DEFINITION OF MONEY AND CONCEPT OF BARTER TRADE

Money is anything which is generally acceptable in exchange for goods and services and in settlement of
debts which has legal and societal backings. Before the invention of money, goods were exchanged for
goods (counter trade or trade by barter) .Later various commodities were used as money before
currency (coins and notes was later introduced).

Barter trade is the direct exchange of goods for goods and services for services,

Problems associated with barter trade includes:

1. Difficulty of double coincidence of wants : Both parties must have what the other wants and be willing
to trade at the same time, which can be difficult to arrange.

2. Indivisibility of Goods: Some goods cannot be divided without losing value, making it hard to trade for
smaller items. For example, if you own a cow and need several smaller items like vegetables or tools you
cannot easily divide the cow into portions without it losing its overall utility and value.

3. Lack of Common Measure of Value : There is no standard way to measure and compare the value of
different goods and services, complicating negotiations. For instance, how many loaves of bread are
equal to a pair of shoes? Without a common measure, determining the quantity is difficult.

4. Problem of storing goods: Many goods are perishable or depreciate quickly with time , this makes it
difficult to store wealth under barter trade .

5. No standard for deferred payments : The system did not allow for deferred payments or deferred
exchange because the system requires simultaneous exchange of goods and services.

6. Transportation and logistics: Moving physical goods from one place to another can be costly and
impractical particularly for bulkier or heavier items. For example, trading large quantities of grain for
livestock would require significant effort and resources to transport the goods to each party.

FEATURES/CHARACTERISTICS/QUALITIES OF MONEY

[Link]: Money must be universally or generally acceptable in payment for goods and services by
the members of the community. For anything to serve as money, it should be acceptable by everybody.

[Link]: Any object used as money should not be bulky but must be easily carried and transferred
from one place to [Link] money is considered as the best material because it is easily
transferable.
[Link]:It should last for a long period of time and storable without loosing its value. Itshould be
capable of being kept for a long period of time.
[Link]: It must be easily divisible into various units without loosing value. For money to perform
effectively it should be capable of being divided into smaller parts e.g. N 5, N10, N100 and N500.
[Link]: Money should be relatively scarce so that it will not loose its value. When there is too much
money in circulation, it will lose its value.

[Link]: The material used for money should be of the same shape, size and qualities. Each
denomination of a country's currency should be homogenous e.g. N50 in Lagos is the same in K

FUNCTIONS OF MONEY

1. Medium of exchange: Money is given in payments and taken in exchange of goods and services. This
makes money easier to facilitate trade among individuals and country.

2. Store of value: Money is the best form of holding surplus wealth over time. It is generally preferred to
other assets as a form of reserve. This function is adversely affected by inflation.

3. Unit of account: Money makes accounting procedures and preparations interesting and possible.
Money is used to keep record of transactions.

4. Measure of value: Money is a good parameter for determining the worth of goods and services as
well as comprising their qualities.

5. Standard of deferred payments: As a result of the durability feature of money some goods and
services can be purchased now and payments made for them in the future.

FORMS OF MONEY

1. Coins : A coins is a metallic money with definite amount and weight issued and stamped by central
authority to aid divisibility and transactions in smaller denominations.

2 . Paper money: This is in form of paper note which originated from the receipts. The goldsmith's issued
to people who kept gold and other valuables with them.

3. Bank money: This is the money one keeps in one's bank account. It is also called bank deposit which is
given back to the owner on demand.

4. Token money: This is money whose intrisinc worth is less than its nominal or face value i.e it costs
more to produce the money than what it'd value can purchase e.g coins

5. Commodity money : These are goods or tangible materials that have been used as money from one
time and place to another e.g gold, diamond, silver, manila, cowries, salt etc.

6 .Legal tender: Money which by law must be acceptable in exchange for goods and services and
settlements of debts. Coins and notes constitute legal tender in all countries e.g Naira and kobo in
Nigeria.

7. Fiduciary note issue/ money: This is the type of money that is issued without the backing of either
gold or any foreign currency.
8. Fiat money: This refers to money whose value or cost as a commodity is less than its value of money.
The government through the Central Bank has a monopoly over the issue of fiat money. The most
important example of fiat money in Nigeria is fiat money.

