Topic 1: The Purpose of Money Flashcards
What is money?
We can define money as anything that can be accepted as a means of making payments and specify that money means coins, notes and the electronic balances held in bank accounts.
How was barter used to trade goods and services?
Before money was created, people used to trade goods and services. This is known as bartering. The barter system has many limitations. It relies on a ‘double coincidence of wants’. This means that the items being exchanged must have an equal value This could be a time-consuming process.
How are items with intrinsic value used as a form of payment?
The limitations of barter led people to create systems where the local community used an item they all valued as payment. For example, in Japan people used rice as money. The use of valuable items such as cattle or grain as money can be traced back to around 9000 or 6000 BCE. The use of intermediate item that all local people value as forms of money allow people to sell any surplus or specialist goods they produce for this intermediate item. Sellers can then use the item they have been paid to buy other goods. There were many practical drawbacks with early forms of money. Some items are not durable. For example, pigs and cattle die. Also, some items cannot be divided. For example, if a seller wanted payment of one whole pig, but the purchaser did not agree the goods were worth a whole pig there were few options available. If the purchaser did not have a smaller pig to offer, the trade cannot be made.
How are items that represent value used as money?
An important stage in the development of money, then, was changing from an intermediate item that had value in its own right (an intrinsic value) to an item that represented value but had no value of its own. In China, for example, spades and knives, which had an intrinsic value of their own, were used in barter systems. Later, coins in the shapes of small spades and knives were used to represent a standard value where each coin was worth roughly the same as the real spade or knife. These coins were made of metal, often bronze or copper, but the value of the metal was low. The coins had no intrinsic value as pieced of metal. They had representational value because local people agreed that a coin symbolising a spade or knife had the same value as a real spade or knife.
How are paper notes used as money?
China developed the idea of paper banknotes in the 17th century. Merchants who traded high value goods found it impractical to carry large quantities of copper coin. Instead they deposited the coins with a trusted person, who gave them written receipts stating how much was stored in their name. Rather than paying for goods with actual coins, merchants paid by passing the receipt for the coins to the person selling the goods, who could claim the coins in storage. Over time people no longer claimed the coins from storage because buyers and sellers agreed that the banknote represented the value of the coins and would accept the banknote as payment, knowing they could use it to make payments of their own.
How do modern payments work?
Most purchases are now made using coins and banknotes or by transferring electronic balances between bank accounts. However, barter systems still exist in some communities, especially those where the people have little or no cash. Some barter systems are informal with friends or neighbours trading skills such as gardening and cake baking or baby-sitting. There are also bartering websites that help put people with a double coincidence of wants in contact.
What is LETS?
A Local Exchange Trading System is a local network that enables people to exchange goods and services with each other without using money.
How many features of money are there?
8.
What are the features of money?
- Acceptable
- Recognisable
- Stable
- Divisible
- Durable
- Portable
- Scarce but sufficient
- Homogenous
Explain: Features of money: Acceptable
People are only willing to accept money as payment for goods and services if they are confident others will. In turn, accept money from them as payment in later transactions.
Explain: Features of money: Recognisable
Cash must be recognisable so that people are confident they are receiving genuine coins and banknotes.
Explain: Features of money: Stable
Money needs to hold its value so people can be confident that the money they accept now will be worth the same or a similar amount in the future.
Explain: Features of money: Divisible
Coins and banknotes must be provided in a variety of denominations so that people can use them in different combinations.
Explain: Features of money: Durable
Coins and banknotes need to be strong enough to be used many times before they need to be replaced by the Royal Mint or The Bank of England. Although UK coins are coloured gold, silver or bronze, they are made of metal alloys to ensure they are durable. Coins made of pure gold, for example, are quite soft and damage easily.
Explain: Features of money: Portable
People must be able to carry the coins and banknotes they need for everyday use. This is another reason why they are produced in different denominations and then larger amounts are paper based.
