Money is anything that is generally accepted as a medium of exchange. The emergence and use of money has catalysed trade in many markets over the years. Trade or exchange is the act of transfering ownership of a product from one entity (seller) to another (buyer) against another product. A market is a network (physical or virtual) of persons that enables trade to take place.
Origin of trade & exchange: It became apparent that no person could be self sufficient in the products he or she needed hence the need for exchange which was based in the barter system. Division of labour and specilisation further deepened the need for trade.
Barter trade & some of its limitations: Barter trade is a form of exchange involving the trading of products for products. Some of the major limitations of barter trade were: Need for a double coincidence of wants, indivisibility of certain products e.g. livestock 8led to loss of value) and perishability of some products e.g. agricultural products.
Types of money: Commodity money i.e. objects with intrinsic value (e.g. bread,sea shells, salt, cattle, grain, pigs, whale teeth, gold, silver, cocoa beans), representative or token money and fiat money e.g legal tender.
Key properties of good money include: Durability, portability, cognisability/ease of recognition, divisibility, general acceptability, homogeinity, stability/limited supply and malleability.
Key functions of money include: Medium of exchange, store of value/measure of wealth and standard for deferred payments/unit of accounting,
Currencies: USD, EUR, GBP, JPY, CNY, CHF, CAD, ZAR, DKK, NOK, FIM, RUB, INR, SEK, AUD, BRL, KES, UGX, TZS, RWF, BIF, SSP, ETB, SOS, NGN, CFA, GHS, SAR, BWP, ZMK, CDF, AOA, NAD, SGD, HKD, TWD, KRW, MYR, NZD, MXN, PKR, KPW, IRR, CUC, MUR, ZWD.
Some references to money in various languages: Pesa, Man’gondo, Mbeca, Omuom, Geld.
Gold, silver and bronz coins were used. Issuance of notes as evidence of metal deposits at smiths later paved the way for the development of bank notes just as the issuance of IOUs prepared the way for cheques. Deposit takers played the role of banks.
Origin of central banks: Bank of Amsterdam (1609) & Sveriges Riksbank – Sweden (1664) and Bank of England in (1690).
Central/reserve banks and their roles: A central or reserve bank is a monetary authority that manages a state’s/region’s currency, money supply and interest rates. In individual states, it functions as the banker to the government & commercial banks, implementer of monetary policy, controling interest rates, lender of last resort to banks suffering liquidity crisis, issuer of currency/legal tender, regulator/supervisor of financial institutions hence bank runs can be prevented and reckless business activities by commercial banks minimised. It also manages foreign exchange and gold reserves beside maintaining the government stocks register. The tools used by the central/reserve banks in monetary policy (interest rate, inflation & exchange rate oversight) include open market operations, bank reserve requirement (cash ratio), interest rate policy (discount rate), credit policy and moral suasion.
The central bank can be headed by a governor, chairman or president (not the country’s president).
Run on banks: When panicking depositors (clients with money in their bank accounts) demand to withdraw their money from the bank at once due to perceived or real fears of bank collapse or an impending financial crisis.
In case of collapse of a commercial banks, the state, through the central bank guarantees deposits upto a certain maximum figure. In Kenya, this figure is KES 100,000.00.
Exchange rates: Fixed/managed, free-floating and managed/dirty float exchange rate regimes. Currency revaluation and devaluation (case of GHS). Loss of trust in a currency (the case of ZWD & SOS).
Money & Wealth
Having answered the question ‘what is money?‘. We now turn our attention to the relationship between money and wealth.
A person can earn money by satisfying people’s needs and use it to satisfy his or her own needs and to accumulate wealth.
Wealth/affluence is a quantity or store of money, valuable possessions, property, or other riches (both physical and intangible) owned by an entity be it a person, community, company or country. As an example, people are said to be wealthy when they are able to accumulate many valuable resources or goods.
Wealth may exist in multiple forms but it only includes things that have a monetary or exchange value i.e. things that have utility and are capable of being appropriated or exchanged. Real estate , plantations, livestock, investment/capital goods (machines, tractors, trucks, tankers, taxis, buses), minerals like gold or silver, agricultural commodities, factories, cash, money in current/savings or fixed deposit accounts, royalties, patents/copy rights, paintings, sculptors, company shares and government securities.
Various forms of wealth maintain/retain value to different extents over time. Land or real estate has over the years proved to be the best value retainer, most secure and a carrier of positive returns.
Wealth kept in cash (at hand or at bank) form is reduced by inflation over time. Treasury bills have a guaranteed return but the gains barely cover for inflation.
Fluctuations in commodity prices may lead to growth or decline in the value of the commodities held, fluctuations in values of companies in which one holds shares may lead to loss or gain in value over time while droughts, floods, disease or livestock theft may reduce the value of livestock. Agriculture/Plantations may be affected by drought, floods, disease or pest invasion as well as price fluctuations.
Advances in technology may render capital goods obsolete while the goods in use tend to depreciate over time. Patents/copyrights expire as do mining rights.
By investing your earned money in various investment activities, you accumulate wealth to various levels of success. Higher return investment activities tend to carry higher risks while lower return investments tend to carry lower risks. Success lies in striking an optimal balance between security/risk and returns. Many wealthy persons tend to assemble an optimal mix of the various types of assets to form balanced portfolios of assets in which to keep their wealth. Competent wealth managers specialise in managing the assets of their clients in a professional way so as to secure positive results across time.