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

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It will interest you to know that money is not only limited to paper because it operates in different forms. In this piece, we will take a deep look into the forms of money, and the representative money.

Lesson Objectives

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

1. Compare money with other commodities used in trade by barter, stating their similarities and differences.
2. Identify and explain the various forms of money.
3. Explain the meaning of representative money.
4. Explain how the introduction of money solved the problems of the barter system.

Similarities and Differences Between Money and Other Commodities Used in Trade by Barter

A. Similarities

1. Both are used as a means of exchange: Money and other commodities used in trade by barter both serve the purpose of exchange. In the barter system, goods such as salt, cattle, or cowries were exchanged directly for other goods or services. In the same way, money is used to obtain goods and services in modern economies. In both cases, the aim is to facilitate trade and satisfy human wants by exchanging something of value for another thing of value.
2. Both have value: Money and barter commodities both possess value that is recognized within a society. Barter commodities had value because they were useful, scarce, or desired, such as food items, livestock, or precious metals. Money also has value because it is accepted by law and trusted by people as a store of purchasing power. Without value, neither money nor barter commodities would be accepted in exchange.
3. Both are accepted within a community: Both money and commodities used in barter are accepted based on social agreement. In barter economies, certain commodities were accepted because members of the community agreed to use them for exchange. Similarly, money is accepted because people trust it and believe others will also accept it in exchange for goods and services. This general acceptance makes trade possible in both systems.
4. Both facilitate economic activities: Money and barter commodities both help in carrying out economic activities such as buying, selling, and distribution of goods. In barter economies, trade took place using available commodities, which allowed specialization and exchange to some extent. In modern economies, money performs the same role more efficiently by making transactions faster and more organized. In both systems, exchange supports production and consumption.

B. Differences

1. Money is generally acceptable in an economy, meaning everyone is willing to accept it in exchange for goods and services. Other commodities used in trade by barter are not generally acceptable because their acceptance depends on individual needs and preferences. For example, a person may not accept yams in exchange for clothes if they do not need yams at that time.
2. Money has a standard and stable value that is recognized by all users. This makes it easy to fix prices for goods and services. In contrast, commodities used in barter do not have a standard value. Their value changes from place to place and from person to person, making exchange difficult and often unfair.
3. Money is highly divisible, allowing it to be broken into smaller units without losing value. For example, a naira can be divided into kobo. Most commodities used in barter are not easily divisible. Dividing goods like cattle or tools often reduces their value or makes them useless.
4. Money is durable and can last for a long time without losing its usefulness. Coins and notes can be used repeatedly over many years. Many barter commodities are not durable. Items such as food crops can spoil, rot, or get damaged over time.
5. Money is easy to carry and store because it is light and occupies little space. This makes transportation and safekeeping convenient. Barter commodities are often bulky and heavy, making them difficult to transport and store, especially over long distances.
6. Money serves as a store of value, allowing people to save wealth for future use. Because its value is relatively stable, it can be kept for a long time. Barter commodities are poor stores of value because they may spoil, lose usefulness, or decrease in value over time.
7. Money can be used as a standard for deferred payment, which makes borrowing and lending possible. Loans, wages, and contracts can be fixed and paid in money at a future date. Commodities used in barter are unsuitable for deferred payment because their quantity and value may change before the time of repayment.

Forms of Money

Money exists in different forms, which are:

1. Commodity Money: Commodity money is money that has intrinsic value, meaning the item itself is valuable apart from being used as money. Examples include gold, silver, cowries, salt, or cattle. People accepted these items in trade because they could also be used for other purposes, such as cooking, jewelry, or livestock. Commodity money was common in early economies but had limitations, such as difficulty in transport, storage, and divisibility.
2. Metallic Money: Metallic money consists of coins made from metals like gold, silver, copper, and nickel. Coins are durable, portable, and easier to standardize compared to other commodities. Metallic money became widely used because it was more convenient than barter goods and easier to carry in trade. Its value depended on the metal used and its weight, and it was accepted as legal tender in many societies.
3. Paper Money: Paper money refers to banknotes issued by a central authority such as a government or central bank. Unlike coins, paper money does not have intrinsic value but represents a claim on valuable assets, like gold or silver in earlier times. It is lightweight, easy to carry, and allows large transactions to take place efficiently. Today, paper money forms the bulk of money in circulation in most countries.
4. Bank Money: Bank money includes cheques, promissory notes, and deposits held in banks. It is a form of money that exists in the form of records rather than physical cash. People can transfer it from one account to another for payment purposes. Bank money facilitates large transactions without the need for carrying cash, encourages savings, and makes the banking system an integral part of the economy.
5. Electronic Money: Electronic money, or e-money, refers to digital forms of money that exist electronically. This includes mobile money, internet banking, debit and credit card balances, and online payment platforms. Electronic money is convenient, fast, and safe for modern transactions, allowing people to send and receive payments instantly across distances. It represents the latest development in money, adapting to the digital economy.

Representative Money

Representative money is a type of money that does not have intrinsic value on its own but represents a claim on a commodity of value, such as gold or silver, which can be exchanged upon demand.

For example, in the past, paper notes were issued that could be redeemed for a specific amount of gold held in a bank or treasury.

This system made trade easier because people did not have to carry heavy metals for transactions, yet they could trust that the paper money had real value backed by a tangible commodity.

Representative money served as a bridge between commodity money and modern fiat money, providing convenience while maintaining confidence in the value of money.

How the Introduction of Money Solved the Problems of the Barter Economy

1. 1. Solving the Problem of Double Coincidence of Wants: In a barter system, trade could only happen if both parties wanted exactly what the other had at the same time. This often made exchange very difficult. With the introduction of money, people no longer needed to find someone who wanted exactly what they offered. They could sell their goods or services for money and then use that money to buy what they needed from anyone else. This made trading much easier and faster.
   2. Providing a Common Measure of Value: Under barter, it was hard to decide how much of one good should be exchanged for another. For example, how many yams were equal to a basket of fish? Money provided a standard measure of value. Prices could now be expressed in terms of money, making it easier to compare the value of different goods and services. This simplified transactions and allowed trade to expand beyond local communities.
   3. Making Goods Divisible: Many goods used in barter were difficult to divide. For instance, dividing a cow or a large piece of cloth could reduce its usefulness or value. Money, on the other hand, can easily be divided into smaller units such as coins or notes. This divisibility allows people to make precise payments for goods or services of any value, no matter how small.
   4. Enabling Storage of Value: Barter goods, such as food or livestock, could spoil or lose value over time. Money is durable and maintains its value over long periods, allowing people to save and store wealth. This means they could sell their goods now, keep the money, and buy what they needed later without worrying about losing value.
   5. Facilitating Deferred Payments: In a barter system, borrowing or lending was very difficult because it was hard to agree on the future value of goods. Money provides a standard unit for deferred payments, allowing loans, credits, and other forms of future payments to take place. People could now borrow money and repay it later in agreed amounts, which encouraged trade and economic growth.

Lesson Summary

• Both money and barter commodities are used for exchange, but money is widely accepted, divisible, and stable in value.
• Money exists as commodity money, metallic money, paper money, bank money, and electronic money.
• Representative money is paper or token money backed by a valuable commodity like gold or silver.
• Money solved barter problems by providing a common measure of value, storing wealth, and enabling deferred payments.

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

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