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Economics

Money

Definition and Meaning of Money

Money may be defined as anything that is generally acceptable as a medium of exchange for making payments, settlement of debts or other business obligations. Before the introduction of money, the type of exchange that took place wastrade-by-barter.

Trade by Barter

Definition of Trade by Barter

Trade by barter may be defined as direct system and practice of exchanging goods for goods and services for services.

Problems/Difficulties/Disadvantages of Trade by Barter

  1. The difficulty of double coincidence of wants
  2. It wastes time and energy
  3. Difficulty in assessing the value the value of commodities
  4. Exchange become uninteresting and unexciting
  5. It does not encourage largequantity and variety purchases
  6. It does not encourage deferred payment
  7. It does not encourage installment payments
  8. It does not encourage division of labor
  9. There is no lending and borrowing
  10. It discourages large scale production
  11. Miscellaneous problem: These difficulties include: the non-durability, portability, divisibility, homogeneity; of the commodities that were used in exchange under trade by barter.

Historical Development of Money

Money and bank have a common ancestor – the goldsmith. The paper money presently in use, originated from the receipts the goldsmiths issued to people who kept gold and other valuables with them. In the olden days, when there were no banks, people kept their gold and other valuables with the goldsmith. As the name indicates, the goldsmith deals with gold which is a very valuable and rare commodity. Because of the costly nature of gold, the goldsmith had a place called strong-room where gold and other valuable commodities and documents were kept for safe custody.

With his strong-room, the goldsmith started receiving valuable commodities from people for safe-keeping. Receipts were issued to those who deposited their valuable as evidence and they paid the goldsmith for his services. As time went on, people started using the receipts issued by the goldsmith for the exchange of goods and services since they will be honored by the goldsmith on presentation. When the goldsmith discovered that some people who deposited valuables with him do come for them in a short period of time, he started enticing others in form of interest to deposit their gold and other valuables with him. He(goldsmith) also started lending these valuable commodities out to other people on short term basis on interest rate. This exchange of goods and services with the receipts issued by the goldsmith continued until the receipts were modernized and re-named money. Today, money has another form other than the paper money, called coin. We also have other forms as representative or token money. The origin of money really came as the aftermath of the difficulties or problems of trade by barter. People were forced to fashion out a generally acceptable means of exchange through a long process of trial and error.

Today, money has come to replace that cumbersome means of exchange called trade by barter. It does not mean that money drove in the final nail on the coffin of trade by barter because the trade of exchange of goods for goods and services for services has been baptized and called counter-trade. Such play on words is in perfect character with the improbable science called Economics.

EVALUATION (POST YOUR ANSWER IN THE COMMENT BOX BELOW FOR EVALUATION AND DISCUSSION)

  1. What is money?
  2. What is trade by barter?
  3. List five problems of barter system.

Functions of Money

The functions of money are the following:

  1. A medium of exchange:With money, you no longer need to look for somebody who has what you want and who at the same time wants what you want. Instead, money is used as a means of payment for goods and services and for the settlement of debt.
  2. It measures values of goods and services: Money is therefore a parameter for determining the worth of gods and services
  3. A store of value:Money is now used in storing wealth, unless there is inflation, money stored or saved retains its values for many years.
  4. A standard of deferred payment:As a result of the durability of money, one can buy some commodities now and pay in future
  5. A unit of account:Money makes accounting possible because the worth of goods and services is measured in money.
  6. Money commands variety:The existence of money encourages large quantity  and variety purchases of goods and services
  7. Money encourages installment payments: This is possible because money is divisible.
  8. Money encourages division of labour:With the existence of money, people tend to concentrate on certain occupations and aspects of production processes, leaving other aspects to other people, with the hope of buying the commodities with money they will earn as the reward for their services.
  9. Encouragement of lending and borrowing:The existence of money gave rise to bank loans and overdrafts and other forms of lending and borrowing.

EVALUATION (POST YOUR ANSWER IN THE COMMENT BOX BELOW FOR EVALUATION AND DISCUSSION)

  1. List five functions of money and explain them
  2. How does money solve problem of deferred payment with barter system?

