Paper Money | Medium Of Exchange
Although it is widely published in many books that the receipt issued by goldsmiths constitute the first use of paper money, it was not until the British colonial state of Massachusetts put them into circulation during her war with French Canada that they became very important. The French later did same between 1716 and 1720 with a greater success than the British colony.
Paper money functioned at first in the same way as gold coinage, because the holder of such notes could claim from the authority issuing the note, the exact equivalent in gold or silver. Paper money consist of simple normal values, or symbols of value, which then replace the full value of gold silver. Paper money has value of its own and cannot therefore be exchanged for precious metals. Today the state has full responsibility for its issues and because of the legality attached, they are widely used in various countries. The use of paper money in the society offers the following gains;
- It is a good medium of exchange
- It can be withdrawn with ease from circulation to control the rate of depreciation.
- It is cheap to issue and maintain
- Since it is legally backed, debtors and creditors can carry out their business with certainty.
Bank Money (Paper Money)
The final stage in the development of money is that of bank money. Bank money, commonly referred to as bank deposits, is the money, deposited by customers in their accounts. Such money is withdrawn by means of a cheque. In the industrialized economies, it is the common form of money in use. This is because there are many banks and their citizens are familiar with the use of cheques.
Many instruments perform some of the functions of money. Such instrument enable people holding them to make payments or to carry money from place to place. They are near money because they do not have the same degree of liquidity as coins and bank notes; Examples of such instruments of such instruments are cheques, postal orders, travelers cheques and Bills of Exchange.
What Is Money
Money is any commodity that is generally accepted in a society in the settlement of transactions and the payment of debts. Any commodity, which has the following attributes can serve as money in a community or country;
- The commodity should be generally acceptable in the society. This is important because, if people refuse to use the commodity, no exchange will take place. Secondly, the commodity will sooner or later disappear from the market.
- The commodity should be stable in value. Once a commodity is stable in value, it will also enhance its use as a unit for deferred payment. A trader who gives credit does so because he knows he will be paid the exact sum in the future.
- It must be capable of being divided into smaller units. Once this is possible transactions of all kinds will be entered into the economy. Furthermore it creates a situation of general conveniences to seller and buyers.
- It should be durable so that it can last for long without getting damaged. The quality in appearance should remain in the same and should last in order for it to serve as a store of value.
- It should be homogenous, in essence easy unit of the commodity must be the same so that no one will reject it.
- It must be relatively scarce so as to maintain its value. An abundant supply of the commodity will result in its depreciation and a consequent loss of confidence in it (the money).
- It must be known to all people in the society so that no one will refuse to accept or use it to effect a transaction in the economy.
- It should be possible to transport or carry the commodity over long distances in the country. Therefore such medium must not be too bulky or cumbersome in nature.
The Functions Of Money (Paper Money)
- Money acts as a medium of exchange – In the primitive economy people had to find those who were interested in buying what they had. Today, it is easy to sell what one has and then use the receipts to buy what one wants. By doing this money helps us to get a variety of goods and to increase specialized in the economy.
- Money acts as a store of value – when barter was the order of the day, it was not easy to store what was produced over long intervals. With money this problem is overcome, thus farmers can sell their produce and preserve the same in the form of money.
- Money serves as a measure of value – Money is used to measure the value of a commodity or service in the market. Sometimes too, money is used to compare the relative value of two commodities in the market.
- It can be used as a unit of account – It is difficult to keep a records of goods and services in themselves. Since their value is measured in terms of money, it becomes easy to keep record of goods and services in themselves. Since their value is measured in terms of money, it becomes easy to keep records of what has to be used in production.
- Money act as Standard for deferred payments – the existence of money facilities trade as most trading is done on credit basis. Once money is being used, goods can be bought now but payment made later. Loans too can be made because the money will be returned. This function is dependent on the stability of the value of money for it the value of money changes fast, most people will be unwilling to allow credit.
- It serves as a medium for one way payment – It thus becomes possible for the government or the local authorities to collect money from members of the society as taxes and rates respectively. Had there been no money, it would have been very cumbersome to collect assorted types of goods from people in use to provide social services.