Money is defined as anything that is accepted as a means of payment for goods or services. It is a legal tender issued by the government of a particular country through its central / national bank for transaction purposes. A bank can be defined as a financial institution that receive deposits from people and lend these funds to firms and individuals.

Banking simply means a process through which the bank engage in the business of safeguarding money and issuing of credit. Banks act in accordance with central bank, which regulates the operation of local banks in any country. The central bank does this to prevent inflation which may occur due to increase in money supply in the economy.

Barter Trade

Barter is an act of trading goods or services or a system of exchange between two or more parties without the use of money —or a monetary medium, such as a credit card. In essence, bartering involves the provision of one good or service by one party in return for another good or service from another party.

A simple example of a barter arrangement is a farm labourer who works on a farm for a farmer. Instead of the farmer paying the builder $1,000 in cash for labor, the farmer could instead recompense the labourer with $1,000 worth of crops or foodstuffs.

Unlike the use of a medium as a medium of exchange, the advantages of barter system are, the system is simple, there are no complexities involved unlike monetary system, natural resources will not be overexploited, power will not be concentrated in some circles, there won’t be problems of balance of payments crisis, foreign exchange crisis, or other complex problems of international trade.

Money emerged out of the barter economy whereby Goldsmiths kept gold for people and gave them receipts; instead, those receipts became the “money.” The main reason for emerging of money was the challenges of the barter trade system which are inability to make deferred payments, lack of common measure value, difficulty in storage of goods, lack of double coincidence of wants.

Functions of Money

Money has taken different forms through the ages; examples include cowry shells in Africa, large stone wheels on the Pacific island of Yap, and strings of beads called wampum used by Native Americans and early American settlers. What do these forms of money have in common? They share the three functions of money:

Money is a store of value: As services can’t be stored and a lot of goods are perishable, society requires more effective ways of storing wealth. Money can be easily stored, retrieved, and used at a later time, and, at least in times of low inflation, it’s able to maintain most of its value.

Money is a unit of account: Money can be used as a universal unit of account to measure the value of all the goods and services exchanged in an economy. In a money-based economy, prices can be indicated using only one measure of value, simplifying transactions and people’s understanding of how much a good or service is worth. Conversely, in a barter economy, the prices for a good or service should be established based on all the other goods or services produced and exchanged.

Medium of exchange: Money’s most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another.

Money as a standard of deferred payment: This means that the standard of payment is contracted to be made at some future date. This is possible because value of money remains more or less constant and has the merit of general acceptability. This function of money has facilitated borrowing and lending activities.

Characteristics of Money

1. General acceptability: Money must be something that is generally acceptable by everyone in the society or country as a medium of exchange for goods and services.
2. Portability: Anything which is usually used as money must be something that can easily be carried around for easy transactions this means that anything which is used as money must be light enough for people to carry about and not something that is heavy such that carrying it in bulk becomes a huge burden to carry around.
3. Homogeneity: Currencies always take a universal shape size and color. It is out of place for a currency to appear differently irrespective of the place it may be found, it must have the same semblance irrespective of the place where it may be. Its quality also must be of a high standard and value nationwide.
4. Durability: In the 21st century, whatever is used an object that will serve as money must be able to last long, it must stand the test of time and must not be a commodity that can perish over time, it must be able to stand the test of time.
5. Stability: The value of money must be Stable it must not be something that shrinks, it must not follow the trend of the economy and change in its stability.
6. Divisibility: Money must be capable of being divided into smaller units, e.g. N100, N50 and N20, N10, N5, etc. in order to enhance the purchase of commodities that are both high and low prices.
7. It must be recognized: Money must be easily recognized and identified by the totality of every person in the society where it is circulated. It must be of high quality in order for it not to be easily counterfeited.
8. No intrinsic value: Whatever commodity it is that is used as money must on its own little or no value as opposed to its value of the exchange.

Conclusion

In tracing the evolution of money we have seen that it plays two major roles in business transaction; as a medium of exchange and measure of value. As a medium of exchange it serves as a go-between in the exchange of commodities; in barter trade, for the item to be accepted a double coincidence of want had to prevail otherwise it was hard to acquire the commodity of your choice. Measure of value also helps in pricing of items unlike in barter trade where it was a mere guess. Thus, money plays a major role in the economy.