CHAPTER SIX
MONEY & BANKING
Barter trade
This is a form of trade where goods and services are exchanged for other goods and services.
Barter and the Double Coincidence of Wants
To understand the usefulness of money, we must consider what the world would be like without money. How would
people exchange goods and services? Economies without money typically engage in the barter system. Barter—
literally trading one good or service for another—is highly inefficient for trying to coordinate the trades in a modern
advanced economy. In an economy without money, an exchange between two people would involve a double
coincidence of wants, a situation in which two people each want some good or service that the other person can
provide.
Another problem with the barter system is that it does not allow us to easily enter into future contracts for the
purchase of many goods and services. For example, if the goods are perishable it may be difficult to exchange them
for other goods in the future. Imagine a farmer wanting to buy a tractor in six months using a fresh crop of
strawberries. Additionally, while the barter system might work adequately in small economies, it will keep these
economies from growing. The time that individuals would otherwise spend producing goods and services and
enjoying leisure time is spent bartering.
Benefits of barter trade
a. Satisfaction of wants: And individual is able to get what he or she needs.
b. Surplus disposal: an individual or country is able to dispose of its surpluses.
c. Social relations: it promotes social links since the communities’ trade together.
d. Specialization: some communities shall specialize in a particular commodity.
e. Improved living standards: this is enhanced by receiving what one is unable to produce.
Limitations of Barter trade
a. Lack of double coincidence of wants: - it is difficult to find two people with the need for each other’s product
at the same time.
b. Lack of store of value/ perishability of some commodities: - some goods are perishable thus their value cannot
be stored for a long time for future purposes e.g. one cannot store vegetables for exchange purposes in future.
c. Indivisibility of some commodities: - it is difficult to divide some products like livestock into smaller units to be
exchanged with other commodities.
d. Lack of standard measure of value: - It is not easy to determine how much one commodity can be exchanged for
a given quantity of another commodity.
e. Transportation problem: It is difficult to transport bulky goods especially when there is no faster means of
transport.
f. Lack of a standard deferred payment: - The exchange of goods cannot be postponed since by the time the
payment is made, there could be fluctuation in value, demand for a commodity may not exist and the nature and
quality of a good may not be guaranteed. It may be therefore difficult what to decide what to accept for future
payment.
g. Lack of specialization: - Everyone strives to produce all the goods he or she needs due to the problem of double
coincidence of wants.
h. Lacks unit of account - it is difficult to assess the value of commodities and keep their record.
Money System
Money is anything that is generally accepted and used as a medium of exchange for goods and services.
Features/ characteristics of Money
For anything to serve as money, it must have the following characteristics:
Acceptability: The item must be acceptable to everyone.
Durability: The material used to make money must be able to last long without getting torn, defaced or losing its
shape or texture.
Divisibility: Money should be easily divisible into smaller units (denominations) but still maintains it value.
Cognoscibility: The material used to make money should be easily recognized. This helps reduce chances of
forgery. It also helps people to differentiate between various denominations.
COMMERCE COURSE NOTES CHAPTER 6 – MONEY AND BANKING PREPARED BY MR. ANTONY AMBIA Page 1
, Homogeneity: Money should be made using a similar material so as to appear identical. This eliminates any risk
of confusion and forgeries.
Portability: - Money should be easy to carry regardless of its value.
Stability in value: The value of money should remain fairly stable over a given time period.
Liquidity: - it should be easily convertible to other forms of wealth (assets).
Scarcity: - It should be limited in supply. If it is abundantly available its value will reduce.
Malleability- the material used to make money should be easy to cast into various shapes.
Not easy to forge- money should not be easy to imitate.
Functions of Money
a. Medium of exchange: It is generally acceptable by everyone in exchange of goods and services. It thus
eliminates the need for double coincidence of wants.
b. Store of value: It is used to keep value of assets e.g. surplus goods can be sold and then money kept for future
transactions.
c. Measure of value: Value of goods and services are expressed in money form. Performance of businesses is
measured in terms of money.
d. Unit of account: It is a unit by which the value of goods and services are calculated and records kept.
e. Standard of deferred payment: it is used to settle credit transactions.
f. Transfer of immovable items (assets): Money is used to transfer assets such as land from one person to another.
g. Functions for Money
Money solves the problems created by the barter system.
First, money serves as a medium of exchange, which means that money acts as an intermediary between the buyer
and the seller. Instead of exchanging accounting services for shoes, the accountant now exchanges accounting
services for money. This money is then used to buy shoes. To serve as a medium of exchange, money must be very
widely accepted as a method of payment in the markets for goods, labor, and financial capital.
