BISHOPS GRADE 9 EMS
In this section of work you will learn about the following concepts…
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Why do we need money?
The functions of money
The characteristics of good money
So, why is money important?
The History of Money
What is money?
Name: _____________________
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Why do we need money?
Money is something we use to buy that new record or pair of jeans we always wanted, or
even just to pay bills. Money is in constant use, but we often take it for granted. Without it,
life would become very difficult. Yet in the past, man existed for many thousands of years
without the help of money.
Our primitive ancestors relied on the direct swapping of goods and services they produced. For
example, if an early farmer had some spare corn and needed an axe he would travel to the
local market with his corn. There he would try to find someone who would exchange an axe
for the corn. This early form of exchange is known as barter.
GROUP EXERCISE
Imagine there is no money and we have to rely on swapping goods with each other. In groups of
three, each member of the group acts out the role of either a ruler-maker, a pencil-maker or an
eraser-maker.
1. Firstly, the pencil-maker wishes to exchange some pencils for some rulers. Try to arrange a
swap on the best possible terms for yourself. What problems do you encounter?
2. Now the eraser-maker wants to exchange erasers for some pencils. But the pencil-maker is
not interested in obtaining erasers. Your only hope is to involve the ruler-maker in the
swap.
3. Imagine now that the goods being traded are eggs, milk and cheese. What problems would
arise if you could not find anyone to swap your goods with? (Remember fridges have not
been invented yet!)
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From that group exercise, you may have discovered that bartering is a most inconvenient way to
carry out business. In fact three main problems arise:
1. Fixing a rate of exchange
How many pencils are worth one ruler? How many pencils are worth one apple? How many
oranges are equivalent in value to one ruler? Indeed, how many rulers could Farmer Giles
get for a cow? And so it goes on. In a barter system the value of each and every good must
be expressed in terms of every other good.
2. Finding someone to swap with
Miss Swap may want some apples from Mr Trade and in return may be prepared to offer
him some cheese. If by chance Mr Trade would like some cheese they can barter. But, if
Mr Trade does not like cheese no deal can take place. In this case an economist would say
no double coincidence of wants exists. In other words, before two people can barter they
must both want the good that the other person has.
3. Trying to save
A final problem is how to save under a barter system. A carpenter could store tables and
chairs but would need a large room, but imagine trying to save some meat or cheese for a
long period of time without the help of a refrigerator.
The functions of money
By now you will be familiar with the problems involved in swapping goods and services in a barter
system. It would be much easier if there was one commodity that everyone would be willing to
accept in exchange for all other goods and services. This commodity is called money and
overcomes the problems with barter by performing the following functions.
1. Money is a medium of exchange
Because money is a commodity that is generally acceptable in exchange for all other goods we do
not have to search for a person who is willing to barter. That is, money overcomes the problem of
needing a double coincidence of wants. Now, Miss Swap can sell her cheese to anyone who is
prepared to buy it with money. In turn Miss Swap can use this money to buy the apples she wants
from Mr Trade, or anyone who is willing to sell her some apples.
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2. Money is a measure of value
Just as a thermometer measures temperature and a ruler measures length, so money measures
value. Using money helps traders to avoid the problems of fixing prices of goods and services in
terms of all other goods and services.
Instead of arguing and attempting to remember how many pencils to one ruler, all goods have a
price expressed in terms of one single commodity called money.
3. Money is a store of value
One of the problems with barter is that many commodities are difficult to save either because they
use up too much space or they lose their value.
Money is usually a good store of value. Unless prices are rising rapidly, money tends to hold its
value over time. In other words, it allows people to save in order to make purchases at a later
date.
However, today some people save by storing valuable antiques and works of art, things that we do
not regard as money but which can be exchanged for money in the future. People often save in
this way because as prices of goods rise over time, the same amount of money will buy less and
less. Therefore, the purchasing power of money, or what it will buy, is reduced. With a continued
rise in prices, or inflation, money is unable to be such a good store of value.
