Learning Objectives
1. Describe the properties of money.
2. Describe the functions of money.
3. Explain the definitions of money used
today.
4. Explain the concept of near monies.
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Money
Money has existed for a long
time, and a wide range of
commodities have served as
money in different countries and
at different times.
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Examples of money
Throughout history, a wide variety of
items have served as money. These
include salt, shells, gold, silver, large
stone wheels, tobacco, beer, dog
teeth, porpoise teeth, elephant tusks,
cattle, metal coins, paper bills and
cheques.
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Money
All of these types of money
should be judged on how well
they accomplish the functions of
money.
‘Money is what money does’.
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The barter system
Before money, economies used barter
system.
The principal problem with a barter system
is the double coincidence of wants
required for success.
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Double coincidence of wants
Double coincidence of wants means
that you must find someone who wants
what you want to trade and has what
you want.
This search could be extremely timeconsuming and limiting to the development
of an economy.
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The functions of money
The functions of money are to
serve as:
(a) a medium of exchange,
(b) a standard of value and
(c) a store of value.
(d) a standard for deferred payment
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A. Medium of exchange
1.
2.
3.
4.
5.
To be a good medium of exchange-,
money must be:
Accepted
Portable
Divisible,
Durable, and
uniform
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Accepted
Money must be accepted by
people when they buy and
sell goods and services.
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Portable
It should be portable or
easily carried from place to
place.
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Divisible
It must also be divisible so
that large and small
transactions can be made.
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Durable
To function as money an asset
must be durable. During its
working life any unit of currency
changes hands many times and
an asset which deteriorated
quickly would not be acceptable
in settlement of a debt.
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Uniform
It must also be uniform so that
a particular unit such as a
quarter represents the same
value as every other quarter.
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B. Standard of Value
To be a good standard of value,
or unit of account, money must be
useful for quoting prices. To
accomplish this, money must be
familiar, divisible and accepted.
This can also be expressed as ‘a
unit of account’.
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C. Store of value
To be a good store of value,
money must be durable so it can
be kept for future use. It also
should have a stable value so
people do not lose purchasing
power if they use the money at a
later time.
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A Standard for deferred payment
In the modern world, goods are
often purchased on credit, with
the amount to be repaid being
fixed in money terms.
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Money defined
Money is any item or commodity
that is generally accepted in
payment for goods and services
or in repayment of debts, and
serves as an asset to its holder.
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Liquidity
One term frequently used in
connection with money is liquidity. An
asset is more liquid the more swiftly
and less costly it can be converted
into the means of payment. It follows
that money is the most liquid asset of
all.
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Forms of money
In modern economies money
takes two forms: cash (i.e. notes
and coin) and bank deposits.
There are several kinds of bank
deposit with varying degrees of
liquidity.
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Examples of bank deposits
• Sight deposits are immediately
spendable.
• Time deposits can only be
withdrawn after a period of notice has
been given to the institution holding
the deposit.
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Bank Deposits vs Cheques
Care must be taken to distinguish between the
role of the bank deposits and the role of the
cheques.
Cheques are simply the means of transferring a
bank deposit from one person to another.
It is the bank deposit which is accepted in
settlement of a debt, not the cheque. A cheque
that cannot be honoured against a bank deposit
is worthless.
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Bank deposits
Creating bank deposits
increases the money supply
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What are bank deposits and how
are they created?
Bank deposits come into being in one
of three ways:
• when a bank receives a deposit of
cash
• when a bank buys a security
• when a bank makes a loan
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Bank Deposits
Whichever way bank deposits
are created, a bank must
always ensure that its liabilities
and assets are equal.
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Bank Deposits – Liabilities
Deposits are the liabilities of a bank, since they
are bound to honour alt demands for cash from
individual depositors up to the full amount
deposited in each individual's account. In other
words, deposits are claims against a bank. The
assets which banks hold, however, can take a
variety of forms, but they always give the bank a
claim against someone else. Notes and coin, for
example, give commercial banks a claim against
the central bank (the Bank of England in the UK)
whereas securities and advances give the bank
a claim against the borrower.
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Money : Exercise 1
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Exercise 1: Functions of money
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Exercise 2
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The Functions of Money
End of Lesson
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