Money

 

The wealth of a community exists in the goods and services it produces and that money is merely a convenient way of measuring wealth.

We must now investigate money more closely and determine what it does, and what problems it creates.

Market economy or Money economy should be compared with the subsistence economy.

Subsistence economy means that people consume what they have themselves produced and exchange nothing. In a market economy, exchange may take two forms: direct exchange (barter) or indirect exchange using money as a “means of payment” or “medium of exchange”.

It should be noted that barter involves such inconveniences at a comparatively early stage. In the development

of an economy, we should expect a medium of exchange; money comes into use.

In every economic system, whether dominated by private interest as in capitalism or government interest

as in communism and socialism, or mixed economy having a blend of capitalism and communism, money has

very crucial roles to play. Its roles in the economy is pervasive, touching every aspect of the economy.

A special attention is given to money because the use of monetary policy as a Stabilization tool by the

government is based on the role of money in the economy. We cannot have a proper grasp of monetary

theories and policies without first of all understanding money.

What is Money?

Everybody who has reached the age of Kindergarten knows what money is. You possibly have touched

money today. However, the term ‘money’ means different things to the ordinary man in the street. It is often

used to describe wealth and financial resources, credit and income. When we say “the man has money or the

man is in money”, we are referring to money as wealth or financial resources. It differs from the way an

economist uses the term ‘money’.

Economists see money as anything that serves as a medium of exchange in a given society. Chandler and

Goldfield (1997) defined money as “anything that is generally acceptable as a medium of exchange”. Amacher

and Ulbrich (1986:239) defined it as “an item that people accept as payment for goods or services.” Cox

(1983) defined it as “anything which passes freely from hand to hand and is generally acceptable in settlement

of debt and other financial obligation is money.” From these definitions, we have two things to note. The

first is that whatever serves as money has to be generally acceptable in settling financial obligations. The

second thing is that anything whatsoever can serve as money provided it is acceptable as money within a

given community. The legal tender approach to defining money brings to fore the point that the law can help

a commodity to achieve general acceptability.

Trade by Barter

It is the direct system and practice of exchanging goods and services for goods or services. The best way to

understand the importance of money in any economy is to look at an economy that does not use money.

When there is no generally accepted medium of exchange, individuals engage in barter. The problem or

difficulties of Trade by Barter includes:

· The difficulty of double co-incidence of wants;

· It wastes time and energy.

· Difficulty in assessing the value of the commodities;

· The exchange always becomes uninteresting;

· It does not encourage deferred payments;

· It does not encourage the system of division of labor and specialisation;

· There is no lending and borrowing;

· It discourages large-scale production.

 

 Types of Money

(i) Coins: They are metal money with definite amount.

(ii) Paper Money: It is in form of paper notes which originated from the receipts that the Goldsmiths

issued to people.

(iii) Bank Money: It is deposit in both Savings Account, Current Account and Fixed Deposit Account.

(iv) Foreign Money: It is the money of other countries and it serves as money in the foreign exchange

market.

(v) Legal Tender: It is money backed by the force of law in a country which is generally acceptable as a

medium of exchange.

(vi) Gold Backed Money: It is money that can easily be converted or changed into gold by the central

authority that issues money.

(vii) Commodity Money: It is commodity used as money in the old days, e.g. cowries, shart teeth manilla

etc.

(viii) Token Money: This is money whose intrinsic worth is less than its normal or face value.

(ix) Representative Money: It is a document or lieu of legal tender but not fully and freely acceptable

e.g. cheques, postal and money order bills, etc.

(x) Fiduciary Note Issue: This is the type of money that are not backed by either gold or any foreign

currency.

 

Qualities of Money

This is also known as the characteristics of money.

(a) Homogeneity: Each unit of money must be homogenous, that is, each note held by different individuals

must be identical;

(b) General Acceptability: Each unit of money must be generally acceptable in exchange for goods and

services purchased;

(c) Portability: Each money note must be easily carried about. In other words, it must be easily transmissible;

(d) Divisibility: Money must be capable of being divided into small units;

(e) Recognisibility: Money must be easily recognizable by all and sundry in order to detect any counterfeit;

(f) Relative Scarcity: Money must be relatively scarce in order to maintain its value;

(g) Stability in Value: There should be absence of inflation and deflation to make money stable in value as

well as enable it serve some useful functions such as the store of value and means of deferred payment;

 (h) Durability: Money must be capable of staying long without spoiling or going bad.

 

Functions of Money

(a) Money serves as a medium of exchange. With the introduction of money, goods and services are

exchanged with money and thus exchange is facilitated. With money as a mean of exchange, the

problems of barter are bye-passed.

(b) Money serves as a store of value. In-so-far as there is no inflation and deflation in the economy,

money serves as a store of value since money would not lose its value any period it is kept.

(c) Money serves as a unit of account. All business transactions are accounted in money units.

Whether it is payments, debts or costs, it is made in money units. This facilitates exchange or

transactions.

(d) Money serves as a measure of value. With money, one can measure the quality or value of goods,

services or different occupations.

Thus money is used to measure and compare the value of goods and services.

(e) Money serves as a standard for deferred payments – With the use of money, one can postpone or

defer the payment for goods and services purchased. This function is important these days when

business transactions are carried out mostly on credit basis.

Conclusion

Money has a very crucial role to play in every economy. One good way to understand the importance of

money to any society is to imagine a situation where there is no money in an economy. All the problems

associated with the barter system will become very prominent in such economy.

In every economy, money performs four major functions. The first two can be classified as primary or basic

function while the last two are secondary functions. They are said to be secondary because they are derived

from the first two. Any commodity that can perform the primary function can automatically perform the

secondary functions, but not all commodities that perform the secondary functions can perform the primary

functions.

The primary functions of money are:

(a) Money as a medium of exchange.

(b) Money as a unit of value.

The secondary functions are:

(a) Money as a standard for deferred payment.

(b) Money as a store of value.

Summary

In this note, it is clear that money plays a vital role in the economic system of any country. Modern economic

activity is based on specialization and exchange. Money is a device for promoting specialization and exchange.

Specialization and exchange would revert to the barter system of money that have ceased to exist.

We are living in an economy based on money. Government development programmes as well as individual

enterprise activities are calculated in terms of money as a note of account. The existence of a note of account

permits the growth of a price system and this in turn promotes growth of markets. By serving as a medium of

exchange, money facilitates the exchange of goods and services among specialists.

View Course Content

Next Note>>>