DEMAND AND SUPPLY OF MONEY

THE SUPPLY OF MONEY

Supply of money refers to the totality of all forms of money in circulation in a country at a given period
of time. The supply of money includes the total bank deposits, bank notes and coins outside the banking
system and cash deposits in current accounts withdrawable by cheque. In developing countries like
Nigeria a large proportion of money supplied in the economy is in form of cash as opposed to bank
deposits.

Money supply can be simply put as the amount of money that is actually in the hands of the public
during a given period of time.

Components of money supply

The two main definitions of money supply are:

[Link] money supply (M1): This is defined as currency outside banks(COB)plus privately held
demand deposits(DD) within the commercial banks. Narrow money primarily functions as a medium of
exchange.

M1=COB+DD

2. Broad money supply (M2): This is the broad definition of money which comprises of M1 plus savings
deposit (SD) and time deposits (TD) with the commercial banks plus total deposit liability of merchant
banks . Time and deposit money are best regarded as quasi money(QM).Broad money also serves as a
store of value.

M2= M1 +QM

=COB+DD+QM

=COB+DD +SD+TD

Each country's central bank determines which definitions to use and for what specific [Link]
money supply directly affects price levels and the value of money, so to promote price stability and
economic growth, governments control the total money supply through the central bank.

FACTORS AFFECTING SUPPLY OF MONEY

1. The Central's Bank total reserves: The higher the central bank reserves the lower the money supply
2. Economics situation: In the period of inflation, the money in circulation is high except the central bank
controls it through the Open Market Operation (OMO) or other monetary policy instruments.

[Link] rate : This is the rate which the Central Bank charges commercial banks and other financial
institutions. Minimum Rediscounting Rate (MMR) plays vital role in money supply. The higher the
rate ,the lower the money supply.

4. Demand for excess reserves : The supply of money will be increased if commercial banks demand for
excess reserves.

5. Cash reserves: This is also known as cash ratio and it is the percentage of the commercial banks
deposits with the central bank. The higher the cash reserves the lower the money supply.

THE DEMAND FOR MONEY

Demand for money refers to the amount of money that the public is willing to hold during a given
period of time. It is the desire to hold money in liquid form.

Economist John Maynard Keynes identified three motives for this:

1. Transactionary Motive: This is the desire to hold money in order to pay for day to day transactions.
This motive is directly related to income and inversely related to interest rate.

2. Precautionary Motive: This is the desire to hold money for the purpose of meeting unpredictable
emergencies and unforeseen occurrences such as sudden illness, accident, disaster etc. This motive is
also influenced by income.

3. Speculative Motive : This is the desire to hold money as a result of speculations in business activities.
Holding cash to take advantage of investment opportunities in bonds or securities. This demand
decreases as interest rates rise.

Keynes called money held for transactions and precautionary motives "active balances" and money held
for speculative purposes "idle balances." Total demand for money is the sum of these three motives.

QUANTITY THEORY OF MONEY

This theory was developed by Adam smith and David Hume but was later modified and made popular by
Irving fisher in 1911.

Quantity theory of money assumes a strict direct relationship between money supply and the level of
prices i.e if the quantity supply of money rises by 10% the price level also rises by 10%

The calculation which relates to the quantity theory of money based on fisher’s equation, and this is
illustrated as:

MV=PQ=GNP
Where:M=money supply

V=velocity of money in circulation

P= General price level

Q=Real output

The equation is an identity. This dentity explains that in an economy, the total value of all goods sold
during any period(PQ) must be equal to the total quantity of money spent during that period (MV).

The velocity of money in circulation refers to the average number of times a unit of money is spent
during the year on final goods and services.

From the equation above, V=PQ/M=Nominal GNP/M

The real output (Q) is determined by the amount of resources available in an economy the efficiency of
which depends on how they are used and the degree of integration in the economy

The price level (P) is the average ruling price at which the transaction is made .

P=MV with the assumption that velocity of money is fixed

ASSUMPTIONS OF QUANTITY THEORY ACCORDING TO FISHER

1. The economy is at full employment level.

[Link] real GNP is fixed in the short run.

3. The velocity of money in circulation is fixed

4. The amount of money supply (M) is determined by monetary authorities

SHORTCOMINGS/WEAKNESSES OF THE THEORY

[Link] and PQ are not equal as against the submission of the theory

2. The submission has been argued by economists as not being a theory but a mere relationship
between M, V, Q and P

[Link] assumption M,V,P,Q are independent of one another

[Link] is no existence of general price level in any economy which is not true

5. Velocity of money cannot be constant since money changes from hand to hand and place to place

6. The theory places more emphasis on supply of money than demand for money

7. The theory ignores how money is determined but only emphasizing on the value of money
8. The theory ignores the interest rate and the roles of monetary policy in regulating money supply

MEANING AND HISTORICAL BACKGROUND OF BANKING

A bank is a financial institution set up for the purpose of safekeeping money, valuable goods and
documents.