Types of Money

  1. Coins:A coin is metal money with definite amount and weight issued and stamped by the central authority responsible for the issuance.The coins in use are kobo and naira, which are in different denominations.
  2. Paper money:As the name indicates, it is in form of paper note which originated from receipts the goldsmiths issued to people who kept gold and other valuables with them.
  3. Bank money:This is the money one keeps in one’s bank account for safe-keeping, also called bank deposit which can be given back to the owner on demand.
  4. Foreign money:It is the money of other countries of the world which serves as money in the foreign exchange market. Some of the most popular foreign exchange are : Dollar, Pounds sterling, Deutschmark, etc., and they enable a citizen of a country to buy items from other countries where he is resident at the time.
  5. Token money:This is money whose intrinsic worth is less than its nominal or face value. That is, its value as a piece of metal or note is not identical with its value as piece of money. Britain’s silver coins were replaced with coins of curpo-nickel because their value rose above their face value or purchasing power value as a result of high rise in the value of silver during the two world wars. As a result of the rise in value of silver, there was danger that the silver coins might be illegally melted.
  6. Commodity money:Different commodities were used in different parts of the world as medium of exchange and they are presently called commodity money. These have two values as money and as commodities. These commodities include: cowries, gold, diamond, silver, shark teeth, cows, manilas etc., and presently some of them have gone into oblivion as media of exchange.
  7. Gold-backed money:This is money that can easily be converted or changed into gold by the central authority that issues money if its holder so desires. This system of exchanging paper notes or coins for gold originate from the goldsmith who assured people that the receipt they  issued to them can easily be exchanged for gold. Nigerian currency before it was decimalized was tied to gold and it was clearly expressed on its face.
  8. Legal tender:A legal tender is money which is backed with the force of law in a country which makes it generally acceptable as a medium of exchange. It is an offence for anybody in a country to reject a legal tender. However, some forms of legal tender have limit in their legality; for instance, in Nigeria, Naira and Kobo serve as legal tender. Kobo which are in form of coins serve as legal tender to some extent.
  9. Fiduciary note issue:This is the type of money that is not backed by either gold or any foreign currency. Acceptance of fiduciary note issue is based on faith and not because it is backed by gold or any strong currency like dollar or pounds sterling.
  10. Representative money:This is a document or instrument used in lieu of legal tender but not fully and freely acceptable. Document or instrument like cheque, postal and money orders, stamps, promissory notes, bills of exchange, etc., that sometimes act as money are called representative money. These documents are not backed by the force of law to be generally acceptable and therefore, are not legal tender (money).However, there representative money remove the hazard involved in carrying physical cash and also ease transfer of money from one place to another.

Representative Money and Means of Payment

These are materials or articles used as money but not backed up by law, generally acceptable and legal tender. They also lack qualities possessed by money. They serve as a means of payment to some extent and ease the burden of carrying physical cash which is hazardous. They include; Cheques, Postal order, Money order, Postal order, Bank Order or Standing Order, Bankdrafts, Credit Transfer, Certified cheque, Mail and Telegraphic Transfers, Promissory Note, Bill of Exchange.

EVALUATION (POST YOUR ANSWER IN THE COMMENT BOX BELOW FOR EVALUATION AND DISCUSSION)

  1. List five types of money.
  2. Differentiate between representative and commodity money.

Characteristics of Money

The following are the characteristics of money

  1. General Acceptability:It must be acceptable to the people of that country, community or a certain territorial area.
  2. Absolute Homogeneity:The article used as money must be the same in all parts of the country where it is being accepted as a medium of exchange.
  3. Easily Recognizable:It is this quality that makes people to detect which is the real and which is the counterfeit money.
  4. It must be capable of being divided into smaller units which facilitates exchange of goods and services.
  5. Money must be something that can be easily carried about from one place to another.
  6. Relatively scarce:Money should not be in excess or too much in circulation or easy to come by otherwise, it will lose its value.
  7. Durability:An article that serves as money must be something that can stand the test of time and not something that will suffer from wear and tear.
  8. Stability:This stability in value of money makes business to be predictable and encourages lending and borrowing of money
  9. Storability:It must be something that can be stored for a long time, without losing its value.
  10. Malleability:Anything that will serve as money must be something that can be stamped and designed to show its value and origin.
  11. No intrinsic Value:The commodity that will serve as money should have little or no value in itself as opposed to its value of exchange.
  12. Cheap to Maintain:Money must have the quality of costing nothing to keep and maintain.
  13. Controllable Supply:Money must have controllable supply which will make it easy for the sole authority i.e. CBN to monitor the quantity in circulation.

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