Money is anything that is generally accepted as a means of payment. Before money, people used barter. Lok Sewa and bank exams ask about the problems of barter, the functions and types of money, Gresham’s law and the history of Nepal’s currency. This note explains all of these simply.
1. From barter to money
- Barter is the direct exchange of goods for goods, without money.
- Problems of barter: lack of double coincidence of wants, no common measure of value, difficulty in dividing goods, and difficulty in storing wealth.
- Money solved these problems and made trade, saving and lending easy.
- Geoffrey Crowther defined money as anything generally acceptable as a means of exchange that also acts as a measure and store of value.
2. Functions of money
| Group | Function | Meaning |
|---|---|---|
| Primary | Medium of exchange | Used to buy and sell goods and services |
| Primary | Measure of value (unit of account) | Prices of all goods are expressed in money |
| Secondary | Store of value | Wealth can be saved in money |
| Secondary | Standard of deferred payment | Loans and future payments are fixed in money |
| Secondary | Transfer of value | Money can move value from place to place |
| Contingent | Basis of credit, distribution of income | Helps the banking and credit system |
3. Types of money
| Type | Example |
|---|---|
| Commodity money | Grain, cattle, salt, shells used as money in early times |
| Metallic money | Gold, silver and copper coins |
| Paper money | Banknotes issued by the central bank |
| Fiat money | Money that has value because the government declares it legal tender, not because of its material |
| Credit / bank money | Cheques, drafts and bank deposits |
| Plastic and digital money | Debit and credit cards, mobile wallets, online banking |
Legal tender is money that must be accepted by law for payment of debts. Banknotes and coins issued by Nepal Rastra Bank are legal tender in Nepal.
4. Gresham’s law and value of money
- Gresham’s law: “Bad money drives good money out of circulation.” When good and debased coins circulate together, people keep the good ones and spend the bad ones. It is named after Sir Thomas Gresham.
- When prices rise (inflation), the value of money falls; when prices fall (deflation), the value of money rises.
- The value of money is measured by its purchasing power.
5. Currency of Nepal
- In the Malla period, silver coins called mohar were used; Mahendra Malla is known for issuing early silver coins (Mahendramalli).
- The Nepali rupee is divided into 100 paisa.
- Since 2013 BS, Nepal Rastra Bank has the sole authority to issue Nepali currency; notes carry the governor’s signature.
- Banknotes in use range from Rs 5 to Rs 1,000; Rs 1,000 is the highest denomination.
- The Nepali rupee is pegged to the Indian rupee at 1 INR = 1.60 NPR.
- Cryptocurrency trading, mining and investment are illegal in Nepal according to Nepal Rastra Bank.
6. Quick facts
| Item | Fact |
|---|---|
| Issuer of Nepali notes and coins | Nepal Rastra Bank |
| Highest note | Rs 1,000 |
| One rupee | 100 paisa |
| First silver coins (mohar) | Malla period, Mahendra Malla |
| Cryptocurrency | Illegal in Nepal |
| Gresham’s law | Bad money drives good money out of circulation |
7. How this topic is asked in the exam
Objective items ask the primary and secondary functions of money, the types of money (commodity, fiat, credit, plastic and digital), Gresham’s law and who issues currency in Nepal. Subjective questions ask about the evolution of money from barter to digital payments.
8. Problems of barter
- Lack of double coincidence of wants.
- No common measure of value.
- Goods cannot be divided easily.
- Difficulty storing value for the future.
Money solves these problems by acting as a medium of exchange and a store of value.
📌 Key points to remember
- Barter is exchange of goods for goods; its main problem is lack of double coincidence of wants.
- Primary functions: medium of exchange and measure of value.
- Secondary functions: store of value, standard of deferred payment, transfer of value.
- Types: commodity, metallic, paper, fiat, credit, plastic and digital money.
- Legal tender must be accepted by law for payments.
- Gresham’s law: bad money drives out good money.
- Inflation reduces the value (purchasing power) of money.
- Mahendra Malla issued early silver mohar; NRB issues notes; 1 INR = 1.60 NPR; crypto is illegal.
Test yourself: Money and Currency
Practise From barter to money, Types of money and Currency of Nepal with 20 questions.