Money is anything which is universally acceptable as a medium of exchange that is generally acceptable as a means of payment. Therefore if we can buy goods and services with it then it could be seen as money.
Forms of Money
- Cash: Bank notes & coins are a physical form of money
- Bank Deposits: these are money reserves placed in commercial banks accounts. Examples are Cheques, Bank Drafts, Debit Cards, Credit Cards
- Central Bank Reserves: These are money held by central banks and used by commercial bank to make payments to themselves.
Functions of Money
Medium of Exchange – When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. It thereby avoids the inefficiencies of a barter system. Exchange is easier and less time consuming in a money economy than in a barter economy.
Measure of Value / Unit of Account – e.g. 1 pair of shoe is $120, while a can of Redbull is $25. In today’s world, each and every country has money. Therefore, determining the relative prices is very easy and quick.
Store of Value – To act as a store of value, a money must be able to be reliably saved, stored, and retrieved – and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time.
Standard for deferred payments – Money is also inevitably used as the unit in terms of which all future or deferred payments are stated. Future transactions can be carried on in terms of money. The loans, which are taken at present, can be repaid in money in the future. The value of the future payments is regulated by money.
Features of money
- Durability:Money must be durable, which means it should be usable for a long time and must be of good quality. It should not be something that gets damaged easily or spoiled in a short period of time. Since money is durable, it can be used as a store of wealth/value.
- Scarcity: Since anything to have economic value, it must be scarce. Money is scarce and that’s why it has value. People can accept something as money only if it has value.
- Portability: Money must be something that people can easily carry with them from one place to another. Today paper currency is used instead of gold and silver because paper currency is more portable.
- Acceptability: Money must be something that everyone can accept for a unit of account and medium of exchange.
- Divisibility: Money must be something that can measure all the goods and services accurately. For this purpose, money must be something that we can divide into small denominations.
- Stability: Money must be something which has a relatively stable value over time. It should not lose its value over time. Its function as a store of value can be fulfilled only if its value is stable.
A central bank is a public institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. A central bank possesses a monopoly on increasing the nation’s monetary base, and usually also prints the national currency, which usually serves as the nation’s legal tender.
Function of Central bank
1- Issuing Currency
The Central Bank in every country, now, has the monopoly note issue. The issue of notes is governed by certain regulation which is enforced by the government.
2-Banker to the state
A Central Bank acts as a banker to the government. It holds cash balances of the government free of interest.
The central bank acts as a banker to the commercial banks.
4-Bankers’ clearing house
The Central Bank acts as a clearing house for the settlement of mutual obligations of different commercial banks. If a difference exists, it is paid by a cheque drawn on the banks accounts carried at the Central Bank.
5-Lender of the last resort
The Central Bank helps the member banks in times of crisis.
The Central Banks act as financial agents for the government. It is an agent for the government in purchasing and selling of gold and foreign exchange.
7-Effective monetary policy
The aim of the government is to create employment in the country, resist undue inflation and achieve a favorable balance of payment.
A commercial bank is a retail bank that provides services to its customers such as accepting deposits and giving bank loans.
- Accepting Deposits: commercial banks accept deposits from their customers. These deposits could be sights deposits which are always available on demand or time deposits which comes with a fixed period of time.
- Giving Loans: They provide loans to their customers which could be in form of overdraft or mortgage for acquiring properties.
- Credit Creation: This process ensures that banks increase money supply in an economy by making money available to borrowers.
- Offering financial advise to clients and government
- Providing money transfer avenues
- Providing internet banking activities
- Providing safety deposit boxed for valuables
- Collecting and clearing cheques on behalf of their clients