ELEMENTS OF BANKING – MONEY & BARTER SYSTEM

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  • Module: Elements of Banking (BAF 217217)

  • Level: B.Sc. Banking & Finance, Year 11

  • Academic Year: 2022/232022/23

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  • Barter = direct goods-for-goods exchange.

  • Key limits:
    • Double Coincidence of Wants\text{Double Coincidence of Wants} required.
    • No common measure of value\text{measure of value}.
    • Many goods indivisible.
    • Deferred payments hard.

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  • Further limits:
    • Fixing exchange rates (e.g. “how many fish = 11 rabbit”).
    • Lending complicated (quality/size mismatch).
    • Hinders division of labour & specialisation.

  • Result: gradual shift to money.

  • First stage: Commodity Money\text{Commodity Money} (salt, fur, cattle, cowries, beads). Choice depended on location, climate, culture.

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  • Metallic Money\text{Metallic Money}: metals prized for durability, divisibility, portability.

  • Early forms: gold/silver bars (Egypt, Mesopotamia). First coin: 7th7^{th}–6th6^{th} C. BCE in Ionia (electrum, lion image).

  • Practice: precious-metal coins for high value; copper/ alloys for small value.

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  • Paper Money\text{Paper Money}: Goldsmiths’ receipts (IOUs) became transferable; basis of banknotes.

  • Example: Banco de Brasil issued notes in 18101810.

  • Credit Money\text{Credit Money}: Demand deposits payable by cheque.

  • Electronic/Digital Money\text{Electronic/Digital Money}: stored on hardware/software, enables instant, borderless payments.

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  • Money = anything generally acceptable for goods, services, debt settlement.

  • Two definition approaches:
    1.1. Institutional (legal backing) – e.g. Irving Fisher: “any property right generally acceptable in exchange.”
    2.2. Functional (what money does).

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Functional view → 44 core functions:
1.1. Medium of exchange
2.2. Store of value
3.3. Unit of account
4.4. Standard of deferred payment

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Primary functions detailed:

  • Medium of exchange removes double coincidence problem.

  • Measure of value provides common price yardstick.
    Secondary functions:

  • Store of value preserves purchasing power over time.

  • Standard of deferred payment simplifies lending/repayment.

Page 99

Essential characteristics of good money:
1.1. General acceptability (often via legal tender status)
2.2. Scarcity (limited supply)
3.3. Stability of value
4.4. Divisibility
5.5. Portability

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Continued characteristics:
6.6. Cognoscibility (easy recognition)
7.7. Homogeneity (uniform units)
8.8. Durability (physical & value preservation)

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Keynesian motives for demand for money:
1.1. Transactions – day-to-day spending
2.2. Precautionary – unforeseen needs
3.3. Speculative – future opportunities (e.g., asset purchase)

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