MONEY AND BANKING

Money is anything that is generally accepted as a medium of exchange in settlement of financial obligations.

Legal tender

This refers to money which by law must be accepted as a medium of exchange in settlement of financial obligations.

A country’s currency is its legal tender. So in Uganda, legal tender denominations include;

ÿ 50,000 shillings note

ÿ 20,000 shillings note

ÿ 10,000 shillings note

ÿ 5,000 shillings note

ÿ 2,000 shillings note

ÿ 1,000 shillings note and coin

ÿ 500 shillings coin

ÿ 200 shillings coin

ÿ 100 shillings coin

ÿ 50 shillings coin

FUNCTIONS OF MONEY

1.     It is a medium of exchange. Money is used to pay for goods and services

2.     It is a unit of account. Money is used as a unit of account to carry out book keeping in form of calculations and accounting.

3.     It is a store of value (wealth). When properties like land or buildings are converted into monetary terms, the money can be stored. This is because it is not bulky and it is not perishable.

4.     Standard of deferred payment. Modern economics set up is based on credit and credit is paid in terms of money only. Only money is such a commodity in whose form accounts of deferred payments can be maintained that both the creditors and debtors do not stand to lose.

5.     Money is a standard measure of value. Through money, the relative values or prices of commodities can be determined. Money therefore reflects the quantity and quality of goods sold and bought in the market.

CHARACTERISTICS OF GOOD MONEY

ÿ Should be generally accepted

ÿ Should be divisible

ÿ Should be portable

ÿ Should be durable/ long lasting

ÿ Should be homogeneous/ similar

ÿ Should remain stable in value for long

ÿ Should not easily be forged

ÿ Should be relatively scarce

ÿ Should be malleable (easy to design and print by the monetary authority)

ÿ Should be easily recognized.

BARTER TRADE

Barter trade is a system of exchange where there is direct exchange of goods for goods, goods for services or services for services.

ADVANTAGES OF BARTER TRADE

1.     Barter trade system saves foreign exchange that is scarce especially in LDCs hence devoted to other uses.

2.     It reduces balance of payments problems in LDCs by reducing their foreign exchange expenditure abroad.

3.     It promotes specialization because countries are assured of exchanging with others.

4.     It widens the market for commodities. This is because one does not need money in order to have a commodity.

5.     It expands friendly relationships between countries and their citizens.

6.     It shortens the trade process because it is more direct.

7.     It is not inflationary because there is no use of money.

8.     It facilitates trade among small countries and increases their share in international trade.

9.     Etc.

DISADVANTAGES

1.     The problem of double coincidence of wants. It was very difficult to get one who has got what you want and at the same time willing to exchange it for what you have.

2.     Indivisibility of some commodities. Some commodities could not be divided up into small units to effect small transactions e.g. if one had a cow for exchange but another one had a tin of beans and needed 2kg of beef, then it became difficult to get them from a cow.

3.     Difficulty in determining the exchange rates for example how many cocks for a cow.

4.     Some commodities were perishable which made future trade impossible.

5.     Limited storage facilities since some goods are bulky and others are perishable.

6.     Difficulty in transportation given the bulkiness of some products and existence of poor roads.

7.     Barter trade system encourages dependence of one economy on another and in case of conflicts, a country may suffer.

8.     The barter system restricted the number of transactions that could take place.

ASSIGNMENT

Read and make notes about evolution of money.

CONCEPTS USED IN RELATION TO MONEY

1.     Currency

This is money in form of paper notes and coins commissioned by a particular country to facilitate the exchange of goods and services and settlement of debts within the country. For example Uganda’s currency is a shilling, Japan – Yen, British – Pound, South Africa – Rand.

2.     Legal tender

This refers to money which by law must be accepted as a medium of exchange in settlement of financial obligations

3.     Token money

This is money whose intrinsic value is less than the face value.

NOTE

1.      Intrinsic value is one which when the same coin is melted and that metal is sold the cost of that.

2.     Face value is the value written on the coin/ currency.

3.  If face value = intrinsic value  intrinsic money.

4.     Commodity money

This is money in terms of the value of commodities. For example salt, corn, tobacco, etc.

5.     Fiat money

This is money issued on the directive of the government irrespective of the level of economic activity (money printed by the central bank on government orders).

6.     Fiduciary issue

This is money issued by the central bank at its discretion and is not backed by gold or foreign reserves.

7.     Quasi (near) money

These are financial assets which can easily be turned into money e.g. cheques, treasury bills, postal orders, etc.

8.     Narrow money

This is currency in the hands of the public plus demand deposits in commercial bank.

NOTE

Demand deposits is money deposited on current accounts.

9.     Broad money

This is the sum of currency in circulation, demand deposits, savings and time deposits.

10. Nominal value of money

This refers to the monetary (face) value of money for example 1000/=.

11. Real money value (value of money)

Value of money refers to the amount of goods and services a unit of money can purchase.

OR

It is the purchasing power of a unit of money.

The value of money depends on the following;

ÿ General Price level/ rate of inflation.

ÿ The velocity of circulation of money

ÿ The quantity of goods and services available.

ÿ Amount of money in circulation

ÿ Government policy e.g. devaluation.

1.     Convertible (hard) currency

This is currency which can be exchanged for other currencies and it is internationally accepted in carrying out transactions e.g. pound, dollar, etc.

2.     Soft (managed) currency

This is currency which is used only within the country and cannot be accepted in carrying out international transactions e.g. Uganda shillings.

3.     Foreign reserves

Foreign reserves refer to the total of foreign currencies, gold and special drawing rights kept/ held by a country (in its central bank) that can be used to make international payments.