4. Money is a means of deferred payment
When a person buys goods on credit the consumer has the use of the goods but does not have to
pay for them immediately. The consumer can pay some time after he or she receives the goods. In
the case of hire purchase, payment is made by instalments spread over a number of months or
years.
Credit in a barter system would be very confusing and open to cheating. For example, imagine a
person who trades a box of nails for a dozen apples to be paid one month later. Would the apples
be fresh? Would they be large or small apples? Using money to pay later overcomes these
problems and therefore encourages people to trade, reducing the worry of giving credit.
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EXERCISE 1
1. For what reason did the Israeli economy move over to the US dollar as a measure of value
in 1984?
2. Which of the following functions of money was the shekel failing to perform?
a) a medium of exchange
b) a measure of value
c) a store of value
Give reasons for your answers.
The characteristics of good money
In different countries around the world, and at different times, a vast range of objects have been
used as a medium of exchange. These have ranged from beads used by the American Indians to
large stone discs used by the inhabitants of Yap, a small island in the Pacific Ocean.
Money, as we know it today, is the product of a long period of development. Man has slowly
discovered, by a process of trial and error, that some objects fulfil the functions of money better
than others.
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EXERCISE 2 - What is good money?
In groups discuss which of the following items would make good money. Appoint a spokesperson
for your group to record your views and to present your arguments to the class
Your discussion may have led you to the conclusion that characteristics like the following are
important for good money to possess.
1. Acceptability
Anything can be used as money as long as it is generally acceptable. This is why a worthless piece
of paper can be used as money, for example, a 10 dollar or a 50 rand note. It is only worth this
amount in spending power because everyone accepts it as such. Thus our present money is a
token money - as a piece of paper it is worth much less than the face value printed upon it .
2. Durability
Any commodity used as money must be hard-wearing. Money would be useless if it just melted
away in your pocket. Coins and notes must be strong and durable so that they may act as a store
of value.
3. Portability
Money should be easy to carry. A house would clearly be far too heavy to move. A cow would be
reluctant to go shopping with you, and even more reluctant if you tried to squeeze it into your
wallet or purse. Metal coins and paper notes are lightweight and fit easily into your pocket.
4. Divisibility
If cars were used as money a problem would arise if you tried to buy something priced at half your
car. Sawing the vehicle into half would reduce its value. One whole working car is worth much
more than two halves. Therefore it must be possible to divide money of a large value into smaller
values to make small purchases or to give change, without it losing value.
5. Scarcity
Pebbles on a beach could not be used as money simply because anyone can pick them up. A
shopkeeper would not exchange her goods for freely available pebbles that she could gather at
any time, and in any quantity she wished. Only if money is scarce will people value it as a
commodity that can be used in exchange.
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So, why is money important?
People living in a self-sufficient society began to specialize in the jobs they were most able to do.
Specialisation was the first step towards a wealthier society and a community which practiced
specialisation was for the first time able to produce more than enough food, clothes, pots and
other things that they needed. They had some leftover - a surplus.
If people specialize they must trade. A man concentrating on making pins could not satisfy his
need for food by eating them or his need for clothes by wearing them. Therefore trade is a
necessity for the individual to obtain those things they cannot make on their own.
But in a barter system trade is difficult. There is no guarantee that an expert pin-maker will be able
to find someone willing to swap their goods for his pins at a fair rate of exchange. The result is the
pin-maker and others will be unable to specialize to their full potential. They would have to spend
their time and effort producing a range of goods and services in order to increase their chances of
trading successfully for the things they needed.
This would mean that much less would be produced by whole economies than if they had
specialized in their production.
Money encourages specialisation by making trade easier and so enables an economy to increase
the level of national income and allow people to enjoy a much higher standard of living. In turn,
the more an economy specializes the more money is needed to finance an increasing amount of
trade.
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The History of Money
There have been five main stages in the development of money. Each stage being the result of
man's attempt to find objects that display the characteristics of good money.
Stage 1
The earliest form of money was goods. Knives, beads and shoes among other objects were used as
money because many people were willing to accept these in exchange for their produce.
However, such commodity money was quickly abandoned because many of the goods did not
possess the essential characteristics of good money: divisibility, portability, durability, scarcity.