The evolution of modern banking system in Nigeria can be traced to the establishment of the African
Banking Corporation in 1872. Due to some problems, the bank merged with the Bank of British West
Africa (BBWA) which was set up in 1894. In 1911, Barclays Bank now (Union Bank) was established while
the British and French Bank was established in 1949. These three banks were prominent expatriate
banks which dominated early commercial banking scene in Nigeria.

Today, commercial banking in Nigeria has become highly indigenised and privatised. At the end of
December 1993, there were over 66 commercial banks with 2,352 branches in Nigeria. By now the
number has been significantly increased, but with the ongoing recapitalisation exercise, there are 24
commercial banks in Nigeria.

The Bank of British West Africa now (First Bank PLC), Barclays Bank now (Union Bank)and the British and
French Bank now(UBA) are clearly dominating the commercial banking subsector of Nigeria.

COMPONENTS OF THE MODERN BANKING SYSTEM

The modern banking system consists of the Central Bank, The Commercial Bank, Merchant Banks and
other special banks such as developments banks, Bank of Commerce and Industry, Federal Mortgage
Banks, Agricultural and Co-operative Banks etc.

In all modern economies, commercial and merchant banks are the major financial intermediaries
through which monetary authorities (acting on behalf of the government) ensure effective distribution
of funds as well as exert control over money supply.

The Central Bank plays the supervisory and regulatory role in the banking industry in the area of bank
supervision and examinations, monetary management, enforcement of prudential standards in the
banking industry etc.

The special banks are established for specific programmes e.g mortgage banks are established as
building societies.

COMMERCIAL BANKS: A commercial bank may be defined as a financial institution set up for keeping
and lending money to people, owned by individuals, organisations or governments for the main purpose
of making profit.

Functions Of Commercial Banks

1. They accept all forms of deposit (savings, current,fixed deposit account )

2. They grant loans and advances

3. They act as agents for transfer of funds.

[Link] help customers in settlement of debts

5. They provide foreign exchange services

[Link] act as standing order

[Link] provide international trade services such as bill of exchange and letter of credit

CENTRAL BANK: This is the only financial institution established and charged with the day-to-day
management and control of the nation's monetary affairs, the supervision and coordination of banking
and financial activities of the [Link] is the apex bank in the country and not established to make
profit. Each country has only one central bank. The Central Bank of Nigeria was established in the year
1959.

Functions Of The Central Bank

1. It issues currency and allocated it to other financial institutions

[Link] acts as bankers bank i.e all other banks keep account with the Central Bank

[Link] acts as a lender of last resort

4. It manages the foreign exchange and public debts of a country

5. It acts as a bank to the government

[Link] supervises the finance houses and commercial banks

7. It promotes monetary stability

MERCHANT BANKS: A merchant bank may be defined as a financial institution that provides medium
and long term loans, accept large deposits, bills and deals in stock.

Functions Of Merchant Banks

[Link] act as issuing houses in the capital market i.e issuing and floating of new securities

2. They involve themselves in equipment leasing

3. They provide advisory services to their clients on project financing,joint venture, mergers etc .

[Link] engage themselves in project finances

[Link] accept deposit

6. They grant loans and advances

SPECIALIZED BANKS/FINANCIAL INSTITUTIONS

A. Insurance company : An insurance company may be described as a financial institution involved in

the protection of persons and objects (assets) against risk.

Functions Of An Insurance Company

1. They protect life and property against death and risks

2. They offer both short and long term loan to individuals, organisations etc

[Link] serve as both money and capital markets by providing funding available to industry and
commerce

4. They offer advisory services to individuals, organisations, government etc on the best way to secure
their lives, property and businesses

[Link] Development Banks : They are banks specifically set up to provide credit and other facilities
mostly in medium and large scale enterprises on concessionary terms. Their sources of financial
resources include loans and advances from banks, The Central Bank and the Government. The
Development and Industrial banks performs similar functions with the Bank for Commerce and Industry.

