MONEY

Definition of money

• Money is defined as anything that is generally

accepted in payment for goods and services or
in the repayment of debts. Hence, money is
wanted, not for its own sake but because it
has purchasing power over other goods.
 Forms of money

• Commodity money
• Early forms of money consisted of commodities that were full bodied. That is
the face value of the commodity was always identical to the commodity value
(intrinsic value). This was also referred to as commodity money.

• Fiat money
• With time commodity money gave way to token (fiat) money. Here the face
value of money was greater than the intrinsic value of the commodity used as
money. The best example of token money is the banknotes and coins used in
Tanzania and elsewhere in the world these days.

• For example, the face value of 10,000 Tanzanian paper note is larger than the
cost of the paper used in producing the 10,000-shilling bank note. Fiat money or
paper currency is made legal tender by the government .
 Forms of money cont’d
• Bank money
• Development of the commercial banking resulted into a
more sophisticated form of money known as demand
deposits. This reflects debt a bank owes to customers
holding current accounts with the bank.
• Bank deposits become money when owners of current
accounts effect payments by transferring portion of the
deposits by means of a checks.
• Cheques are a type of IOU (I owe you) payable on demand
that allows transactions to take place without the need to
carry around large amounts of currency.
 Forms of money cont’d
• Plastic money
• Debit cards – linked to one’s bank account.
TEMBO card of CRDB
• Credit cards- line of credit. Purchase and pay
later. Not linked to balance in your account
but rather credit history.
• Examples of VISA and MASTER CARDS
 Functions of Money
 

• Medium of exchange
• The most important function of money is that it
serves as a medium of exchange or means of
payments.
• Unit of Account
• The second important function of money is that
it can act as a common measure or standard of
value of the unit of goods and services.
 Functions of money cont’d
• Standard of deferred payments
Debts are usually expressed in terms of the money of
account. Loans are taken and repaid in terms of
money
• Store of value
• Money is a store of value. This means that it is a way
to store wealth. It is true that the wealth can be stored
even in the form of other assets, but its holding in the
form of money is better than all the other alternative
forms of wealth.
 Characteristics of money

• Durability
• Money must be durable and not likely to deteriorate
rapidly with frequent handling.
• Acceptability
• Money should be generally acceptable otherwise the
public will have very little faith in it.
• Divisibility
• Money should be readily divisible into various
denominations so as to enable transactions that involve
cheap payments to take place.
 Characteristics of money cont’d
• Portability
• A good medium of exchange must be
portable that is convenient to be carried
around. It should not be heavy or bulky.
• Uniformity or homogeneity
• Money should be homogeneous in the sense
that the different denominations are similar
in terms of size, colour, weight e.t.c.
 Characteristics of money cont’d
• Recognisability
• To be accepted, money must be easy to recognize and
familiar to most people.
• Stability of value
• Money should have some stability of value. If the value
of money fluctuates violently money loses its significance
• Scarcity
• Money should generally be scarce in order to maintain its
value. If money is in abundance its value may be very low
and hence affecting its use.
 Money supply
• Money supply is an important indicator in the economy
because it reflects economic activity and performance.
The growth or decrease of money supply in the
economy has an influence on the economic activities
and performance.
• Monetary aggregate (M1)
• Hence, M1= CC + DD
• Where, CC = currency in circulation
• DD = demand deposits
•  
 Money supply cont’d
• Broader definition of money
• M2 = CC + DD + SD
• Where, SD= savings deposits
• Alternatively, M2 = M1 + SD
• M3= CC + DD + SD + TD