Features of money

How can money fulfil its purposes?

Money needs to have certain features

What are the features of money?

1) Acceptable

2) Recognisable

3) Stable

4) Divisible

5) Durable

6) Portable

7) Scarce but sufficient

8) Homogeneous

Why are people willing to accept money as payment for goods and services?

• Only if they are confident that others will, in turn, accept money from them as payment in later transactions

Acceptable

People, shops and organisations etc will take it as a payment for goods and services

• People prepared to accept money as they have faith that coins and banknotes are worth their face value (the denomination written on them)

What do coins, banknotes and balances in bank accounts represent?

• Value rather than having an intrinsic value of their own

• This means people have to trust they will be accepted

What is an example of the role of the Bank of England plays in maintaining people’s trust in the money they use?

• The promise on each british banknote being signed by the Chief Cashier of the Bank of England

Money is said to have a what value?

‘Fiduciary value’

• From the latin fides meaning faith, which is based on trust in the banking system

What is another aspect of faith in the monetary system?

That seller will receive the funds transferred between bank accounts electronically

How is this money transferred?

Use a variety of payment mechanisms such as payment cards and cheques

Recognisable

People become familiar with the look and feel of coins and notes

Why must become recognisable?

So that people are confident that they are receiving genuine coins and banknotes

Why must coins have security features?

To ensure that it is difficult to make forgeries

What are some examples of security features introduced by the Bank of England?

• Raised print

• Metallic thread

• Micro lettering

• Watermarks

• Holograms

• Ultraviolet features

• See-through windows

• Complicated designs to the note it issues

Some of these features are easy for merchants to verify e.g. watermarks

Others e.g. ultraviolet features require specialist equipment

Stable

• It needs to hold its value

• Inflation must be low

Why does money need to hold its value?

So people can be confident that the money they accept now will be worth the same or a similar amount in the future

What is inflation and what does it mean?

• When the general level of prices in an economy rise

• Means that the same amount of money will buy less in the future and so its value falls in real terms

Divisible

It must be available in different amounts so that people can use it to pay different prices and to make change

Why must coins and banknotes be provided in a variety of denominations?

So that people can use them in different combinations to make transactions of different sizes

What does having smaller denominations allow?

People to pay with larger amounts of cash and to receive change

How are payments from bank accounts different?

Are for specific amounts and do not need to be divisible

Durable

It must be hardwearing, so that it lasts a long time

Why do coins and banknotes need to be strong?

So can be used many times before they need to be replaced by the Royal Mint or the Bank of England

How are UK coins ensured to be durable?

Made of metal alloys

What is the issue with having Gold coins?

They are quite soft and damage easily

When was the durable polymer £5 note introduced and how long is it supposed to last?

• Introduced in England and Wales in September 2016

• Hoped to last for 5 years

• Other polymer notes followed in later years

Portable

People must be able to carry it for everyday use

Coins and banknotes being portable is also another reason for what?

• Why they are produced in different denominations

• Why larger amounts are polymer-based

What other payment mechanisms are also very portable?

• Ones used to transfer bank balances such as cheque books and payment cards

Scarce

• It must be sufficiently rare that it has value

• But there must be enough of it for people to make transactions

Who manages the supply of cash in the economy so that there is enough for peoples transactions?

The Bank of England

Why is it important to make sure that there is not to much cash in circulation?

Because this leads to inflation and the value of money falls

Homogeneous

All coins or notes of the same value must look and feel the same

Why is it important that all coins and banknotes of a certain denomination need to be homogeneous?

It helps them to be recognisable and therefore acceptable

The designs on coins and banknotes ….

vary but the shapes and main features remain the same

What happens when the Bank of England or Royal Mint occasionally change the size of a note or coin?

• They provide plenty of information about the change to ensure the new note is recognisable

• Withdraw the earlier version over a limited period to achieve homogeneity as quickly as possible