MONETARY ECONOMICS
CONCEPTS OF MONEY
Content
 History and Evolution of Money
 Monetary Systems/Payment Standards
 Definition/Functions of Money
 Measurement of Money Supply
 Discussion: Concepts of Money in Islam
From Barter to Money
 Barter is the exchange of a good or service for another good or service.
 Barter requires a “double coincidence of wants” for a transaction to take
place.
 A barter economy has fewer exchanges, exchanges that are made are more
time consuming, and less specialization is possible.
 The frustrations associated with barter led people to create MONEY
 Over time may different items have served as money.
 To serve as money an item must be SCARCE and:
 Portable
 Durable
 Divisible
 Familiar (Uniform)
 Acceptable
 Stable in Value
Various Forms of Money
The use of cattle in
exchange can be traced
back as far as 90006000 BC
Cowrie shells being
used as money can be
traced to China in 1200
BC.
An Okpoho manilla (or
bracelet) was an early
form of money in
Nigeria.
The Katanga Cross was
an archaic form of
money from West
Africa.
Bronze and copper
replicas of shells were
manufactured in China
by the end of the Stone
Age and the Lydians
(modern Turkey) coined
gold and silver around
560 BC.
Other Forms of
Money:
- Whale’s teeth
- Bread
- Spices
On the Micronesian
Island of Yap, huge
limestone rocks were
formed into coins.
􀂆 Some of these
coins were 9-12
feet in diameter and
weighed several tons.
Monetary Payment Systems
Commodity Money: item
which is useful in its
intrinsic value as well as
its monetary properties
Began with banks issuing
paper receipts to
depositors indicating that
the receipt is redeemable
for the precious goods
being stored
Representative
to Gold-backed
money
Commodity
Money
Barter
Economy
Representative
money made the
practice of
fractional reserve
banking possible.
Paper Currency
This money is
not backed by
reserves of
another
commodity
Fiat Money
and the
Future
The money is
given value by
government
fiat (Latin for
“let it be
done”) or
decree
Functions of Money
 Medium of Exchange – acts as a go-between to make it easier
to buy and sell goods and services or pay debts. Allows buyers
and sellers to avoid the difficulties associated with barter
exchanges.
 Store of Value – allows people to transfer the purchasing
power of their present money income or wealth into the
future, ideally without a loss of value.
 Unit of Account – serves as a way to measure and compare the
value of goods and services in relation to one another. It also
allows people to keep accurate financial records.
Measurement of Money Supply
Money supply (or Money Stock):
– The amount of money in an economy that is easily available for use in
payments. It is not just coins and notes in circulation
Measurement of Money Supply-Malaysia
M2 = M1 +
M1:currency and demand
deposits held by the private
sector.
savings deposits + fixed deposits
of all maturities + net issues of
NCD + repo transactions effected
[of/to the private sector]
[by the commercial banks].
M3 = M2 +
savings deposits + fixed deposits
of all maturities + net issues of
NCD + repo transactions effected
[of/to the private sector]
[by other banks]
First Discussion:
Do the official measures of Money Stock (M1, M2 and M3)
accurately reflect the quantity of money in the economy?
When we state: M2 = Currency + Demand Deposits + Savings
Deposits + Fixed Deposits + NCD + REPO, what does this
mean?
Second Discussion:
What is the concept of Money in Islam?
Must money in an Islamic economy be in the form of
gold?
Is fiat money incompatible with Islamic principles?