INSTITUTE OF PUBLIC ADMINISTRATION AND MANAGEMENT

(University of Sierra Leone)

Lecture Four (4)

IPAM-USL - 2024/25 AY

Module title ELEMENTS OF BANKING

MODULE CODE BAF 217

Level & YEAR DBF. BSC. Banking And Finance. Financial Economics .Financial Services YR 1
MR. ABDULLAH BAH
Lecturer in Charge

[email protected]
Lecturer’s Contacts
+232 76625303
 LECTURE FOUR (4)
THE BARTER SYSTEM AND MONEY

DEVELOPMENT OF THE MONEY SYSTEM:

The Barter System

Prior to the emergency of money people engaged in a border system. In order to exchange goods and services, this system involves exchanging
merchandise (goods and services) for merchandise (goods and services). Fishermen had to exchange some of their fishes with farmer for some of
their farm produces like beans, wheat, etc. this system provided at the beginning of civilization, goods where in their natural state.

However the border system was limited by a number of factors which include;
The problem of double coincidence of want: The fisherman in need of wheat has to find someone in possession of wheat in need of fishes. In
other words, in other to trade an individual had to find someone who has what he need and needs what he has.
ii. There was no accurate measure of value: There was no predetermined / agreed standard measure with which buyers and sellers could
exchange commodities according to their relative values. Earn if the two person wan each other goods meet by coincidence the freedom arises as
to the proportion in which the two goods should be exchanged.
Furthermore, hunter system required the value of each goods to be stated in as many quantities as there are types and qualities of other goods and
services.
iii. Indivisibility of certain good: The border system is limited by serious challenge that is the indivisibility of certain goods into smaller
marketable units.
iv. Difficulty in making deferred payment
Exchange Rates: Fixing the relative values of two commodities being bartered. E.g. how many fish is one rabbit.
vi. Lending: Trade was also difficult because commodities, for exchange were often not identical, this posed value assessment complications
e.g. a farmer lending yams to a friend to be repaid in the future. The friend’s yams in return may not be of the same size and length. Banks,
financial institutions stock exchange.
Vii.It does not encourage division of labour and specialization: During the barter system, people become jack of all trade and master of none.

As a result of the numerous challenges associated with the border system various other forms of exchange had to evolve, thus the evolution of
money (or payment system). The evolution of money can be divided into various stages.

Evolution of Money (From Commodity Money to Electronic Money)

Commodity money
Owing to the high demand for certain commodities such commodities come to be accepted as a means of exchange amongst individuals in a
particular community or region, given that they could readily be exchanged for any deserved commodity, these commodities not only became a
medium of exchange but also a measure of value. Commodities such as salt, fur, cattle etc. where widely used as commodity money.
The choice of what item that evolved to become commodity money was largely dependent on factors like the location of the commodity,
climate, cultural belief etc.
For example people living by the seashore adopted and dried fish as money people living in very cold region adopted fur as commodity money.
In a bid to further obviate the challenges of border system commodities begun to develop more durable commodities to serve as medium of
exchange. For instance, item like coral beads, cowries, manilas and even tools and implements where used as means of exchange.
Metallic money
With the discover of metals man began to fashion versatile, tools and weapons that was previously made of stone with metals, metal was
treasured because of its cause of transportation, beauty divisibility etc. As a result of the popular demand for money, it became a major standard
of value. It was exchange in various forms and sizes and required assessment and saying of its purity of cash transaction.
Overtime metal money began to gain definite forms and weight, recovering marks indicating their value and source, of its issue. The use of gold
as proto-money has been traced bank to the fourth millennium BCE when the Egyptians used gold bars as a medium of exchange, as had also
been done early Mesopotamia with silver bars.

In the century BC the first coin bearing resemblance with modern day coins was issued in the lonra a city in Ephesus, the metal used was
electron a natural allay of gold and silver found locally. The coins were shaped and were struck on one side with a distinguishing mark such as
the image of lion.
Gold and silver coins were minded in Greece and small ingots were in Lydia, while Chinese had about the same time period started minting
bronze coins. For many centuries, counties minded coins mostly from gold, silver for high valued coins using copper for lesser valued coins.
This system remained in practice up to the end of the last country when cupronickel, and later other metallic clay alloys, became used and coins
came to be circulated for the fair value (extrinsic value).

Paper money
In the middle ages, people trusted the goldsmiths who had security value to with the safe keep of their gold and valuables most especially
merchants trading in with gold and silver, in return the smith issued receipts to deposition of such gold as evidence of deposit, which will be
returned on demand by the depositor with time these receipts which were a form of IOU showing that the gold Smith owed the bearer of the note
abstracted sum.
Come to be end to make payments, circulating from hand to hand giving rise to the origin of paper money. The acceptance of these receipts was
based on the confidence that whenever. It was returned to the gold smith who originally issued it, it would be exchange for gold hence the gold
smith was the first bankers to issue bank notes backed by gold.

In Brazil 1810 the Banco de Brazil issued the first bank notes that had its value within by hand as we do today with cheques. Bank notes are
usually rectangular instance, and of various sizes usually devoting the culture of the issuing county, nowadays bank notes possess several
security features in order to prevent counterfeiting.

Credit money
Credit money emerged almost the same time with paper money. People kept part of their cash as deposits with banks which they could
withdraw. At the convenience through cheques, although the cheque is not money deposit of performs the same function as money. Demand
deposits is the one the most important form of money in advanced economies. Although they are not legal tenders what gives them acceptability.
Is the convenience and confidence that will be cashed in the bank.

