based on its gold reserves. However, due to the financial needs of wartime economies, countries gradually moved away from it.

What happened to the gold standard after World War II?

After World War II, the gold standard was largely abandoned as nations found it unsustainable. Countries needed the flexibility to print more money to fund military operations and post-war recovery. This shift led to the Bretton Woods system, but even that collapsed eventually, giving way to the paper standard.

What is the paper standard, and how does it differ from the gold standard?

The paper standard is a system where currency is not backed by a commodity like gold but is accepted based on government decree. Unlike the gold standard, countries can print more money without needing to hold equivalent gold reserves. This allows for greater flexibility in managing economies but also introduces the risk of inflation.

What role does the Reserve Bank of India (RBI) play in the issuance of paper money?

The RBI is responsible for issuing paper money in India, including notes ranging from Rs. 2 to Rs. 1000. The RBI operates under the guidelines of the Reserve Bank of India Act, 1948, and is authorized to issue currency in India, while the government can also issue Rs. 1 notes.

Why did the Indian government resume issuing Rs. 1 notes in 2015?

In 2015, the Indian government resumed issuing Rs. 1 notes due to a revision in policy, with the Finance Secretary now signing the notes. These notes are printed bilingually in English and Hindi, reflecting changes made under the Currency Act of 2011.

What are bank money and some common examples?

Bank money refers to money issued by banks, and it includes checks, demand drafts, credit and debit cards, and electronic transfers like NEFT and RTGS. These are backed by bank accounts and facilitate transactions without the need for physical cash.

How does bank money differ from physical currency?

Bank money differs from physical currency in that it is digital or paper-based money that is created and issued by banks, not governments. Transactions are facilitated through accounts, credit cards, or digital transfers, and bank money provides benefits like ease of transfer and enhanced security.

What security benefits does bank money offer compared to physical currency?

Bank money offers enhanced security as it can be easily tracked and frozen if lost or stolen, unlike physical currency. For example, if a credit card or checkbook is stolen, it can be immediately reported to the bank and frozen, preventing unauthorized transactions. Additionally, digital transactions are more difficult to counterfeit than physical cash.