OBJECTIVES

This project is intended for you to explore some area of personal interest in the area of 'money'.
This is a fairly large project, intending to take approximately 8 hours to complete. It is not
required for you to present this one to the class, but you may if you wish.
NSTRUCTIONS

PROJECT TOPIC: Select a topic related to 'money' - a list of possible topics is listed
below:
o history of money - how money came to exist - how money has evolved
o compare and contrast the following currencies: Canadian dollar, U.S. dollar, Euro,
and British Pound
o compare and contrast the Canadian dollar with the following: Japanese yen,
Chinese yuan, South Korean won, and Indian rupee
o the evolution of Canadian currency
o Canada's 'Big 5' banks (Royal Bank, Bank of Montreal, TD Canada Trust, CIBC, and
Scotiabank) - research history and/or current status of each
o what is the future of money and currency?
o credit cards...how they work

Barter System

A barter system is an old method of exchange. This system has been used for centuries and long
before money was invented. People exchanged services and goods for other services and goods
in return.

History of Bartering

The history of bartering dates all the way back to 6000 BC. Introduced by Mesopotamia tribes,
bartering was adopted by Phoenicians. Phoenicians bartered goods to those located in various
other cities across oceans. Babylonian's also developed an improved bartering system. Goods
were exchanged for food, tea, weapons, and spices. At times, human skulls were used as
well. Salt was another popular item exchanged.

In the Middle Ages, Europeans travelled around the globe to barter crafts and furs in
exchange for silks and perfumes. Colonial Americans exchanged musket balls, deer skins,
and wheat. When money was invented, bartering did not end, it become more organized.

Due to lack of money, bartering became popular in the 1930s during the Great Depression. It
was used to obtain food and various other services.

double coincidence of wants

The coincidence of wants is the situation where the supplier of good A wants good B and the
supplier of good B wants good A[2]

limitations of barter system

Barter System can work when there exists 'Double Coincidence of Wants':
 The major limitations of Barter Exchange are:
Lack of Double Coincidence of Wants:
Lack of Common Measure of Value:

THE PURPOSE OF MONEY

So, money isn't just pieces of paper. It's a medium of exchange that facilitates trade. Suppose I
have a Wayne Gretzky hockey card that I'd like to exchange for a new pair of shoes. Without the
use of money, I have to find a person, or combination of people who have an extra pair of shoes to
give up, and just happen to be looking for a Wayne Gretzky hockey card. Quite obviously, this
would be quite difficult. This is known as the double coincidence of wants problem:

[T]he double coincidence is the situation where the supplier of good A wants good B and
the supplier of good B wants good A. The point is that the institution of money gives us a
more flexible approach to trade than barter, which has the double coincidence of wants
problem. Also known as dual coincidence of wants.
Since money is a recognized medium of exchange, I do not have to find someone who has
a pair of new shoes and is looking for a Wayne Gretzky hockey card.
I just need to find someone who is looking for a Gretzky card who is willing to pay enough
money so I can get a new pair at Footlocker. This is a far easier problem, and thus our lives
are a lot easier, and our economy more efficient, with the existance of money.

HOW MONEY IS MEASURED

As for what constitutes money and what does not ,he following definition is provided by The
Federal Reserve Bank of New York:

"The Federal Reserve publishes weekly and monthly data on three money supply measures
-- M1, M2, and M3 -- as well as data on the total amount of debt of the nonfinancial sectors
of the U.S. economy... The money supply measures reflect the different degrees of liquidity
-- or spendability - that different types of money have. The narrowest measure, M1, is
restricted to the most liquid forms of money; it consists of currency in the hands of the
public; travelers checks; demand deposits, and other deposits against which checks can be
written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and
balances in retail money market mutual funds. M3 includes M2 plus large-denomination
($100,000 or more) time deposits, balances in institutional money funds, repurchase
liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign
branches of U.S. banks and at all banks in the United Kingdom and Canada."

So there are several different classifications of money. Note that credit cards are not a form of
money.

Note that money is not the same thing as wealth. We cannot make ourselves richer by simply
printing more money.

Advantages of Money:

a. Removes the coincidence of wants.

b. Takes less storage space and is easier to carry.
c. Liquidity of currency is easier.
 d. Now-a-days; many instruments are available through which it is not necessary to
physically carry the currency.

Other Forms of Money

Deposits with Banks: Most of the people need only some currency for their daily needs. Rest
of the amount is usually kept as deposit in banks. Money which is kept in a bank is safe and it
even earns an interest. One can withdraw money from his account as and when required.
Since deposit in the bank account can be withdrawn on demand, these deposits are called
demand deposits.

One can use a cheque; instead of cash to settle payments. Moreover, one can also buy a
demand draft from a bank to make payments.