Electronic money: Is broadly deposit as an electronic store of monetary value on a technical device that may be widely used for making
payments to other entities, e-money could be hardware, based or software based, depending on the technology used to store the monetary value.
Electronic / Digital money is different from physical money although they are similar in some respects, but electronic money allows for
instantaneous and borderless transactions.

Merits of the Barter System

Bartering also has an advantage because even people without money can get something they need.
 MONEY
Definition:
Money is anything that is generally acceptable for the purchase of goods and services. Economists have defined money as anything generally
acceptable in payment for goods and services or in settlement of debts. David Humes, Adam Smith, Ricardo etc. considered money in terms of
influence in international trade relationship.

However, the definitions of money can be categorized into namely

1. Institutional definition (Pre-Keynesian)
2. Function definitions

Institutional Definition of money

From this Economic stand point, for money to be generally acceptable, it must backed up by the institutional force of law. The property of
money if to most important factor. Owing to this argument the definition of money should be based on;
i. Its meaning in the sense of wealth
ii. Its meaning in the sense of property
iii. it’s meaning in the sense of education.
An example of institutional definition is that of Irving who defined money as “any properly right which is generally acceptable in exchange”.
 Functional Definition of money
This economic stand point defined money in terms of function, it performs: These functions include
1. Medium of exchange
2. Store of value
3. Units of Accounts
4. Standard of deferred payment
An example of functional definition of money is;
Money is that which is universally acceptable in an economy by sellers of goods and services as payment for goods and services and by creditors
as payment for debts.

Function of Money
The function of money can be classified into
1. Primary functions
2. Secondary functions

Primary Function
1. Medium of Exchange: This means that money is generally acceptable by buyers and sellers in exchange of goods and services (i.e. as a
medium of payment). This function of money is dependent on its acceptability (i.e. infact that the individual trust that when try want to send it, it
will be acceptable in exchange for goods and services).
As a medium of exchange individual can sell their output to money and use that money to make purchases.
It is however important to note that money as a medium of exchange eliminate the inconveniences and difficulties of trade by border especially
the mid for a double coincidence of want.

2. Money as a measure of value (units of accounts): This refers to as money’s side in determining to value or price of product. Just as height is
measured with a tape in terms of meters, kilometer so the value of goods and services can be measured in monetary terms. Money provides a
comfortable unit for comparing value regardless of size or kind, hence, money is the yard stick with which people keep their account, determine,
income, profits, losses, prepared budget etc.

Secondary Function of money

1. Store of value: This means that is a store of purchasing power over periods of time. For example it is easier for a fisher man to stop the
wealth accrued from the sales of his fishes that to stop the fish itself. The recover or holder of money can choose between sending his purchasing
power (intermediate payment) or saving it (deferred enjoyment).
Saving money assumes various forms but the most prevalent involves holding either money itself (i.e. currency or demand deposit) or money
substitutes (savings deposit, treasury bills etc).

2. Standard of Deferred Payment: Money plays an important role in debt settlement. The existence of money has simplified both the landing
and the repayment process. Debts are ordinarily expressed. In monetary terms a scenario in the barter system where an individual takes a lot in
fishes, it would be difficult to set the term of repayment in commodities other than fishes. Money base eased the process with which people can
take and making loan be its short, medium or long term.
 CHARACTERISTICS OF MONEY
For money to perform its functions, it must possess certain availabilities/attributes these attributes include;
1. General acceptability: No item/commodity can satisfactory serve as money. If it is not widely acceptable as a means of exchange amongst
the individuals in a community, country or region. Gold evolved to become a prevalent medium of exchange because it was highly demanded
and universally accepted in order to ensure acceptability. Money must be a legal tender, accepted by government for tax purpose.

2. Scarcity: This entails money supply is limited relation to demand and the productive capacity such that money losses its value, it also ensures
that people could have to sacrifice something (i.e. opportunity cost) in order to own money.

3. Stability: It is important that the value of money remains relatively stable, this is very important because money is supposed to be a store of
value and a standard of deferred. When the value of money falls i.e. the purchasing power of money is weaken both savers and lenders loose as a
Naira worth today might not be a naira’s worth tomorrow. However the effect of inflation has makes it difficult for money to be absolutely
stable. Yet the fluctuations in the value of money should not be successive

4. Divisibility: In order to facilitate transactions (especially small transaction a good currency should be divisible into smaller units for example
Le10, 000 can be divided into 10 units of Le 1,000 notes, 5 units of Le 2,000 notes etc.

5. Portability: Money should easy to more around for the purpose of business transaction. Thus reducing the stress and cost of moving it around
6. Cognoscibility: For anything to serve as money it must be easily recognized, they should look alike such that individuals are able to identity
counterfeits in circulation.
7. Homogeneity: Closely linked to cognisability is homogeneity, this means that each unit of a commodity must look alike as much as possible;
exactness enhances people’s confidence in a currency.

8. Durability: This is essential because money is supposed to be a store of value of the item.

DEMAND FOR MONEY

This refers to the motives why economic units (i.e. household films, government) hold cash and other monetary aggregates. The demand for
money is said to be derived because economic units do not demand money for its own sale but for the goods and services money providing.
According to John Maynard there are three (3) motives for demanding money namely;
1. Transaction motive
2. Precaution motive
3. Speculative motive

Transaction motive: This refers to a desire to hold money for the purpose of exchange for currently needed goods and services that is for the
purpose current expenditure and day to day transactions.
Precaution motive: This refers to the desire hold cash in order to meet expenditure arising from unforeseen circumstances or emergencies. Thus
include all expenditure arising from event not previously planned for such as unexpected illness, drastic fall in sales price etc.
Speculative motive: This refers to a desire to hold cash in order to take advantage of emerging future opportunities e.g. investment opportunities
in the stock exchange.