Stage 2
Precious metals, such as gold and silver, have always been scarce enough to make them a
possible source of money. However, trading with metals involved carrying around a weighing
scale and tools to cut the metals.
Stage 3
The problem of portability that cursed metals led to the natural development of coinage. Precious
metals in predetermined weights were often stamped with the face of king or queen, and with
another stamp to show their value.
But one problem remained. Throughout history the temptation to 'clip' coins, trimming a fine filing
of the precious metal from the edges, has been greater than the fear of being caught.
The invention of the ribbed edge on coins overcame the problem of 'clipping'. Another problem
with early precious coins was that the rulers of countries often debased them. Coins would be
called in for reminting on a special occasion. The rulers would then mix cheap metals with gold or
silver, producing perhaps six coins for every four received, cleverly keeping two for themselves.
The result of this today is that the metal content of coins is virtually worthless, yet people still
accept such coins in exchange for goods because they know they are generally acceptable.
Stage 4
The first paper money was issued by early goldsmiths who accepted deposits of precious metals
for keeping in their safes. In return they issued a paper receipt to the owner. It was quickly realized
that these paper claims to gold were far easier to exchange for goods than spending time and
effort withdrawing the gold only for it to be given to someone who would then re-deposit it with a
goldsmith for safe keeping.
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Stage 5
Goldsmiths’ receipts for deposits of precious metals were to become the first paper money, and
goldsmiths the first banks. In most countries today only the central bank has the right to issue
notes and coins, but this money can no longer be converted into gold.
What is money?
Money is a generally acceptable medium of exchange. However, we know that to be money a
commodity must also act as store of value. Given this, our savings in banks and other financial
institutions can be classified as money because one day we may withdraw these deposits so that
they may be exchanged for the goods and services we want.
Notes and coins circulating in an economy and deposits with banks and other financial institutions
make up the money supply.
It is not an easy task to decide exactly what money is. For example, a 90-day savings account is a
way of storing value but cannot become a medium of exchange or a measure of value until the
end of that 90-day period. Savings tied up for two years will become a medium of exchange after
two years has lapsed. So although such methods of savings, or assets, can possess all of the
functions of money they do not possess them all at the same time or in equal amounts. Cash is a
medium of exchange but loses its value due to inflation. Jewellery and other such physical assets
may be a good store of value but are not generally acceptable in exchange for other goods.
A savings account in a bank may become a medium of exchange after seven days when it can be
converted into cash. Assets that can be converted relatively quickly into cash are termed near
money by economists. But jewellery and antiques act as a store of value for many years and may
eventually become a medium of exchange given a long enough time to exchange them for notes
and coins. However, if on converting such assets into cash the owner can only get less than they
originally paid for them, that is, they have lost value, then these assets are not near money.
In summary, some assets are nearer money than others, for three main reasons.
1. Some assets fulfil the functions of money better than others. For example, cash is a good
medium of exchange, but antiques are not.
2. Some assets can be converted to cash more quickly than others. For example, a bank
deposit account can usually be withdrawn in 7 days, whereas some other saving schemes
cannot be converted into cash for two years or more.
3. Some assets retain their value on conversion to cash better than others. For example,
savings accounts hold their value because banks reward people who save with them with
periodic payments or interest, whereas cars lose their value.
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Exercise 3
Clues Across
1
A good money must fulfil this function (6,2,8)
4
Man made resources, such as factories and machinery (7)
5
A person with enterprise who organises production (12)
6
The using up of goods and services to satisfy wants (11)
8
The process by which factors of production concentrate on one or very few
productive tasks they are best able to do (14)
11
Natural resources (4)
12
Human resources or another name for workers (6)
13
Making goods and services to satisfy wants (10)
Clues Down
2
The benefit of the next best alternative foregone through making a choice how to use
resources in a particular way (11,4)
3
Anywhere economic or productive activity takes place (7)
7
A commodity that is a generally accepted medium of exchange (5)
9
Another term used to describe the exchange of goods and services
10
The swapping of goods and services without money (6)
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