Second, money must serve as a store of value. In a barter system, we saw the example of the shoemaker trading
shoes for accounting services. But she risks having her shoes go out of style, especially if she keeps them in a
warehouse for future use—their value will decrease with each season. Shoes are not a good store of value. Holding
money is a much easier way of storing value. You know that you do not need to spend it immediately because it will
still hold its value the next day, or the next year. This function of money does not require that money is a perfect
store of value. In an economy with inflation, money loses some buying power each year, but it remains money.
Third, money serves as a unit of account, which means that it is the ruler by which other values are measured. For
example, an accountant may charge $100 to file your tax return. That $100 can purchase two pair of shoes at $50 a
pair. Money acts as a common denominator, an accounting method that simplifies thinking about trade-offs.
Finally, another function of money is that money must serve as a standard of deferred payment. This means that if
money is usable today to make purchases, it must also be acceptable to make purchases today that will be paid in the
future. Loans and future agreements are stated in monetary terms and the standard of deferred payment is what
allows us to buy goods and services today and pay in the future. So money serves all of these functions— it is a
medium of exchange, store of value, unit of account, and standard of deferred payment.
Commodity versus Fiat Money
Money has taken a wide variety of forms in different cultures. Gold, silver, cowrie shells, cigarettes, and even cocoa
beans have been used as money. Although these items are used as commodity money, they also have a value from
use as something other than money. Gold, for example, has been used throughout the ages as money although today
it is not used as money but rather is valued for its other attributes. Gold is a good conductor of electricity and is used
in the electronics and aerospace industry. Gold is also used in the manufacturing of energy efficient reflective glass
for skyscrapers and is used in the medical industry as well. Of course, gold also has value because of its beauty and
malleability in the creation of jewelry.
As commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a
unit of account. Commodity-backed currencies are dollar bills or other currencies with values backed up by gold
or other commodity held at a bank.
As economies grew and became more global in nature, the use of commodity monies became more cumbersome.
Countries moved towards the use of fiat money. Fiat money has no intrinsic value, but is declared by a government
to be the legal tender of a country.
COMMERCE COURSE NOTES CHAPTER 6 – MONEY AND BANKING PREPARED BY MR. ANTONY AMBIA Page 2
MONEY & BANKING
Barter trade
This is a form of trade where goods and services are exchanged for other goods and services.
Barter and the Double Coincidence of Wants
To understand the usefulness of money, we must consider what the world would be like without money. How would
people exchange goods and services? Economies without money typically engage in the barter system. Barter—
literally trading one good or service for another—is highly inefficient for trying to coordinate the trades in a modern
advanced economy. In an economy without money, an exchange between two people would involve a double
coincidence of wants, a situation in which two people each want some good or service that the other person can
provide.
Another problem with the barter system is that it does not allow us to easily enter into future contracts for the
purchase of many goods and services. For example, if the goods are perishable it may be difficult to exchange them
for other goods in the future. Imagine a farmer wanting to buy a tractor in six months using a fresh crop of
strawberries. Additionally, while the barter system might work adequately in small economies, it will keep these
economies from growing. The time that individuals would otherwise spend producing goods and services and
enjoying leisure time is spent bartering.
Benefits of barter trade
a. Satisfaction of wants: And individual is able to get what he or she needs.
b. Surplus disposal: an individual or country is able to dispose of its surpluses.
c. Social relations: it promotes social links since the communities’ trade together.
d. Specialization: some communities shall specialize in a particular commodity.
e. Improved living standards: this is enhanced by receiving what one is unable to produce.
Limitations of Barter trade
a. Lack of double coincidence of wants: - it is difficult to find two people with the need for each other’s product
at the same time.
b. Lack of store of value/ perishability of some commodities: - some goods are perishable thus their value cannot
be stored for a long time for future purposes e.g. one cannot store vegetables for exchange purposes in future.
c. Indivisibility of some commodities: - it is difficult to divide some products like livestock into smaller units to be
exchanged with other commodities.
d. Lack of standard measure of value: - It is not easy to determine how much one commodity can be exchanged for
a given quantity of another commodity.
e. Transportation problem: It is difficult to transport bulky goods especially when there is no faster means of
transport.
f. Lack of a standard deferred payment: - The exchange of goods cannot be postponed since by the time the
payment is made, there could be fluctuation in value, demand for a commodity may not exist and the nature and
quality of a good may not be guaranteed. It may be therefore difficult what to decide what to accept for future
payment.
g. Lack of specialization: - Everyone strives to produce all the goods he or she needs due to the problem of double
coincidence of wants.
h. Lacks unit of account - it is difficult to assess the value of commodities and keep their record.