Credit: Banks keep a small proportion of their deposits as cash with themselves. This is
usually 15% of their deposits as cash. This amount is kept as provision to pay the depositors
who may come to withdraw the money on any day. This amount is enough because only a
small fraction of people come to withdraw money on a given day. The rest of the amount is
used by the banks to give money on credit to people who need the credit. A bank charges
interest on the loan which it gives to its creditors. The interest rate charged by a bank no loans
is higher than the interest rate given by it on deposits. Thus, interest is the main source of
income for banks.

Credit/Debit Cards: Now-a-days, credit/debit cards are in vogue. A debit card allows you to
make payments from the amount which is lying in your bank account. A credit card, on the
other hand, provides money on credit. Payment through credit/debit card is done electronically
and this removes the need of carrying cash.

Terms of Credit

People often need to borrow money for various purposes. Many businessmen need to borrow
to buy raw materials and machineries. Many farmers need to borrow to buy seeds, fertilisers,
farm equipments, etc. People usually buy vehicles and houses by borrowing from banks. Thus,
credit plays an important role in the economy.

Every loan agreement specifies terms and conditions; regarding the rate of interest and term of
payment. In most of the cases, the banks fix an EMI (Equated Monthly Installment) for
repayment of loan.

Collateral: An asset which is owned by the borrower and is used as a guarantee to a lender
until the loan is repaid is called the collateral. Land, house, vehicle, livestocks, deposits with
banks, insurance policy, gold, etc. are examples of assets. If the borrower fails to repay the
loan, the lender reserves the right to sell the collateral to obtain payment.
 Terms of Credit: The terms of credit include rate of interest, collateral and mode of repayment.
The terms of credit varies from one loan agreement to another and also on the nature of the
lender and the borrower.
Sources of Credit

Formal Sector: The formal Sector comprises of banks and cooperative societies.

Informal Sector: The informal sector consists of money lenders and friends and relatives,
merchants and landlords.

The following diagram shows share of different sources of credit in rural households in India in
2003.

Fig: Sources of Credit for Rural

Households in India in 2003

While the formal sector is bound by the rules and regulations of the RBI and charge the
prevalent rate of interest as per RBI guidelines; the informal lenders are not bound by such
rules. The informal lenders usually charge a very high rate of interest. A higher cost of
borrowing is often detrimental to the borrower. It usually results in a debt trap for the borrower.
The borrower is seldom able to escape the never ending cycle of loan repayment.

Many people are too poor to qualify the requirements of credit-worthiness of banks and
cooperatives. There are many others who may not have enough documents; like residential
certificate or income certificate. Such people are usually at the mercy of informal lenders.

THE FUNCTIONS OF MONEY

Money has three functions in the economy: It is a medium of exchange, a unit .of ,and a store
of value. These three functions together distinguish money from other assets in the economy,
such as stocks, londs, real estate, art, and even baseball cards. Lets examine each of these
fnictions of money in turn. A medium of exchange is an item that buyers give to sellers when they
purchase goods and services. When you buy a shirt at a clothing store, the store gives you the
shirt, and you give the store your money. This transfer of money from buyer to seller allows the
transaction to take place. When you walk into a Store, you are confident that the store will accept
your money for the items it is selling because money is the commonly accepted medium of
exchange.
A unit of account is the yardstick people use to post prices and record debts. When you go
shopping,
you might observe that a shirt costs $20 and a hamburger costs $2. Even though it would be
accurate to say that the price of a shirt is 10 hamburgers and the price of a hamburger is into of a
shirt, prices are never, quoted in this way. Similarly, if you take out a loan from a bank, the size of
your future loan repayments will be measured in dollars, not in a quantity of goods and services.
When we want to measure and record economic value, we use money as the unit of account A
store of value is an item that people can use to transfer purchasing power from the present to
the future. When a seller accepts money today in exchange for a good or service, that seller can
hold the money and become a buyer of another good or service at another time. Of course, money
is not the only store of value in the economy, for a person can also transfer purchasing power from
the present to future by holding other assets. The term wealth is used to refer to the total of all
stores of value including both money and non monetary assets. Economists use the term liquidity
to describe the ease with.which an asset can be converted into the. economys medium of
exchange. Because money is the economys medium of exchange, it is the most liquid asset
available. Other assets vary widely in their liquidity. Most stocks and bonds can be sold easily

History of money

The history of money concerns the development of means of carrying out transactions involving
a medium of exchange. Money is any clearly identifiable object of value that is generally accepted
as payment for goods and services and repayment of debts within a market or which is legal
tender within a country.

Key Functions of Money

1. Medium of exchange: money allows goods and services to be traded

without the need for a barter system. Barter systems rely on there being a
double coincidence of wants between the two people involved in an
exchange
2. Store of value: this can refer to any asset whose value can be used now
or used in the future i.e. its value can be retrieved at a later date. This
means that people can save now to fund spending at a later date.
3. Unit of account: this refers to anything that allows the value of something
to be expressed in an understandable way, and in a way that allows the
value of items to be compared.
4. Standard of deferred payment: this refers to the expressing of the value
of a debt i.e. if people borrow today, then they can pay back their loan in the
future in a way that is acceptable to the person who made the loan.