General Evolution of Money Flashcards
Describe the concept of commodity money.
Commodity money is a type of money where the item used as currency has intrinsic value in itself (gold, salt, etc.). Its value comes from its usefulness beyond being money.
What distinguishes metallic money from commodity money?
Metallic money is a specific type of commodity money focused on precious metals (often coins). While still having some intrinsic value, it became more standardized for exchange.
Explain the key difference between paper money and previous forms of money.
Paper money (representative money) isn’t valuable in itself. Its value comes from the promise of the government or bank that issued it, guaranteeing it can be exchanged for something of value.
What is fiat money, and how does it differ from earlier forms?
Fiat money has no intrinsic value or backing by a physical commodity. Its value comes purely from government declaration and people’s trust in that government.
What are the defining features of cryptocurrency?
Cryptocurrency is digital, uses encryption for security, and operates on a decentralized structure rather than being controlled by a single government or bank.
What is one key advantage and one key disadvantage of cryptocurrency?
Advantage: Potential for more secure, independent transactions.
Disadvantage: Volatility, less mainstream acceptance compared to traditional currencies.
What is commodity money?
Commodity money is a form of currency where the medium of exchange is a good that has intrinsic value (value in and of itself) beyond its use as money. Examples include iron nails, bear pelts, cocoa beans, whale teeth, and gold nuggets.
What are the problems associated with commodity money?
Perishability: Some commodities, like food items, can spoil or rot.
Lack of uniformity: It’s difficult to find units of the commodity that have identical value.
Purity issues: Commodities may be mixed with other materials, making their value hard to determine.
Lack of universal acceptance: People in other regions or countries might not accept the commodity as payment.
Why did traders and kings stamp marks on gold nuggets?
Traders and kings stamped marks on gold nuggets to ensure uniformity and promote trust. The marks acted as a guarantee of weight and purity, making transactions smoother.
Describe the significance of Gupta gold coins.
Gupta gold coins were considered spectacular. They often depicted kings in various activities like playing the Veena (a musical instrument), hunting animals, or standing with their wives. These coins offer insights into the culture and artistic styles of the Gupta period.
List important coins issued by historical Indian rulers.
Indo-Greek and Kushana kings: Gold coins
Delhi Sultanate Kings: Silver Tanka
Sher Shah Suri: Rupiyah (silver coin)
Akbar: Muhr (gold coin)
Explain the key characteristic of full-bodied coins.
Full-bodied coins have an intrinsic value (the value of their metal content) that is equal to or greater than their face value (the stated monetary value).
Why were gold and silver historically favored for full-bodied coins?
Gold and silver are precious metals with inherent value. Using them for coins ensured the currency had worth beyond its use as a medium of exchange, providing stability and confidence in the monetary system.
Provide an example of a full-bodied coin and describe its characteristics.
The Gupta gold coin is a prime example. If a Gupta coin contained 8 grams of gold, its intrinsic value (the value of the gold itself) would likely match or exceed its face value as a currency.
How does a token coin differ from a full-bodied coin?
A token coin’s intrinsic value (the worth of its metal) is significantly less than its face value (the stated monetary value). Token coins are made from inexpensive metals like steel, copper, or nickel.
Why do most modern currencies use token coins?
Token coins offer several advantages:
Cheaper to produce than relying on precious metals.
Not tied to the fluctuating prices of gold or silver.
Discourages melting for raw materials, as there’s little profit in it.
What is debasement of currency? Provide historical examples.
Debasement is the intentional reduction of precious metal content in coins while keeping the face value the same. Rulers like Aurangzeb and Roman kings sometimes used debasement during times of economic hardship or political instability.
What potential problems did full-bodied coin systems face?
Counterfeiting: Creating fake coins with cheaper metals but disguised to look like the precious metal equivalents.
Clipping & Sweating: Shaving off tiny bits of the precious metal or shaking coins to collect the dust.
Scarcity: Limited availability of precious metals could restrict the money supply, hindering economic activity.
Why is the Coinage Act of 2011 in India significant in the context of token coins?
The Coinage Act of 2011 specifically prohibits melting coins. This is to protect token coins, since their low intrinsic value makes melting them unprofitable, safeguarding the currency supply.
Besides discouraging melting, what’s another benefit of issuing token coins?
Token coins allow government greater control over the money supply. They can produce more or less currency as needed for the economy, without being constrained by the availability of precious metals.
Can you think of a potential downside to relying solely on token coins?
Token coins are more susceptible to inflation. Since their value isn’t tied to tangible assets like gold, governments could overproduce currency, leading to a loss in its purchasing power.
What is the key source of value for precious metal coins?
Precious metal coins derive their value from the intrinsic worth of the metal itself (e.g., gold, silver, copper).
Besides their use as currency, how else could precious metal coins be utilized?
The metal from precious metal coins could be melted down and repurposed for jewelry, tools, weapons, or other objects.
Why did precious metal coins play a crucial role in the development of early economies?
Precious metal coins, with their intrinsic value, fostered trust in trade. They provided a standardized medium of exchange, facilitating transactions within and between different societies.
List two disadvantages of using precious metal coins.
Transportation: Precious metal coins in large quantities are heavy and bulky, making them inconvenient for big transactions.
Value Fluctuation: Their value is tied to the changing market prices of precious metals, leading to potential instability.
Explain the term “fiat money” in the context of paper currency.
Fiat money describes currency with no intrinsic value. Paper currency’s worth comes from government decree, not the paper or ink itself.
How does paper currency gain its value?
Paper currency is declared legal tender by a government or central bank. This means it’s guaranteed acceptance for goods and services, creating trust and assigning value.
Discuss two key advantages of paper currency over precious metal coinage.
Convenience: Paper currency is lightweight, portable, and easily represents large denominations.
Cost: Production costs of paper currency are significantly less than minting precious metal coins.
What are potential risks associated with paper currency?
Inflation: Overproduction of paper currency can dilute its value, leading to inflation.
Counterfeiting: Paper currency is more vulnerable to counterfeiting compared to precious metal coins.
What is fiat money?
Fiat money is a government-issued currency not backed by a physical commodity like gold or silver. Its value comes from the trust in the issuing government and the relationship between supply and demand.
What are the two essential conditions that define fiat money?
Condition 1: It must exist in a form that can measure value (physical currency like coins or notes, or digital forms like cryptocurrency).
Condition 2: It must be officially issued or recognized by a governing authority (king, queen, government, or central bank).
Provide examples of physical and digital forms of fiat money.
Physical: Paper banknotes (e.g., US dollar, Euro), coins
Digital: Virtual currencies, cryptocurrencies (under debate if they fully meet the definition)
Why is “paper money” considered a form of fiat money?
Paper money is fiat money because:
It has the ability to measure value.
It is issued and declared legal tender by a government.
It is not backed by a physical commodity like gold.
Does all cryptocurrency qualify as fiat money? Explain.
Not necessarily. While some cryptocurrencies may function as a means of exchange, they are often decentralized and not issued by a government or central bank. This lack of official backing creates debate around their true classification as fiat money.
What legislation empowers the Indian government to issue coins?
The Coinage Act of 2011.
