Money
What is Money?
Money is anything that is commonly accepted by members of a
community as a means of payment for goods and services as well as
settlement of a debt. Money is a legal tender in a particular territory
which is generally accepted as a means for the settlement of debts and
for purchasing goods and services. Money is a legal tender because the
creditors are compelled to accept it because it is backed up by the law
of the country.
Barter System of Trade
Before the introduction of money there was a method of trade, known as
trade by barter. Trade by barter is a system of trade whereby goods are
exchanged for goods. This was used during the primitive era and it had
a lot of problems
Problems of Barter Trade
(i) Double Coincidence of Wants: It is not enough for a trader to have
goods to offer, he must also look for somebody who has what he wants
and be ready to collect what he has to offer. That is, the wants of the two
partners must coincide. This is the greatest setback of barter
(ii) Lack of Specialization: People were engaged in all aspects of
production, there was no single focus. Nowadays, one specializes in
occupation and uses the money he earns to satisfy other wants
(iii) Individuality of the Commodities: Each time exchange took place,
one trader gained at the expense of the other because it was difficult for
the commodities exchanged to be divided into smaller units. For
instance, cloth cannot be torn into pieces in exchange for a tuber of
yam
(iv) Lack of Storability: Due to the fact that commodities were used as a
medium of exchange, they could not be stored for a long period of time,
thus making it impossible to accumulate wealth
(v) Lack of Future Trade: There was no chance for credit transaction
where one will receive a commodity now and later make his own goods
available
(vi) Lack of Economic Growth and Development: Barter trade was not
only boring but also cumbersome. Long periods of hours used to take
place before an exchange was possible
Historical Development of Money
The problems of barter, especially that of double coincidence of wants
led to the introduction of a uniform medium of exchange, known as
money. During the early day’s items such as shells, beads, cowries,
coppers, silver, and gold, among others were used as forms of money in
different parts of the world.
These items were not generally accepted because they were bulky and
some of them could not be stored for too long. These problems led to
the search for easier means of exchange until coins, banknotes, and
bank deposits were introduced to replace the other commodities
Types of Money
(i) Coins: These are metals in form of silver and gold. It has a definite
denomination issued and stamped by the central authority responsible
for the issuance of money. For instance, the coins in use are kobo which
are in different denominations.
(ii) Paper Note: It consists of bank notes with definite money value. This
is in the form of paper notes originated from the receipts the goldsmiths
issued to people.
(iii) Bank Deposit: This is demand deposits with the bank. They are
withdrawn by means of cheques. It is the money one keeps in one’s
bank account for safe-keeping, also called bank deposit, which can be
given by bank on the demand of the owner.
(iv) Legal Tender: These are all types of money that are generally
accepted to be spent and it has legal backing e.g. Cedis and Pesewas
are legal tenders only in Ghana. It is backed with the force of law in
which makes it generally acceptable
(v) Commodity Money: It serves as both commodity and money and
has dual values e.g. gold.
(vi) Currency: This the type of money being issued in a country e.g.
Ghanaian currency is Cedis and Pesewas
(vii) Fiduciary Issue: It is in form of note issue which is not backed by
gold
(viii) Fiat Money: It is the money that is declared by the government
order (or fiat), to be legal tender for the settlement of debts but it can’t
be converted into anything else
Functions/Characteristics of Money
Functions of Money
1. Medium of Exchange: This is the primary function of money, a means
of payment for goods and services as well as settlement of debt
2. Measurement of Value and Unit of Account: It helps in putting prices
or values to goods and services, and also helps in keeping financial
records of all business transactions. The real value of money is what it
can buy at a particular time.
3. Store of Value: This makes the accumulation of wealth to be possible
because money can be kept or saved for future use without any loss of
value. In the period of inflation, money becomes a very poor store of
value.
4. Standard for Deferred Payment: Money has helped to create credit in
business transactions because goods and services can be bought now
and payments made in the future. It makes payment to be postponed
from the present to a future date.
Characteristics of Money
1. Acceptability: It must be generally acceptable to the people of that
country, community or a certain territory
2. Divisibility: It must capable of being divided into smaller units e.g.
naira and kobo
3. Homogeneity: It must be the same in all aspects
4. Recognisability: The users should be able to recognize or notice it,
there should not be confusion in money of the same denomination
5. Portability: Money should be very easy to carry about, it must not be
too heavy
6. Storability: It must be capable of being stored for a long time without
physical deterioration
7. Relatively Scarce: In order for money not to lose its value, it must be
relatively scarce
Evaluation Questions
1. Identify the problems of barter system
2. Explain five qualities of good money