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Money

Money serves as a medium of exchange, a standard for deferred payments, a unit of account, and a store of value, with essential characteristics including acceptability, scarcity, portability, recognizability, durability, and divisibility. Various forms of money have evolved from commodity money to coins, with commercial banks providing financial services such as accepting deposits and making loans, while central banks manage national currency stability and monetary policy. Together, these institutions play a crucial role in the economy by facilitating transactions and maintaining financial stability.

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2 views

Money

Money serves as a medium of exchange, a standard for deferred payments, a unit of account, and a store of value, with essential characteristics including acceptability, scarcity, portability, recognizability, durability, and divisibility. Various forms of money have evolved from commodity money to coins, with commercial banks providing financial services such as accepting deposits and making loans, while central banks manage national currency stability and monetary policy. Together, these institutions play a crucial role in the economy by facilitating transactions and maintaining financial stability.

Uploaded by

stephennchingombe
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Money

Money is any commodity which can be used as a medium of exchange that is accepted for the purchase of
goods and services.
Functions of Money
 Medium of Exchange – money can be used to carry out transactions between buyers and sellers.
People are happy to accept it and know they can use it to buy something else.
 Money is a standard for deferred payment - This means that money is used as the standard for
future (deferred) payments of debt. For example, loans taken out today are repaid in money at
some time in the foreseeable future. Both the US dollar and the euro have been widely accepted
standards for settling international debts.
 Unit of Account – money can be used to measure value. Accounting/ business transactions are
measured in monetary terms
 Store of Value – money can be kept and used later and still retain it’s worth. Wealth can also be
stored in form of money.

Characteristics of Money
 Acceptable – It is given legal status by the government
 Scarce – An increase in money supply can lead to a decrease in its value. For money to be valuable,
it must remain scarce
 Portable – It must be easy to carry
 Recognisable – It must be easily recognized, yet forgery must be difficult. Copying will cause
problems with money supply
 Durable – It must be long lasting so it can be saved
 Divisible – It must be easily divided up into small amounts for smaller transactions
 Add 3 more features of your own

The forms of money


 Commodity Money – earliest form of money was goods e.g. pots, shells, etc. People were willing to
accept goods in exchange for their produce.
 Precious Metals – precious metals such as gold, and silver were scarce enough to make them
possible money. Weighing and cutting tools were necessary – so rates of exchange could be fixed.
Portability was a major problem.
 Coins – precious metals of predetermined weight were moulded and stamped with the face of the
ruler and the coins value. To stop shaving the edges of the coins “ribbed” coins were developed.
Rulers would often debase the value of by mixing cheap metals with them, resulting in the precious
metal content of coins to be virtually worthless today but people still accept such coins because
they are generally acceptable.
Banks
Commercial Banks
A commercial bank is a retail bank that provides financial services to its customers, such as accepting
savings deposits and approving bank loans. Their functions are:
 Accepting deposits - Commercial banks accept deposits from their customers, including
private individuals, businesses and governments. Examples include sight deposits (which arc
payable on demand) and time deposits (which are deposits that are payable after a fixed
time period such as 6 months or a year). Time deposits tend to attract higher rates of
interest for deposit holders than sight deposits. Businesses deposit their cash in commercial
banks for the convenience of their own financial operations, such as paying their suppliers
and employees.
• Making advances - Commercial banks provide advances (loans) to their customers. These
advances include overdrafts (a banking service that allows registered customers to withdraw
more money than they actually have in their account) and mortgages (long-term secured loans
for the purchase of assets such as commercial and residential property).
• Credit creation - This describes the process by which banks increase the supply of money in an
economy by making money available to borrowers. Credit allows the borrower to obtain money
now with the promise to pay the lender (or creditor) at a future time. Credit creation is a key
function that distinguishes commercial banks from other financial institutions, such as insurance
companies and investment banks.
 To accept payments: people can deposit their money into a Current or Savings Account.
 To enable customers to make payments: there is a range of ways people can receive money and
make payments e.g. credit card
 Exchanging foreign currency
 Storing important documents of customers
 Providing advice: e.g. completing tax forms, and the purchase and sale of shares
 Selling insurance
 collecting and clearing cheques on behalf of their clients
 offering additional financial services, such as tax advice, foreign exchange dealings and the
buying and selling of shares
 providing safety deposit boxes for customers to safeguard highly valued possessions,
including items of jewellery and important documents such as wills
 providing money transfer facilities, such as transferring money to an overseas bank account
or paying various bills, such as telephone, electricity, gas and water bills
 providing credit card facilities for the convenience of customers - both private individuals
and commercial clients
 providing internet banking facilities, such as online bill payments, online bank transfers
between bank accounts and the online purchase of shares and foreign currencies.
 Credit cards

Central Banks
Government owned banks which aim to maintain stability of the national currency and money supply.
There functions are:
 To act as a banker to the Government
 To act as a banker to Commercial Banks: Commercial Banks have accounts at the central bank to
settle debts between each other and draw out cash
 To act as a lender of last resort: the central bank will lend to banks which are temporarily short of
cash
 To manage national debt: when government debt builds up, the central bank can issue government
securities e.g. government bonds
 Holds the country’s reserves of foreign currency and gold
 Issue bank notes: to central bank both prints and destroys notes
 Operates monetary policy: this involves controlling the money supply to influence interest rates to
keep inflation low and steady.

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