M2: INTRODUCTION TO FINANCIAL SYSTEM (2)

• Money is an economic unit that functions as a

  generally recognized medium of exchange for transactional purposes in an economy.

  Money provides the service of reducing transaction

  cost, namely the double coincidence of wants.

  Money originates in the form of a commodity, having a physical property to be adopted by market participants as a medium of exchange.

  Money can be: market-determined, officially issued legal tender or fiat moneys, money substitutes and fiduciary media, and electronic cryptocurrencies (Potters, 2021).
• UNDERSTANDING THE FEATURES OF MONEY

  The use of money as currency provides a centralized

  medium for buying and selling in a market. This was

  first established to replace bartering.

  Monetary currency helps to provide a system for overcoming the double coincidence of wants. In order to be most useful as money, a currency should be: 1) fungible,

  2) durable, 3) portable, 4) recognizable, and 5) stable.
• 2. Durable - The physical character of the good should be enough to retain its usefulness in future exchanges and be reused multiple times. A perishable good or a good that degrades quickly with use in exchanges will not be as useful for future transactions. Trying to use a non-durable good as money conflicts with money's essentially future-oriented use-value.
• 3. Portable - The physical character of money can be carried with and transfer to others. In the modern world of developed countries, they use currency in the form of bills (paper money) and coins that can be easily carried.
• 4. Divisible - It should be divisible into small quantities so that people appreciate its original use value - highly enough that a worthwhile quantity of the good can be conveniently carried or transported.

  An indivisible good, immovable good, or good of low original use-value can create issues. Trying to use a non-portable good as money could produce transaction costs of either physically transporting large quantities of the low value good or defining practical, transferable ownership of an indivisible or immobile object.
• 5. Recognizable - The authenticity and quantity of the good should be readily ascertainable to the users so that they can easily agree to the terms of an exchange. Trying to use a non-recognizable good as money produces transaction costs of agreement on the authenticity and quantity of the goods by all parties to an exchange.
• 6. Stable - The value that people place on a good in terms of the other goods that they are willing to trade should

  be relatively constant or increasing over time. A good whose value varies widely up and down over time, or consistently loses value over time is less suitable.

  Trying to use a non-stable good as money produces transaction costs of repeatedly revaluing the good in each successive transaction and the risk that the exchange value of the good might drop below its other direct use-value or not be useful at all, in which case it will no longer circulate as money.
• History of Money

  ● The barter system is an old method of exchange. This

  system has been used for centuries and long before money

  was invented. People exchanged services and goods for other services and goods in return.
• ● Shells Coastal regions around the Indian Ocean saw the

  use of cowrie shells in trade as early as 1200BC.

  * Became the first medium of exchange.

  * Shells prototype of money.

  * For the reason that barter was unfair to an extent.

  ● Coinage - After the use of shell the first mental money was developed and introduced. Those coins had holes in the middle, so they could easily carry around their neck. They were imprinted with the faces of emperors and gods to show the value. Such as silver, bronze, gold.
• ● Leather - In 118BC, banknotes in the form of leather money were used in China. They were made out of deer

  skin. leather was used as banknotes.

  ● Paper money - The first known paper banknotes appeared in China in 9th century. The travels of Marco Polo to China introduced the idea of paper money to Europe. Paper money was developed after all the other mediums of exchange were introduced one after the other. Up to this day notes (paper money) is used as evidence of ability to pay.
• TYPES OF MONEY

  1. Fiat Money - Fiat money (fiat currency) is money whose value is not based on its inherent value but is based on an authoritative decision (fiat) by the governing body. Examples: Banknotes (paper money) and coins
• TYPES OF MONEY

  1. Commodity Money - Unlike fiat currency, the value

  of commodity money is intrinsic; its value comes from

  the commodity it is made from. If the money is destroyed, it cannot be replaced. Examples: Precious metals (i.e. gold), salt, beads, alcohol
• TYPES OF MONEY

  1. Representative Money - Representative money, like fiat money, has no value of its own. Unlike fiat money, it is backed by a commodity. Examples: Certificates, paper money, token coins
• TYPES OF MONEY

  1. Fiduciary Money - Deriving from the Latin word fiducia, to trust, fiduciary money works on the promise and trust that it will be exchanged for fiat or commodity money by the issuer (bank). Examples: Checks, bank drafts
• TYPES OF MONEY

  1. Commercial Bank Money - (also known as demand deposits) is a claim against a bank for the purchase of goods and services (through the means of withdrawing in person, check, ATMs, or online banking). It is a debt-created currency by the bank. Example: Funds in a checking account
• GENERALIZATION:

  Money is an essential commodity and fundamental for survival that helps us run our life. Exchanging goods for goods is an older practice and without any money, you cannot buy anything you wish. Money has gained its value because people are trying to save wealth for their future needs. Philosophically speaking, money cannot buy everything but practically money is the basic thing that is used for calculating the status of any person.
• 1. Fungible - Units of the good should be of relatively uniform quality so that they are interchangeable with one another. If different units of the good have different qualities, then their value for use in future transactions may not be reliable or consistent. Trying to use a non-fungible good as money results in transaction costs of individually evaluating each unit of the good before an exchange can take place.