Legal Tender and Types of Money in Indian economy - Learn Basics of Economy for UPSC/RBI/SBI Video Lecture | Indian Economy for Government Exams (Hindi) - Bank Exams

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hello and welcome to study IQ in this
lecture we will discuss about legal
tender the term legal tender has become
more common after the D monetization
drive if you notice what happened during
the monetization was that the status of
legal tender was cancelled so the term
legal tender became more popular and
more common after the D monetization
drive and also if you see the UPSC
civil services preliminary examination
2018 gs1 paper there was a question
regarding the definition of legal tender
so in that question four options were
given and the candidate had to choose
the right definition of legal tender so
in this video we will be discussing
about legal tender and also we will
discuss what are the other types of
money in the market so let us start
there are many modes of exchange in the
market so if you look at the market
there will be many modes of exchange in
the ancient times history says that salt
and spices were used as currencies so
that was in the ancient times and as
time moved we came to a system known as
the barter system barter system is a
system in which you exchange commodities
for commodities so there is no use of
money or currency in the barter system
so you exchange or you give commodities
and buy commodities so it was a exchange
of commodities in the barter system and
later on came the use of money as a
medium of exchange so our point of
discussion here is legal tender or what
this legal tender so let us see what is
a legal tender so legal tender is
defined as the money which is accepted
by the law of the land for the
settlement of debt or for the payment of
debt so one thing is it is accepted by
the law of the land and second point for
the payment of debt so what is meant by
law of the land we live in a country
called India so in India what is a law
of the land
wartella law is followed by the country
so the government or the country the
public in the country should accept it
so one condition is the money should be
accepted by the law of the land or the
government of that particular country so
it becomes a legal tender when the money
is accepted by the law of the land for
what for the payment of that in order to
settle transactions or conduct
transactions this money should be
accepted by the law of the land or the
government of the particular country so
a money becomes a legal tender only when
it is accepted by the law of the land or
the government of the particular country
so if the government says if a
particular currency is not a legal
tender
that means the currency has no value it
merely becomes a piece of paper
according to the RBI Act of 1934 RB Act
1934 this Act says that the central bank
of the country has the sole authority to
issue currency notes so which means our
bill is the sole authority to issue
currency notes in India and according to
the RB Act of 1934 the app also says
that every note that is issued by the
Reserve Bank of India in the country
shall be legal tender anywhere in the
country which means whatever notes is
issued by the Reserve Bank of India it
is a legal tender in any place in India
which means it should be acceptable or
the money is recognized by the law of
the land which means it is compulsory to
accept that money if a money is a legal
tender the creditor has to accept the
money so there is a compulsion for the
creditor to accept the money let us see
that in detail if we take the legal
tender money there are two types of
legal tender one is a limited legal
tender and the second one is unlimited
legal tender limited and unlimited
coming to limited legal tender voltage
limited legal tender this money is
accepted or lethal a particular limit so
there is a limit for the acceptance of
that particular currency or money if we
take an example of limited legal tender
an example is 50 paisa coins so 50 paisa
coins is a legal tender only up to ten
rupees so you can pay 50 paisa coins up
to ten rupees and of
that amount it is not compulsory for the
creditor to accept it so for example if
you go to a shop and if you purchase
something for rupees 20 when you are
giving 40 50 paisa coins so the
shopkeeper says that he cannot accept 50
paisa coins so what you will do you will
have to give something else so up to
piece 10 it is compulsory for the
shopkeeper to accept your 50 paisa coins
so after that it is not compulsory for
the shopkeeper to accept so what you
will have to do is you can give 20 50
paisa coins and then after that you will
have to give some other sums so that is
the case of limited legal tender which
means up to limit it is a legal tender
and after that particular limit it does
not become a legal tender so example is
50 paisa coins and what about unlimited
legal tender unlimited legal tender is
offered for payment of dues of any size
so any size for example 10 rupee note if
you make a purchase of rupees thousand
and you are giving the shopkeeper 110
rupee notes it is compulsory for the
shopkeeper to accept the 10 rupee note
he cannot say that no I cannot accept
such smaller denominations you will have
to give me denominations of 100 rupees
and more no he cannot say that 10 rupees
a legal tender it is an unlimited legal
tender and he is obliged to accept that
10 rupee notes from you so that is the
case with unlimited legal tender and
another example if you make a purchase
of rupees 20 and you are giving 2
thousand rupee note to a shopkeeper that
also he cannot deny because two thousand
rupee note he souls were legal tender
and this was the question that was asked
in the UPSC preliminary examination last
week the question was what is a
definition and the answer option which
was correct was that it is compulsory
for the creditor to accept a legal
tender money and during the monetization
we have seen that the status of legal
tender of five hundred and thousand
rupee notes were cancelled and why is
the cancellation of legal tender stages
very important let us see
that--no so we know that we use notes
currency notes and currency notes are
merely pieces of paper and these pieces
of paper that I have all its value from
government recognition we said that the
money becomes legal tender when it is
accepted by the law of the land so the
piece of paper which we use as currency
