History of Money

Long before money existed, trade and exchange used to take place through barter. Barter is the
direct exchange of goods and services for other goods and services. E.g. A farmer may trade a
surplus of corn for fish from the fisherman. Barter enables an individual to trade his surplus
output for other goods he needs to enjoy a wider variety of goods. Successfully bartering enables
the farmer to enjoy dishes such as corn pie and fish for dinner.

However, there are numerous problems associated with barter;

 Unequal value of exchange – Traders in the barter system had difficulties in determining
the relative value of goods. The dressmaker might feel that the value of the dress is equal
to that of the television, but the television set owner might think his television is worth
four dresses.

 Double coincidence of wants – A trader has to find someone who wants his good and
has exactly what he wants to trade it for. The dressmaker will have to find someone who
wants a red dress, size small who also has a Sony 21’ color television set to trade.

 Impossibility of saving – When barter takes place, saving is difficult. Saving of goods
requires storage space. A producer may not have enough space to store bulky goods.
Additionally, some goods may be perishable and so difficult, if not impossible to store.
 Features of Money
For anything to function as money, it must possess certain features or characteristics such as;

 It must be homogenous – All units of money must be identical or uniform.

 It must be divisible – Money must be able to be divided into smaller units. Larger
denominations of notes and coins must be able to be converted into smaller units. This
will enable the buyer to pay in smaller amounts for cheaper items. It would also allow the
seller to give change.

 It must be portable – Money must be easy to carry around. This will enable transactions
to take place in all areas without inconvenience.

 It must be legal tender – This means that a creditor is legally obligated to accept the
money in settlement of a debt. Notes and coins are legal tender. Cheques are not legal
tender. This means that no creditor is bound to accept Cheques as a means of payment.

 It must be acceptable – Everyone must be willing to accept money as a means of

settling debts. It is from our willingness to accept money as a means of payment that
money obtains its value.

 It must be durable – Money must be long lasting and not easy to wear away. If it were
to crumble or melt away easily, money would be useless.

 It must be relatively scarce – Money must be relatively scarce for it to have value. No
one would work hard all day just to be paid in pebbles that you can pick up from the
sidewalk.
 Functions of Money
Functions of Money includes;

 A medium of exchange – Money is acceptable as a means of payment for goods and

services. A farmer can sell his apples at the market for money.

 A store of value – Unlike some goods, money can be stored or saved for use at a later
date. It gives the saver purchasing power in the future.

 A unit of account – This means that money is a measure of value.

 A standard of deferred payment – In the modern economy, a consumer might buy a

good today and derive satisfaction from consuming it now. However, the consumer may
choose to pay for the good some time in the future.

https://www.youtube.com/watch?v=cgzNFNTGNng
 The Money Supply
The money supply is the total stock of money in the economy and in circulation at a particular
time. The supply of money in the economy is determined by the central bank. The money supply
can be categorized into two groups which are Narrow money and Broad Money.

Narrow money is called M1. This narrow money can be used directly for transactions. It
consists of all notes and coins in circulation, all deposits on which Cheques can be drawn, and
travelers’ cheques.

Broad money is called M2 consists of M1 plus savings accounts in financial institutions and
money market accounts. Savings accounts and money market accounts are considered part of
broad money, as such savings can easily be converted into cash or transferred to a cheques
account to be used as money.

Narrow Money Broad Money

- Notes and coins - M1
- Chequing deposits - Saving deposits
- Traveler’s Cheques - Money market accounts

https://www.youtube.com/watch?v=JN0qdN7MTsQ

Complete the practice exercise below.

Questions:
Explain what is meant by the term ‘Barter’
What are some problems associated with the Barter system
What are the 4 main functions of money?
Describe each function
What is Narrow money called?
What does it consist of?
What is Broad money called?
What does Broad money consists of?