MONEY

 MONEY

Money may be defined as  anything which serve as a medium of exchange.Anything which is generally acceptable can serve as money. Before the introduction of money,  the method of exchange that took place was  by means of barter wehereby goods were exchange for goods 

EVOLUTION OF MONEY

In ancient times, people were self-sufficient and everybody produced commodities needed to meet their personal needs, but with time specialization began to set in and everybody started producing what they could produce best. This led to what is today known as Barter System of Trade i.e. exchange of goods for goods. People exchange what they had for what they want, but the problem that came along with the barter system was so much that people started looking for a way out. The search leads to the following

  • Development of Commodities; to be used as money e.g. cowries, shells, hides and skins, cereals, etc. soon it was discovered that all these things are easy to come and not scarce at all. Soon people were not willing to let go of their commodities for things they could easily get
  • Precious Metals; to solve the problem of commodities that are easy to come by precious metals. Such as gold, silver, bronze, etc became acceptable as a means of exchange
  • Coinage: This is the transformation of precious metals to coins of specific values. This was a result of seeking solutions to the problems of carrying metals around and weighing to know the specific value. It then had heads of kings and queens stamped on them
  • Paper Money; the coins were deposited with goldsmiths for safe keeps. The goldsmiths issue their customers with receipts to prove their deposit.

WHAT IS TRADE BY BARTER?

Trade by barter is the Direct exchange of goods for some quantity of other groups without the use of money. For transactions to take place there must be double coincidence of wants e.g. yam maybe exchange for cassava. A barter economy is an economy in which exchange is done without the use of money. It is moneyless economy.

Problems of trade by barter

Barter systems has the following difficulties. 

  • Double coincidence of wants
  • Lack of common measure of value
  • Difficulty in storing value
  • Indivisibility of certain goods
  • Difficulty in making deferred payment
  • Lack of specialisation
  • Discourages lending and borrowing
  • Discourage installment payments
  • Heaviness of goods

BARTER SYSTEM

A barter system is an old method of exchange. Th is system has been used for centuries and long before money was invented. People exchanged services and goods for other services and goods in return. Today, bartering has made a comeback using techniques that are more sophisticated to aid in trading; for instance, the Internet. In ancient times, this system involved people in the same area, however today bartering is global. The value of bartering items can be negotiated with the other party. Bartering doesn't involve money which is one of the advantages. You can buy items by exchanging an item you have but no longer want or need. Generally, trading in this manner is done through Online auctions and swap markets.

History of Bartering

The history of bartering dates all the way back to 6000 BC. Introduced by Mesopotamia tribes, bartering was adopted by Phoenicians. Phoenicians bartered goods to those located in various other cities across oceans. Babylonian's also developed an improved bartering system. Goods were exchanged for food, tea, weapons, and spices. At times, human skulls were used as well. Salt was another popular item exchanged. Salt was so valuable that Roman soldiers' salaries were paid with it. In the Middle Ages, Europeans traveled around the globe to barter crafts and furs in exchange for silks and perfumes. Colonial Americans exchanged musket balls, deer skins, and wheat. When money was invented, bartering did not end, it become more organized.

Due to lack of money, bartering became popular in the 1930s during the Great Depression. It was used to obtain food and various other services. It was done through groups or between people who acted similar to banks. If any items were sold, the owner would receive credit and the buyer's account would be debited.

Disadvantages and Advantages of Bartering

Just as with most things, there are disadvantages and advantages of bartering. A complication of bartering is determining how trustworthy the person you are trading with is. The other person does not have any proof or certification that they are legitimate, and there is no consumer protection or warranties involved. This means that services and goods you are exchanging may be exchanged for poor or defective items. You would not want to exchange a toy that is almost brand new and in perfect working condition for a toy that is worn and does not work at all would you? It may be a good idea to limit exchanges to family and friends in the beginning because good bartering requires skill and experience. At times, it is easy to think the item you desire is worth more than it actually is and underestimate the value of your own item.

On the positive side, there are great advantages to bartering. As mentioned earlier, you do not need money to barter. Another advantage is that there is flexibility in bartering. For instance, related products can be traded such as portable tablets in exchange for laptops. Or, items that are completely different can be traded such as lawn mowers for televisions. Homes can now be exchanged when people are traveling, which can save both parties money. For instance, if your parents have friends in another state and they need somewhere to stay while on a family vacation, their friends may trade their home for a week or so in exchange for your parents allowing them to use your home.

Another advantage of bartering is that you do not have to part with material items. Instead, you can offer a service in exchange for an item. For instance, if your friend has a skateboard that you want and their bicycle needs work, if you are good at fixing things, you can offer to fix their bike in exchange for the skateboard. With bartering two parties can get something they want or need from each other without having to spend any money. 