notes they derive the value from the
government recognition so for a piece of
paper to function as a medium of
exchange and a store of value
it needs acceptance from the general
public so this acceptance is ensured by
the government how is it insured the
government declares such currency notes
as legal tender so declaration as a
legal tender is an insurance from the
part of the government so when the
government cancels the legal tender
status of currency what happens the
currency loses its value it becomes
merely pieces of paper it cannot be used
in transactions or as a medium of
exchange so that is what exactly
happened during the monetization period
and if we look at the D monetization
also it is not a rare incident that
happened only in India the largest D
monetization in the world happened in
the year 1999 when the European Union
was formed so what happened during
European Union formation was that the
member countries of the European Union D
monetize their countries currencies in
order to accept euro from 2002 so from
2002 they came to a conclusion of using
a common currency that is the euro so
what they had to do the members of the
European Union had to demonetized the
currencies of that particular countries
and come to a common currency in 2002
that is the Euro so this was the largest
d monetization in the world again coming
to another example in 1990s Australia
also had undergone an D monetization
so during 1990s Australia with droids
paper currencies and replace them with
polymer currencies and replace it with
polymer notes so this is another example
of the monetization now let us quickly
see what are the types of money the
first type of money is for
body money in case of full-bodied money
the value as a currency or as money will
be equal to the value as a commodity
various money will be equal to value as
commodity for example earlier we had
gold coins or gold currencies so which
means if the particular currency is for
five hundred rupees it is a five hundred
rupee coin the value of that coin as a
commodity also will be equal to 500
rupees maybe currencies that are made up
of precious metals like gold silver etc
such currencies the value of that
particular currency as money will be
some amount and that amount will be
equal to that as a commodity also
examples gold coins or gold currency
silver currencies etc second type of
monies token money which is also known
as credit money or paper money so here
in token money value as money all as a
currency will be more than value as
commodity example is currency notes so
if we take the example of currency notes
a 500 rupee currency note we have a
value of 500 as some money but if we
considered that currency note as a
commodity is this merely a piece of
paper it has no value so as a money it
will have higher value compared to as a
commodity that is token money which is
also known as credit money or paper
money third type of money's convertible
money all non convertible money so
convertible money means money that can
be converted into equivalent value of
bullion by the issuing authority issuing
authorities the RBI in case of India so
by the issuing authority this can be
converted into equivalent amount of
bullion and the opposite of this is non
convertible money which cannot be
converted into equivalent value of
bullion next is legal tender money which
we have already explained next is non
legal tender money all optional money
non legal tender
all optional money one thing you must
understand here is that non legal tender
money or optional monies different from
that of limited legal tender money so if
we take an example of optional money
either this makes me clear when I
explain it with an example if we take
the border areas for example let us take
the utter Pradesh border so from the
Luthor Pradesh border it is easy to
access Nepal market so what happens is
that since there is a porous border and
it is easily accessible for both the
countries from India people will go to
Naples market and from Nepal also people
will come to Indian market so on the
basis of some trust or mutual
understanding sometimes Indian currency
or Indian rupees acceptable in Nepal and
also Nepalese rupees acceptable in India
also but it is not legal tender which
means it is not compulsory for a Nepal
shopkeeper or merchants to accept Indian
money or Indian rupee and vice-versa so
it is not a legal tender or it is not
compulsory it is optional so that is non
legal tender money or optional money it
is not compulsory it is optional for the
credit them to accept the money next is
fiduciary money fiduciary money is a
type of money which circulates on the
basis of mutual trust or personal trust
so Trust is a factor and there is no
legal backing so there is no legal
backing this circulates on the basis of
rest factor Lexus Fiat money so fiat
money circulates on the fed or order
issued by the government so all the
money that is issued by the government
is a fiat money that means the money
circulates on the basis of an order or
the Fiat of the government next is an
important concept that is near money
what is mean by near money near money
refers to highly liquid financial assets
so what does mean by highly liquid or
liquidity liquidity means the ease at
which you can convert something into
money or equivalent so if you are able
to convert something into money very
easily without losing much time or
losing value you can call that
particular commodity or product as
highly liquid product the ease at which
you can convert it into money or
equivalent is known as liquidity so
highly liquid financial assets are known
as near money what are the examples of
mere money then checks drast bond exits
are near money which means they can be
easily converted into money so examples
are cheque draft shares or bonds next
type of money is deposit money deposit
money refers to the money that is
deposited with the banks or financial
institutions so whatever money is
deposited with banks and financial
institutions they are known as deposit
money next one is plastic money so
plastic money refers to debit card or
credit card so these are the types of
money and legal tender is a very
important concept not only on the basis
of D monetization but you must clearly
understand what is a legal tender and
what happens if the legal tender status
gets cancelled
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