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Understanding What Currency is
In our bid to educate our readers about their financial status and building their credit trustworthiness, it is expedient that we take a closer look at currency and some terms associated with the term currency.
Now, what is currency?
This refers to the coins and paper currency in circulation in our economy.
Note however that coins may be either full-bodied or token.
The US Dollars in United States is legally defined to be equal to a specific amount of a commodity e.g Gold.
A coin is full-bodied where the value of the metal or commodity which it contains is as r equal to its legal value. In this way, it can freely move in and out of the monetary system without loss of value.
Examples of full-bodied money in history include cowries shells, Gold, Silver and Metallic Money.
The advantages ascribed to this form of money include:
- It is inflationary and thus stable in value: This is because it could not be issued at will.
The fault with this assertion is that the assumption is not everlastingly correct.
Full-bodied money does not have infinity stability in value and is not always anti-inflationary and best for any country.
If we increase the supply of the money without corresponding increase in the supply of goods and services, inflation will result.
On the other hand, if the supply of money declines without the supply of goods and services decreasing too, a fall in prices will result – hence the value of money will be affected.
- There are differences in natural endowments and in capabilities of exploitation:
Thus for any country not endowed with the metal which it needs to use as money and even when so endowed, the cost of importation and or mining of such a mineral may be so prohibitive and thus fraught with great ppolitical and economic implications.
For Instances, Britain importing gold from former Apartheid South Africa before now would mean political alignment to apartheid policy.
Representative full-Bodied Money
Representative full-bodied money is simply a ware house receipt.
It represents in circulation an amount of metal with a commodity value equal to the value of the money i.e. it represents a claim to a specific amount of the commodity money such as gold or silver stored in the treasury and payable to the holder on demand.
This form is different from a cheque because a cheque is not a representative of full-bodied money in that anybody carrying a cheque gets a demand for money which is not full bodied money.
Advantages associated with this form of money include:
- Economical i.e there is less expenditure on mining of the minerals or metals.
- Cheap storage
- Ease of transportation
- Safe from wear and tear
It’s Disadvantages includes:
- Possibility of forgery and confusion in high with the so-called ‘receipt’
- Easy to destroy or lose.
- Sometimes, unavailability of metal.
Credit Money – What it is?
Credit money is any money that circulates at a value greater than the commodity value of the metal of which it is made.
Gold does not circulate in our economy as coins.
The market value of the commodities of which our currencies are made is much less than the value of the coins and paper currencies in most cases.
Hence all our coins are more or less token coins.
Again our paper currencies are fiat money in that thet are not redeemable either in giold or silver.
The value of the paper of which our $10 for instance is made is below its face value. Yet it is accepted in exchange.
The reason is because it has the coercive backing of the authorities of the sovereign power in which it circulates.
The difference in value between this paper and the money value it represents is called seigniorage profit (that is profit of the issuer)
Advantages of Credit Money
- Its demand and supply can be controlled by the authprities
- It does not depend on metals
- It is not usually over issued.
Quesi Money – What it is?
Some people argue that outside legal tender money, nothing else can serve as money.
Note however that in my defination i claimed that anything can function as money e.g demand deposits or other objects.
Therefore to this study, demand deposits along-side tender constitute the money supply.
Demand deposits or chequing accounts represent an obligation of a bank to pay say dollar amounts, immediately or on demand.
A cheque is a written order to the bank specifying how much and to whom the payment is made.
It is merely a means of transferring ownership of a deposit.
Demand deposits therefore meet the primary requirement of good money i.e they serve as medium of exchange by being generally acceptable in payments for goods and services and their quantity is sometimes limited by our monetary authority, hence its inclusion in the money supply.
To some economist too, a predominant volume of all monetary transactions involve the use of cheque.
Some writers also contend that the above definition of money supply is narrow, and argue that time and savings deposits should be included on the kinds of money we have.
Logic dictates that these items are not payable on demand but attract interests to their owners as investments and there is also a time element involved in their maturity, hence, do not constitute money.
Motives for Holding Money
J.N Keynes in one of his earliest works identifies three principles motives why people hold money.
- Transaction Motives: This is the use of money as a means of exchange.
People need money for day to day running of business and firms.
- Precautionary Motives: This relates to the use of money as a store of value.
When the prices of goods and services are stable, money is stored as a protection against some risks.
- Speculative Motives: Money is also use as a speculative method. When the expectation is that of a fall in prices of goods, people build up money to take advantage of future transactions.