Understanding Money: Meaning, History, Functions and Why It Matters Today Money Part I

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Money is no stranger to anyone in any nation; however, no matter how common it is, there is a need to further understand what it is, its historical development, and its functions.

Lesson Objectives

At the end of the lesson, students should be able to,

1. Explain the meaning of money.
2. Describe trade by barter.
3. Identify and explain the problems of trade by barter.
4. Trace the historical development of money.
5. List and explain the characteristics of money.
6. State the functions of money.

Definition of Money

Money is anything that is generally accepted by people as a means of exchange for goods and services. It is used to buy and sell goods, to measure the value of goods and services, and to store wealth for future use.

Money also serves as a standard for deferred payment, making it possible for debts and loans to be settled easily. Common examples of money include coins, banknotes, and money kept in bank accounts.

Trade by Barter

Trade by barter is a system of exchange in which goods and services are directly exchanged for other goods and services without the use of money.

Under this system, a person gives what they have in excess and receives what they need in return. For example, a farmer may exchange bags of rice for clothes from a tailor.

Trade by barter was common in early societies before the introduction of money, when communities were small and needs were limited. Although it helped people meet basic needs, the system was slow and inefficient because exchange could only take place when both parties agreed on the value of the goods being exchanged and needed each other’s products at the same time.

Problems of Trade by Barter

Trade by barter had many difficulties, which made it inefficient. Here are the problems of trade by barter:

1. Lack of Double Coincidence of Wants: In a barter system, exchange can only take place if both parties want what the other person has at the same time. For example, a yam farmer who wants fish must find a fisherman who wants yams. If the fisherman wants clothes instead, the exchange becomes impossible. These conditions made trade slow and difficult, as people may spend a lot of time searching for someone with matching needs.
2. Absence of a Common Measure of Value: Under barter, there is no standard way to measure the value of goods and services. It is difficult to determine how many tubers of yam should be exchanged for a goat or how much maize equals a bag of rice. This makes pricing confusing and leads to disagreements during exchange, reducing fairness and efficiency in trade.
3. Indivisibility of Some Goods: Many goods used in barter cannot be divided into smaller units without losing their value. For example, a cow cannot be divided into parts to pay for small items like vegetables. This makes it hard to carry out small transactions and limits the types of goods that can be exchanged conveniently.
4. Difficulty in Storing Wealth: Most goods exchanged under barter are perishable or can easily lose value over time. Items such as food crops can spoil, while others may get damaged. As a result, people find it difficult to store wealth for future use, which discourages saving and long term planning.
5. Difficulty in Making Deferred Payments: Trade by barter does not support borrowing and lending easily. Since there is no standard unit of value, it is hard to agree on what and how much should be repaid in the future. Changes in the quality or availability of goods can also affect repayment, leading to disputes.
6. Lack of General Acceptability: In barter trade, goods are not generally accepted by everyone. A person may reject a good simply because they do not need it at that moment. This limits exchange opportunities and makes trade uncertain and unreliable.
7. Transportation and Storage Problems: Many barter goods are bulky and heavy, making them difficult and costly to transport from one place to another. Storing such goods also requires space and protection. These challenges increase the cost of trade and reduce the scale at which exchange can take place.

Historical Development of Money

The historical development of money began with the barter system, where people exchanged goods and services directly without using money.

This system was simple but inefficient, as it required both parties to want each other’s goods at the same time.

To overcome this problem, societies began to use commodity money such as salt, cowries, cattle, gold, and silver, which were widely accepted and had value.

Over time, metallic money in the form of gold and silver coins became common because they were durable and easy to carry.

Later, paper money developed as a convenient substitute for heavy coins, often representing precious metals kept with goldsmiths or banks.

In modern times, money has further evolved into bank money and electronic money, including cheques, bank transfers, and digital payment systems, making transactions faster and more efficient.

Characteristics of Money

For anything to serve as money, it must have certain qualities, which are:

1. General Acceptability: Money must be generally acceptable to people in a society. This means that everyone is willing to accept it in exchange for goods and services. Because people trust that others will also accept it, money can circulate freely. Without general acceptability, money would not perform its role as a medium of exchange.
2. Durability: Money must be durable so that it can last for a long time. It should not spoil, rust easily, or wear out quickly. This is important because money is used repeatedly in transactions. Durable money reduces the cost of frequent replacement.
3. Portability: Money must be easy to carry from one place to another. People should be able to move it conveniently when buying or selling goods. If money is too heavy or bulky, it becomes difficult to use in daily transactions. Portability makes exchange simple and efficient.
4. Divisibility: Money must be divisible into smaller units without losing its value. This allows people to make small and large payments. For example, a note can be broken into smaller denominations to buy cheaper items. Divisibility helps in accurate pricing and fair exchange.
5. Stability of Value: Money should have a relatively stable value over time. This means its purchasing power should not change suddenly. Stability allows people to plan, save, and enter long term contracts with confidence. If the value of money changes frequently, it becomes unreliable.
6. Scarcity: Money must be scarce, meaning it should not be freely available to everyone. Scarcity helps to maintain its value. If money were too plentiful, it would lose its worth. Controlled supply of money ensures that it remains valuable and useful in the economy.
7. Uniformity: Money must be uniform in quality and value. Units of the same denomination should look alike and have equal value. Uniformity makes it easy to recognize money and prevents confusion during transactions. It also helps to build trust in the monetary system.
8. Recognisability: Money must be easily recognized by users. People should be able to identify genuine money and distinguish it from fake ones. Clear designs, symbols, and security features help in recognition. This reduces fraud and increases confidence in the use of money.

Functions of Money

Money performs several important functions, which are:

1. Money as a Medium of Exchange: Money serves as a medium of exchange by acting as an accepted means through which goods and services are bought and sold. Instead of exchanging goods directly, people sell their goods for money and then use the money to buy what they need. This function removes the difficulties of trade by barter, especially the problem of double coincidence of wants, and makes buying and selling faster and more convenient.
2. Money as a Unit of Account: Money functions as a unit of account by providing a common measure of value for goods and services. Prices are expressed in monetary terms, which makes it easy to compare the value of different goods. This function helps individuals, firms, and governments to keep records, prepare budgets, calculate profit or loss, and make economic decisions.
3. Money as a Store of Value: Money acts as a store of value because it can be saved and used in the future. Unlike many goods in the barter system that may spoil or lose value quickly, money retains its value over time if inflation is stable. This function allows people to postpone consumption and plan for future needs such as emergencies or investments.
4. Money as a Standard for Deferred Payment: Money serves as a standard for deferred payment by making it possible to borrow and lend. Debts, wages, rents, and taxes can be fixed in money terms and paid at a later date. This function supports contracts and long term economic activities, as both the lender and borrower clearly understand the amount to be paid in the future.

Lesson Summary

• Money is anything generally accepted as a medium of exchange for goods and services.
• Barter is the direct exchange of goods and services without using money.
• Barter had problems like lack of double coincidence of wants, indivisibility of goods, and difficulty in storing value.
• Money evolved from barter to commodity money, metallic money, paper money, and modern electronic money.
• Money must be acceptable, durable, portable, divisible, stable in value, and scarce.
• Money acts as a medium of exchange, unit of account, store of value, and standard for deferred payment.

Tags

Money, Medium of exchange, Store of value, Unit of account, Barter, Trade by barter, Double coincidence of wants, Commodity money, Metallic money, Paper money, Bank money, electronic money, Representative money, Deferred payment, Divisibility, Durability, Portability, Scarcity, Stability of value

Read also: Money Explained: History, Types, and Global Perspectives