FORM THREE COMMERCE – MONEY AND BANKING

Money is anything or any commodities chosen by common community to be used as the measure of value and medium of exchange.
OR

Money is anything acceptable as a medium of exchange

Money is not wanted for itself but for what it can be exchanged for. In modern world exchange must takes place and this may not be possible without money.

EVOLUTION OF MONEY

Before money was introduced trade was by the means of barter trade. This is a exchange goods for goods.

However due the problems which come up with barter trade it was inevitable monetary trade was introduced.

Generally evolution of money was in five stages;

• Barter trade
  
• Commodity money
  
• Cowries
  
• Precious metal
  
• Coins and Notes
  

 

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PROBLEMS OF BARTER TRADE

1. Lack of Double coincidence of wants

 

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During barter trade it  was so much difficult to get two people of the same wants. e.g Let’s say one wants maize  and another wants beans thus these two people could find difficult to get other people of the same wants.

1. Lack of measure of value.

 

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It was very difficult to decide how much quantity of one commodity to be exchange for another commodity for example it was very difficult to decide ho much quantity of maize must be exchanged with unit of a cow.

     3.  Lack of store of value

Under batter system it was difficult to store perishable goods such as vegetables and exchange for another commodity in future.

     4. Indivisibility of commodities

It was not possible to divide commodities in small part for example if person wanted cloth equal to half value of sheep could not divide sheep into two parts.

1. Difficult of transporting some commodities

   Due to lack of modern means of transpotation and immobility of some items from one place to another for exchange.
   

 

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ADVANTAGES OF BARTER TRADE

1. Barter trade may not involves many documents
   
2. It removes the problems of currency differences
   
3. One can easily know the extact quality of others goods he is like to get from their goods exchanged.
   
4. Barter trade promotes social understanding among the part involved
   
5. Barter trade eliminates the risk involved in carrying money
   
6. The system is quite simple and fast avoiding unnecessary delay
   
7. Even illiterates can carry out exchange since no documentation required
   
8. Cheating is not possible because both parties physically see and involved in the exchange.
   

 

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FUNCTIONS OF MONEY

1. Medium of exchange:

 

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This was solved the problems of barter trade of double coincidence of wants. A goods or services can be exchanged with money even if double coincidence is not there.

     2. Unit of Account:

With the introduction of money every goods has own value today, unlike in the past when it was very difficult to determine the value of goods or services.

     3. Store of Value:

Under normal situations money can be stored and anytime it is withdrawn by the owner. It can exchanged goods or services.

     4. Standard for future payments: Obligation to be made in the future can be entered now by using money.

FEATURES OR QUALITIES OF GOOD MONEY

Good money should be posses the following characteristics

• Should be generally acceptable
  
• Should be easily and tight to carry
  
• Money should be durables
  
• Should be homogeneous
  
• Should not be easy to forge or counterfeit
  
• Good money should be scarce
  
• Should be stable in value
  
• Should have standard units (divisible)
  
• Should be cheap and convenient to print
  
• Should be easy to recognize whether it is real money or forged
  

 

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LEGAL TENDER

This is any means of payment that people are compelled by saw to accept in settlement of any obligation. Therefore all bank notes and coins are legal tender in their respective countries of issue.

CURRENCY

The currency of a country is that money which is nationally acceptable in exchange of goods and services. Countries with strong economies have their currencies convertible. In other wise they are conveniently and freely accepted in other countries. Examples, The US dollar and pound sterling the most convertible currencies in the world. 

MONEY AND CAPITAL

Money and Capital are two different terms through used interchangeably. Money is anything generally acceptable as a means of exchange but Capital is anything invested with an aim of further production. In this case money may act as capital but not all capital is money.

FORMS OF MONEY

1. Commodity money: At one stage certain goods acted as money because many people were within to exchange them for other goods.

-These included cattle, bark-cloth, goods and cowries shells, even today in many Africa societies, girls (women) are being given away in exchange to cows.

2. Coins: This is any metallic money. It may be in cents or shillings. Coins may be standard or token

(a)Standard coins: These are ones where the face value is equal to the value of metal from which it is made.

(b) Token coins: These have the face value greater or less than real value of the metal from which it made.

3. Bank Notes: This is money inform of paper issued by the central Bank well known us paper money. Paper money may also be token money. Originally paper money was as good as gold, because it was fully backed by Gold. Later countries abandoned the Gold standard and started printing money which was not fully backed by gold.

4. Bank Deposit: This is the money which is deposited by their accounts in banks, bank deposits can be well protected under saving, current and fixed deposits accounts. In Tanzania all peoples deposits are insured by the central bank at a time of 3,000,000/= (three million shillings)

5. FLOUCIARY ISSUE: This is not backed up by gold reserves but only by government securities.

6. CHEQUE: A cheque is a written order by a bank customer to his bank to pay a specified sum of money to a named person. A cheque is money but not a tender, so one may reject it in settlement of bills.

DEMAND FOR MONEY

People hold money for several reasons. Money may be held for any of the following motives

TRANSACTION MOTIVE: This is when money is held to enable a person to buy and maintain daily expenditures. E.g. to buy food, watch a film, attend football match and many other.

PRE-CAUTIONARY MOTIVE: People may keep money to cater for future unforeseen occurrences. These unexpected expenditures may include sickness, accident, death, of relatives or any other.

SPECULATION MOTIVE: People may hold money after anticipating future tenders in the economy E.g. Fall or rise in prices. They spend when prices are low and serve when prices rise.