Money
Money
Money
Money:
Money has been a cornerstone of human civilization and economic development since ancient
times. From simple bartering systems to the rise of digital currencies and crypto currencies, the
evolution of money has been a fascinating journey. Money serves as a medium of exchange, a
store of value, and a unit of account. It has taken various forms over the years, from coins and
paper currency to virtual currency and digital assets. Today, our money is predominantly digital,
a shared construct created by society to enable trade and value creation. But at its core, money's
worth depends on trust and faith in the system
History of money:
Barter and Commodity Money:
Before the concept of money existed, People used the barter system, which involves the direct
swapping of goods and services. For example, a man giving a woman a basket that he wove from
scratch in exchange for a fish that he caught minutes earlier. Despite looking like an efficient way
to exchange goods, barter had its shortcomings. It needed a mutual convenience where both
required what the other side could provide. Also, valuation of non-similar goods was another
problem faced during the exercise.
Later, societies started using commodity money – items that were useful, and accepted in exchange
for goods and services. Three popular products included were salt, grains, and livestock. These
commodities were easily divisible, portable and could be stored unlike having to barter a basket
every time one needed fish. An early example of the above system was observed in around 3000
BC when the Mesopotamian shekel, a unit of weight based on barley grains originated.
The first metal coins date back to the 7th century BCE in Lydia (modern Turkey) and China. In
China, metal coins were made of bronze and shaped like farming tools. In Lydia, coins were made
of an alloy of gold and silver called electrum. Lydian staters were the first coins to be officially
issued by a government body. Early iterations of coins were also used by ancient Greeks, starting
in the late 7th century BC. These coins offered several advantages: divisibility (easily broken into
1|Page
smaller denominations), durability, and portability. Some coins had an
intrinsic value (value in themselves), which was reflected in their face value
these coins were also known as full bodied coins. As the price of gold began
to rise, then Government mix copper and silver in gold coins because the gold
was becoming scarce and expansive with the passage of time.
Modern-day money:
Along with paper money and coins, modern-day money has also branched out to include credit
and debit cards, online payments and crypto currency. When it comes to convenience, credit cards
and debit cards may be some of the most popular choices.
2|Page
Credit cards allow lenders to set a credit limit on your card, so you can spend up to a
certain amount before you have to start paying it back to continue using your card. The
history of credit cards in America goes back to the 1950s when Diners Club issued the first
charge cards.
A debit card, on the other hand, holds a set amount of money from your bank account,
which decreases with each purchase you make. Debit cards did not make their debut in
America until after credit cards. Some point to the Bank of Delaware’s debit card pilot
program in 1966 as the first time debit cards were used in America.
The internet has completely changed the financial world. It has brought about online banking,
electronic funds transfers, and digital payment systems, revolutionizing the way we handle money.
In the 21st century, we witnessed the rise of cryptocurrencies, which can be seen as the newest
form of money. Bitcoin, introduced back in 2009 by a mysterious person called Satoshi Nakamoto,
was the very first decentralized cryptocurrency. It operates on something called blockchain
technology, which is basically a decentralized ledger that keeps track of all transactions across a
network of computers. The cool thing about cryptocurrencies is that they offer secure and
anonymous transactions, which has sparked a lot of interest in the idea of decentralized financial
systems. Crypto currencies can be pretty volatile and there are some regulatory challenges
surrounding them. But despite that, they have gained a lot of popularity and have even influenced
the development of central bank digital currencies (CBDCs). Basically, governments and financial
institutions are looking into creating digital versions of their national currencies. They want to
improve payment systems and make sure they can still control the money in this digital age.
Importance of Money:
1. Basic Needs: Money helps us meet our basic needs, such as food, shelter, clothing, and
healthcare.
2. Financial Security: Having enough money provides financial security, reducing stress and
anxiety about the future.
3. Comfort and Luxury: Money allows us to enjoy comforts and luxuries, making life more
enjoyable and fulfilling.
3|Page
4. Freedom and Independence: Money gives us the freedom to make choices and pursue our
goals, enabling us to live life on our own terms.
6. Social Status: Money can influence social status, allowing us to participate in social activities
and maintain a certain standard of living.
7. Savings and Investment: Money enables us to save for the future, invest in assets, and build
wealth.
8. Charitable Giving: Money allows us to support causes we care about, making a positive
impact on the world.
9. Time and Energy: Money can save us time and energy by outsourcing tasks, allowing us to
focus on what matters most.
10. Peace of Mind: Having enough money can bring peace of mind, reducing financial worries
and enabling us to live a more relaxed life.
Figure 3: Money
4|Page
Mechanisms of Monetary Control:
1. Central Banks and Monetary Policy
Central Banks: Such central banks as the Federal Reserve System in the United States,
European Central Bank, and Bank of Japan are designed to facilitate the execution of
monetary policy.
Monetary Policy: Refers to the measures that a central bank takes in order to control the
amount of money supply and price of money and credit with the purpose of accomplishing
the objectives of a nation’s economy.
5|Page
2. Reserve Requirements
This regulates the quantity of cash or liquid assets that the commercial banks should have with
them to counter their deposit liabilities. This action of increasing the reserve ratio means that
there is less money that can be lent out to the public, which in turn means a decrease in the
money supply. On the other hand when a central bank decides to reduce the reserve
requirements, this means that the banks are able to issue a higher number of loans leading to
expansion of the money supply.
3. Discount Rate
This is the rate of interest at which the central bank provides funds to the commercial banks.
Higher discount rate will mean that banks will not be interested in borrowing, hence a decrease
in the amount of money in circulation. On the other hand, Reduction of discount rate reduces
the cost of borrowing for the banks and in turn provokes the banks to borrow more and,
therefore, supply more money in the economy. The discount rate is a tool that can help in
managing expectations and shaping behavior of the financial markets as the central bank can
use it to signal its position on the course of monetary policy.
Qualitative Tools:
1. Moral Suasion:
The central bank can work on the banks to encourage or discourage them to give out loans,
thus affecting the money supply without having to change the quantity tools directly.
2. Margin Requirements:
This is the minimum amount of capital that investors have to hold when purchasing
specific assets such as stocks. Higher margin requirements limit the funds that can be used
for speculation and thereby affect the money supply in an indirect manner.
6|Page
Implications of Controlling the Money Supply:
1. Inflation and Deflation:
Inflation Control: Central banks can combat inflation by reducing the amount of money
in circulation; thus maintaining the value of money and preventing inflation from spiralling
out of control.
Avoiding Deflation: On the other hand, to stimulate the economy and prevent deflation –
a detrimental decrease in prices and economic activity – the money supply needs to be
increased.
2. Economic Growth:
Stimulating Growth: When the money supply is expanded, the interest rates go down,
and this makes it cheaper for people and companies to borrow money, and they are able to
invest and consume more.
Cooling an Overheated Economy: Contracting the money supply can aid in controlling
inflationary pressures often associated with high levels of spending in the economy.
3. Interest Rates:
Influencing Borrowing Costs: This is because by controlling the money supply in an
economy the central banks are able to manipulate the short term interest rates which has an
impact on the borrowing costs throughout the economy.
Yield Curve Impact: Another channel through which the policy stance can influence
economic outcomes is through its effect on long-term interest rates and investment plans.
4. Exchange Rates:
Currency Value: Variations in the money supply can also have an impact on the exchange
rate of the country’s currency in relation to others and this could affect trade and
investments.
Competitiveness: Currency depreciation leads to increased exports as products become
less expensive for the international market while currency appreciation reduces the import
costs.
7|Page