KIND OF MONEY

  • Commodity Money: These are different items used as money at various times. Such items include cowries, shells, hides and skins, stones, knives, etc.
  • Coins: These are precious metals cut out with definite amount inscribed on them and bearing a country’s seal.
  • Paper Money: These are papers of various quality accepted as money in the society. It usually has the value it represents inscribed on it and it bears a country’s seal. 
  • Representative Money: this is also called near or quasi money. They are document that carry value in place of legal tender but are usually not accepted as a means of exchange e.g. bank drafts, cheques, postal stamps, bills of exchange, share certificates, etc. they are also called assets. 
  • Token Money: this is a form of money with a face value of the material used in making the money.
  • Flat Money: this is any money that ha been declared to be a legal tender but is not backed by reserve. This is a type of paper money since it can no longer be changed unlike the earliest forms of paper money.
  • Partial Money: these are representative money restricted and acceptable with a certain area e.g. voucher and tickets.
  • Fiduciary Money: these are bank notes not backed up by gold but by government securities.
  • Legal Tender: this refers to money backed by law to be accepted as money in a society. It becomes almost impossible to reject them as means of payment for goods and services.

CHARACTERISTICS OF MONEY

For anything to be used as money, it must possess the following qualities:

  • Acceptability: money must be generally accepted in a society where it is used as a means of payment and in settling debts.
  • Divisibility: money should be capable of being divided into small units to enable people pay for goods and services that are of small value.
  • Portability: money must be easy to carry around. It must not be too bulky.
  • Relative Scarcity: anything used as money must be relatively scarce and the supply must be capable of being controlled otherwise it would be too freely available and of no value.
  • Durability: money must be able to last a long time without decaying or being worn out
  • Recognisability: this means that anything used as money must be easily recognized as such even illiterates must be able to recognize every denomination.
  • Homogeneity: anything to be used as money must be uniform throughout the society it is being used. 

FUNCTIONS OF MONEY

Money performs different functions which include;

  • Medium of Exchange: money is used in the transfer of ownership of commodities
  • Standard of Value: the value of all commodities is usually expressed in monetary terms.
  • Means of Deferred Payment: money is used in the settlement of debts. Credit sales and purchases are made possible with the use of money.
  • Store of Wealth and Value: with the use of money, excess wealth may not be consumed immediately; it can be saved or invested.

DEMAND FOR MONEY

The demand for money refers to the desire to hold money. It can also be described as the total amount of money that individuals in an economy keeps in liquid form in order to spend it when the need arises.  

MOTIVES FOR HOLDING MONEY

Lord Keynes, an economist postulated three motives for holding money. the motives include;

  • Transactionary Motive: This refers to people’s desire to keep money for their day to day transactions. This usually depends on the amount of money earned as income and the interest rival of payment.
  • Precautionary Motive: People keep money with them so as to be able to meet up with emergencies and unforeseen circumstances.
  • Speculative Motive: This relates to people’s desire to hold money for the purpose of taking full advantage of investment opportunities. This largely depends on people’s expectations on the trend of interest rate.

SUPPLY OF MONEY

This is the total stock of money available for use in the economy. This is made up of currency in the form of bank notes, coins and bank deposits.

FACTORS AFFECTING THE SUPPLY OF MONEY

  • Bank Rate: This is the rate of interest which the central bank charges the commercial banks for lending money. High bank rate implies high, taking loans will be discouraged; this in turn reduces money in circulation.
  • Cash Reserve: This is the percentage of deposits made with commercial banks that they are expected to keep with them. A high cash reserve ratio implies that the supply of money will be low and vice-versa.
  • Economic Situation: During inflation, too much in circulation is always purchasing few goods to correct this, the supply of money can be reduced and vice-versa during inflation.
  • Total Reserves of the Central Bank: there are times the central bank will have to increase the money kept in reserves at such times money in circulation reduces and implies releasing more money in circulation.

VALUE OF MONEY

This is the purchasing power of money. It is the quantity of goods and services that a given amount of money can buy at a particular time. The value of money is measured by the price index. Price Index is the measurement of the changes in prices of goods and services over a given period of time.

Price Index  

A Price Index of 100 indicates that the value of money is constant; greater than 100 izndizctes that the value of money is reducing and commodities are more expensive to buy and a Price Index less than 100 indicates that the value of money is increasing and commodities are reducing in price.

FACTORS THAT DETERMINE THE VALUE OF MONEY

  • Price Value: The value of money varies inversely with the price level. If the price level increases, value of money reduces and if the price level reduces the value of money increases. 
  • Supply of money and its velocity of circulation: If the quantity of money in circulation increases while there is no increase in the available goods and services then larger amount of money refers to the speed at which money circulates or changes hand within an economy. With increased velocity of circulation, prices increase and the value of money reduced and vice-versa.
  • Volume of goods and services: If the quantity of goods in a country increases and the supply of money remains constant, value of money will increase but if the quantity of goods produced reduces with constant supply of money reduces.

QUANTITY THEORY OF MONEY
This theory in its earliest form states that an Increase in the quantity of money would bring about a proportionate in the price level i.e. the price level is proportional to the quantity of money in circulation. Quantity theory of money was Improved upon by Irving Fisher In 1920's. He Introduced two variables, volume of transactions and velocity of circulation. 
The theory is expressed by the equation below. 
MV = PT
Where M is the quantity of money
V the velocity of circulation
P is the price level
T is the volume of transactions.
M Means the total bank deposits i.e. bank notes and cans.
V is the average number of times unit of money is put Into use during a period. T is the total of transactions which takes place.
From the equation, It can be deduced that the general. price level can be Influenced not only by the change in the quantity of money but also a change In the velocity of circulation and volume of production and also that a change In M or V can be offset by a contrary change In T Thus, Inflation is caused by increase In the supply of money.

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