Money System
Money is anything that is generally accepted and used as a medium of exchange for goods and services.
Features/ characteristics of Money
For anything to serve as money, it must have the following characteristics:
Acceptability: The item must be acceptable to everyone.
Durability: The material used to make money must be able to last long without getting torn, defaced or losing its
shape or texture.
Divisibility: Money should be easily divisible into smaller units (denominations) but still maintains it value.
Cognoscibility: The material used to make money should be easily recognized. This helps reduce chances of
forgery. It also helps people to differentiate between various denominations.
COMMERCE COURSE NOTES CHAPTER 6 – MONEY AND BANKING PREPARED BY MR. ANTONY AMBIA Page 1
, Homogeneity: Money should be made using a similar material so as to appear identical. This eliminates any risk
of confusion and forgeries.
Portability: - Money should be easy to carry regardless of its value.
Stability in value: The value of money should remain fairly stable over a given time period.
Liquidity: - it should be easily convertible to other forms of wealth (assets).
Scarcity: - It should be limited in supply. If it is abundantly available its value will reduce.
Malleability- the material used to make money should be easy to cast into various shapes.
Not easy to forge- money should not be easy to imitate.
Functions of Money
a. Medium of exchange: It is generally acceptable by everyone in exchange of goods and services. It thus
eliminates the need for double coincidence of wants.
b. Store of value: It is used to keep value of assets e.g. surplus goods can be sold and then money kept for future
transactions.
c. Measure of value: Value of goods and services are expressed in money form. Performance of businesses is
measured in terms of money.
d. Unit of account: It is a unit by which the value of goods and services are calculated and records kept.
e. Standard of deferred payment: it is used to settle credit transactions.
f. Transfer of immovable items (assets): Money is used to transfer assets such as land from one person to another.
g. Functions for Money
Money solves the problems created by the barter system.
First, money serves as a medium of exchange, which means that money acts as an intermediary between the buyer
and the seller. Instead of exchanging accounting services for shoes, the accountant now exchanges accounting
services for money. This money is then used to buy shoes. To serve as a medium of exchange, money must be very
widely accepted as a method of payment in the markets for goods, labor, and financial capital.
Second, money must serve as a store of value. In a barter system, we saw the example of the shoemaker trading
shoes for accounting services. But she risks having her shoes go out of style, especially if she keeps them in a
warehouse for future use—their value will decrease with each season. Shoes are not a good store of value. Holding
money is a much easier way of storing value. You know that you do not need to spend it immediately because it will
still hold its value the next day, or the next year. This function of money does not require that money is a perfect
store of value. In an economy with inflation, money loses some buying power each year, but it remains money.
Third, money serves as a unit of account, which means that it is the ruler by which other values are measured. For
example, an accountant may charge $100 to file your tax return. That $100 can purchase two pair of shoes at $50 a
pair. Money acts as a common denominator, an accounting method that simplifies thinking about trade-offs.
Finally, another function of money is that money must serve as a standard of deferred payment. This means that if
money is usable today to make purchases, it must also be acceptable to make purchases today that will be paid in the
future. Loans and future agreements are stated in monetary terms and the standard of deferred payment is what
allows us to buy goods and services today and pay in the future. So money serves all of these functions— it is a
medium of exchange, store of value, unit of account, and standard of deferred payment.
Commodity versus Fiat Money
Money has taken a wide variety of forms in different cultures. Gold, silver, cowrie shells, cigarettes, and even cocoa
beans have been used as money. Although these items are used as commodity money, they also have a value from
use as something other than money. Gold, for example, has been used throughout the ages as money although today
it is not used as money but rather is valued for its other attributes. Gold is a good conductor of electricity and is used
in the electronics and aerospace industry. Gold is also used in the manufacturing of energy efficient reflective glass
for skyscrapers and is used in the medical industry as well. Of course, gold also has value because of its beauty and
malleability in the creation of jewelry.
As commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a
unit of account. Commodity-backed currencies are dollar bills or other currencies with values backed up by gold
or other commodity held at a bank.
As economies grew and became more global in nature, the use of commodity monies became more cumbersome.
Countries moved towards the use of fiat money. Fiat money has no intrinsic value, but is declared by a government
to be the legal tender of a country.
COMMERCE COURSE NOTES CHAPTER 6 – MONEY AND BANKING PREPARED BY MR. ANTONY AMBIA Page 2