Functions Of Industrial Development Banks

1. Provision of medium and long term finance for the public and private enterprises

2. Supervision and execution of projects

3. Identification of various types of internal and external constraints for project viability

4. Providing advisory services to indigenous enterprises

5. Promoting foreign investments by providing useful information to prospective foreign investors

C. Stock Exchange: The Stock Exchange is the centre point of a nation's capital market. It is a specialized
market where shares are bought and sold.

Functions Of The Stock Exchange

1. Providing a meeting place as well as a means for the sales and the purchases of existing stocks

2. Providing a mechanism through stock and shares for mobilising private and public savings and making
such funds available for production purposes.

3. Providing facilities to foreign businesses to offer their shares to the Nigerian public for subscription
thereby promoting their indigenisation of the economy
4. Prescribing requirements for new listing and regulating secondary trade activities

MONEY AND CAPITAL MARKETS

Money markets are markets for the lending and borrowing of short term loans. Examples includes: The
Central Bank, The Commercial Banks, Discount Houses, Insurance Companies, Acceptance
Houses ,Issuing Houses etc.

Capital Markets are markets for the lending and borrowing of medium and long term loans. Examples
includes Development Banks, The Stock Exchange, Finance Houses etc .

Both money and capital markets source for funds from savings and deposits, interest on loans and
advances, borrowing from other institutions especially the Central Bank etc.

HOW COMMERCIAL BANKS CREATE MONEY

The lending activities of a commercial bank enables them to create money . Granting loans and
advances, an initial deposit with commercial banks can yield a greater cumulative demand deposits in a
banking system. This automatically increases money supply.

Multiple demand deposit expansion occurs when an initial cash deposit causes an expansion of the
money supply by multiple of initial deposits.

Deposit multiplier is the recripocal of the cash reserve ratio (R) maintained by the banking system. the
higher the cash reserve ratio, the lower the deposit multiplier and the lower the demand deposit
expansion.

Mathematically, M=A/R

M= Maximum total deposits/ amount of money created

A =Initial or first deposit

R=Cash reserve ratio

Kp =1/R

Where Kp = Deposit multiplier and R = Cash reserve ratio

The size of money created by the central bank is influenced by factors such as

1. The Central Bank control over the cash reserves

2. Cash leakage out of the Banking system

3. Willingness of the customer to borrow

4. Willingness of the banks to lend money to the public

MONETARY POLICY ( HOW CENTRAL BANKS CONTROL THE COMMERCIAL BANKS)

Monetary policy is a measure adopted by the Central Bank to control money supply and credit creation
in an attempt to achieve macroeconomic goals .They could be direct or indirect:

[Link] Market Operation (OMO) : This involves the buying and selling of securities especially treasury
bills. If the Central Bank feels the money in circulation is small leading to deflation they will buy
securities from the commercial banks and public. Otherwise if the money in circulation is much then the
Central Bank will sell securities to the commercial banks. It is a direct monetary policy instrument.

2. Bank rate: This is also called discount rate i.e the rate of interest the central bank charges commercial
banks and other banks for discounting their [Link] central bank increases bank rate to reduce the
volume of money in circulation and vice versa.

3. Cash reserve or cash ratio: This is the ratio of the bank deposit with the Central Bank to total demand,
savings and time deposit liability. To reduce money in circulation and credit creation, The Central Bank
reduces bank reserves and vice versa

4. Liquidity ratio: This is the proportion of total deposit to be kept in specified liquid form (cash) by the
commercial banks. The higher the liquidity ratio the higher the money in circulation and vice versa.

5. Special deposit: This is an instrument from the Central Bank asking the commercial banks to keep
special deposits over and above their statutory [Link] is a mechanism used by the central
bank to curtail lending powers of commercial banks.

6. Moral suasion: This is a mere persuasion based on moral ground and not with the use of force. It is a
gentle appeal by the Central Bank to the commercial bank to which lending policy they should adopt
whether expansionary or contractionary.

EXPANSIONARY AND CONTRACTIONARY MONETARY POLICIES

Monetary policies can be for expansionary or contractionary purposes.

The expansionary monetary policies are the combination of measures designed to increase money
supply and credit creation.e.g. reduction of interest and bank rate, buying securities from the public,
increasing liquidity ratio etc.

The contractionary monetary policies in the other hand are a combination of measures aimed at
reducing money supply and credit creation e.g increasing interest and bank rate, selling securities to the
public, reducing liquidity ratio etc.