LECTURE 2 – THE DEVELOPMENT OF MONEY

Definition of Money- A commonly accepted instrument or medium of exchange eg. Coins,

bank notes, paper notes.

History of Money-
 The drawbacks of barter led to the development of money.
 Traditionally cowrie shells, cattle, salt and sugar were used as money.
 Then precious metals were used such as silver and gold but it became burdensome
and heavy.
 The goldsmiths kept the gold while issuing receipts to precious metal owners to
represent the value of gold owned.
 The owner would present the receipt when the gold was required.
 The bearer of the receipt would be paid the gold.
 Gold smiths started to issue smaller denominations such $10 and $5
 Now receipts became a representation of money.
 Goldsmiths became bankers and the amount of money exceeded the amount of gold
or silver in reserve due to loans being given out which led to greater economic
activity.
 Central banks took over the issuing of money to stabilize the system.

Characteristics of Money:
1. Generally acceptable
2. Relatively Scarce
3. Easily divisible
4. Homogenous in nature
5. Fairly durable
6. Portable

Functions of Money:
1. As a medium of exchange
2. As unit of account - pricing
3. As a store of value – stored for future use eg. savings
4. Means of deferred payment- makes credit possible.

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Legal Tender-
Legal tender is a medium of payment recognized by a legal system to be valid for meeting a
financial obligation. Paper currency and coins are common forms of legal tender in many
countries.

Fiat- An official order or decree by someone in power.

Limited legal tender money is accepted as legal tender only up to a certain limit eg coins
because of bulk.

Coins are token money and legal tender up to a small amount.

Banknotes or paper money- faith money and not valued to gold or silver.

Bank Deposits – upon which cheques can be drawn. Cheques are not legal tender the deposit
is.

Near Money- Cheques, credit cards, debit cards, electronic transfer, bills of exchange,
money orders, bank drafts.

Medium of exchange- a commonly accepted form of payment for goods and services.

Representative money- Money of no intrinsic value that is used as money to claim value.

Legal Tender- money that has been accepted by law to be a medium of exchange

Cheques

A cheque is an order to the bank to make payments to the payee stated on it.

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Credit Cards/Debit Cards

This allows the card holder to make payments by simply presenting the card to the seller. A
credit card facility is actually a loan given to a customer and thus it is repaid at an interest. A
debit card is issued against a customer’s account balance and is therefore not a loan.

Money Order

They can be used to make payments locally or overseas, as they are made out in the currency
in which they are to be paid. The payee will cash the money order at his bank.

A money order is basically a tool to transfer money or make payments. Think of it as an

alternative to a cheque. However, while cheques and money orders can serve a similar
function, and they also look quite similar, there are some important differences to consider.

Unlike regular cheques, money orders are prepaid. That means they're backed by large
agencies or corporations instead of individuals, making them especially valuable because of
the safety and reliability they provide.

Bank Draft

A bank draft is a cheque which guarantees payment to the receiver from the issuing bank.
Bank drafts can be made out to a payee in foreign currency and thus used for making
overseas payments. Bank drafts are obtained for a fee from a commercial bank.

 Getting a banker’s draft is like asking a bank to write a cheque for you – you give
them your money, and they give you a cheque for that amount to give to the person
you’re paying.

Bill of Exchange

This is used to pay for goods bought overseas on credit. It is an order in writing from an
exporter (drawer) to an importer (drawee) requiring payments of a certain sum of money at a
fixed future date. The time period allowed is normally three months.

Electronic Transfer

This is a system used to transfer funds electronically rather than paper-based payment
methods.

Funds are transferred over a computer network and makes payments fast, safe and easy.

Examples include credit and debit card transactions, remittances (through companies such as
Western Union) and money transfers.

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Tele-Banking

This system allows a bank’s customer to simply use the telephone to get his banking services
done rather than visiting the bank. Services include; checking account balances and
transaction history, opening a new account, transferring funds etc.

Internet Banking

This differs from tele-banking in that the internet is used to access the same services.
Customers can go on-line to view their balances and transaction history and transfer funds
etc.

Ecommerce

Electronic commerce more popularly called ecommerce is the buying and selling of goods
and service using the internet. It allows for a full range of trading activities over the internet
such as advertising, placing orders, delivery and making payments.