Money and the Banking System

Money and the Banking System

• Money originated from barter systems evolving into commodity money (like shells and grains), metal coins, paper money, banknotes/banking, and finally, fiat money.
• Fiat money isn't backed by commodities, its value is based on trust.
• Digital and cryptocurrencies are recent forms of money.

Overview

• Origin of money, characteristics of money, function of money, types of money, banking and money supply, and importance of introducing money are covered.

Origin of Money

• Early trade was based on direct exchange (barter) but limited by mutual wants.
• Commodity money used items with value (shells, grains).
• Metal coins (gold, silver) became standardized by governments.
• Paper money originated in China to avoid carrying heavy coins.
• Banks issued receipts for stored gold leading to paper currency.
• Modern money isn't backed by commodities; its value is based on trust.
• Current forms like digital currency and cryptocurrencies.

Characteristics of Money

• Durability: Money should last and withstand repeated use.
• Portability: Easy to carry and transfer.
• Divisibility: Divided into smaller units for transactions.
• Uniformity: Each unit has the same value.
• Limited Supply: Availability in a limited amount.
• Acceptability: Widely accepted as a medium of exchange.

Functions of Money

• Medium of Exchange: Simplifies transactions, replacing barter.
• Unit of Account: Standard measurement for pricing and comparing value.
• Store of Value: Retains value over time, useful for savings.
• Standard of Deferred Payment: Enables borrowing and repayment.

Primary Functions

• Medium of Exchange: Enables buying and selling without direct exchange.
• Measure of Value: Provides a clear value to goods and services

Contingent Functions

• Basis of Credit Creation: Money allows banks to create loans.
• Employing Factor Inputs: Decision-making on resources (labour, materials).
• Creation & Redistribution of National Income: Spread income throughout the economy.
• Liquidity: Money quickly accessible when needed.

Secondary Functions

• Store of Value: Can be saved and retains value.
• Transfer of Value: Easily sent/received between people.
• Standard of Deferred Payment: For future payments (loans, credit).

Types of Money

• Commodity money, fiat money, fiduciary money, and Commercial bank money.

Banking and the Money Supply

• Banks increase reserves when deposited.
• Banks lend excess reserves, increasing the money supply.

Importance of Money

• Facilitates economic activity (buying, selling, & trading).
• Unit of Account: Measurement, tracking wealth, financial decisions.
• Store of Value: Saving for future needs, stability.
• Supports International Trade: Collaboration and interactions.
• Foundation for Banking and Finance: Underpins lending, investment.
• Enables Economic Policy: Allows governments/central banks to promote stability and growth

Technological Integration

• Technology reshapes the Financial sector, offering opportunities and challenges for Fintech.
• Fintech aims to create a more inclusive and efficient financial ecosystem.