Trade by Barter
Trade by barter is the direct exchange of goods for goods, goods for services, or services for services. It was a system of exchange that was in use before the introduction of money.
Problems of a trade by barter
1) Problem of double – coincidence of wants: It was time-consuming and energy-sapping to find someone who had what you required and at the same time, want what you had.
(11) Lack of common measure of values: It was difficult to know the quantity of a commodity one should exchange for another.
(ii) Indivisibility of some Commodities: Some
commodities are large and cannot be easily divided into smaller units for exchange purposes.
iv) Bulkiness of some goods: Some goods are
bulky and/or heavy and are therefore difficult to move about when in search of a trading partner e.g. furniture, cows, etc.
(v) Difficulty in saving or storage: It was not easy to store perishable goods and bulky goods took up a lot of space.
(vi)Lack of a standard for deferred payments: Credit transactions and lending were impossible as it was difficult to take goods on credit. To avoid all these problems, there was a need for a medium of exchange for goods and services. This led to the introduction of money.
Definition of Money
Money is any tangible commodity that is generally accepted as a medium of exchange for goods and services or for purposes of settling debts within a given society/community.
HISTORICAL DEVELOPMENT OF MONEY
Several commodities have served as money at different and in different periods of history and different communities.
(A) Commodity money
The earliest forms of money were regarded as commodity money. They were commodities that had intrinsic value and were commonly used by people, thereby making them generally acceptable as a means of exchange. In parts of West Africa,
commodities such as cowries, shells, manillas, elephant tusks, salt, tobacco, cattle, etc were used.
These early forms of money did not possess most of the qualities of good money, they were not durable, not easily portable, not homogeneous, nor divisible were regarded as a, etc.
(B)Metallic money (coins)
Because of the problems associated with the use of commodity money, metallic money was introduced.
1) The earliest forms of metallic money (coins)
were made of precious metals, especially gold and silver. They were more portable,
homogeneous, divisible, durable, etc. These
early forms of metallic money were ‘standard
coins, that is, they contained their full face
(2)Token Coins: Other cheap metals such as
aluminum, zinc, etc. were later used to replace gold and silver coins which were increasingly getting scarce. A ‘token coin’ does not contain the full face value. The market value of the coin (if melted down) is less than the face value of the coin.
(C)The banknotes (paper money)
The use of banknotes originated from the activities of goldsmiths who accepted deposits of gold and silver coins from merchants and issued receipts. merchants discovered that they could use the receipts
for making transactions rather than returning them to the goldsmith to collect their deposits each time a transaction had to be made. The deposit receipt that was issued by goldsmiths became the first banknotes.
(D) Instruments of credit/near money
In the modern world, the volume of transactions has increased significantly. This, coupled with the risk of carrying cash has led to the use of other instruments such as Cheques, Postal Orders, Money Orders, Bills of Exchange, Promissory Notes, Bank Drafts, etc. in modern transactions, in addition to the use of cash.
(E) Near money
Anear money is typically a store of value, for example, a savings account, which is not itself a medium of exchange but can be turned into money very quickly and with little or no risk of loss. It has higher liquidity
the more readily it can be converted to money without the risk of loss. Other forms of near money are certificates of
deposits (CDs), Repurchase Agreements (RPs), Treasury Bills (TRs), Commercial papers (CPs), etc.
CHARACTERISTICS OF A GOOD MONEY
For any commodity to serve as a good means of exchange it must possess the following qualities.
1)General acceptability: The commodity must
be generally acceptable to the members of the community as a means of making payments.
2) Portability: It must be easy to carry about for purposes of exchange.
3)Divisibility: It must be easy to divide the
commodity into smaller units or denominations for small transactions.
4)Homogeneity or standardized units: Each
unit of money (of a particular denomination)
must be identical with other units.
5) Durability: The Commodity should not
deteriorate easily over time.
6) Relative scarcity: The commodity must not be too scarce or too plenty.
7) Stability in value: The value of the commodity must not be changed frequently.
8) Easily recognizable: The commodity must be easy to identify as true money by all.
FUNCTIONS (roles) OF MONEY
i)A medium of exchange: The use of money
facilitates the exchange of goods and services.
ii) Measure of value and unit of account: The
value of goods and services are measured in
monetary units. Also, records of business transactions are kept in units of money.
iii) A store of value: It is more convenient to storm surplus wealth or income in the form of money because of its durability.
iv) A standard for deferred payment: The use of money facilitates credit transactions as one car buy goods or services on credit and pay later.
The supply of money and the
demand for money
The supply of money
The supply of money refers to the total stock of money available for use in an economy. It consists of the following, coins, banknotes, and bank deposits.
(current account deposits)
Money supply means the amount of money that is available in an economy insufficiently liquid and spendable form. In practice, components of the money supply are defined by what constitutes
monetary authorities in any given economy. In this case, it is the relative liquidity of different classes of assets that will determine what qualifies for inclusion in money supply computations.
Major Determinant of Money Supply in Nigeria
(1) Monetary Base or High Powered Money (Bank Balance +Currency)loe
ii) Credit creation by Banks (the Multiplier
Concept) r1ob01528b626 bn
(iii) The velocity of circulation of money.
(iv) Foreign exchange transactions.
(v) Depth of the Financial Market, especially
(b) The demand for money
The demand for money refers to the desire to hold money; that is, to hold money in its liquid form rather than investing it.
There are three main motives behind the demand for money:
(i) The transaction motive: People hold money
for their day-to-day expenditure on food
clothing, fuel, etc. The amount of money held
depends on the level of income and the interval between pay-days.
(ii) The precautionary motive: People hold
money in liquid form to enable them to meet any unforeseen or emergency expenditure such as sudden sickness., death, an important unexpected Visitor, etc. The amount held depends on the level of income.
(iii) The speculative motive: This refers to the
demand for money to take advantage of profitable investment opportunities that may arise. If the prices of bonds fall or if the interest rate is high, people would invest in bonds and hold less money. But if the prices of bonds rise or if the interest rate falls, people would hold more money.
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