Money and Finance

The meaning of money

Money is any commodity that can be used as a medium of exchange that is accepted for the
purchase of goods and services. In today's modern society, money includes officially issued
banknotes and coins (collectively called legal tender), gold and bank account deposits. Money has
the following characteristics:

Durability: Money such as banknotes and coins should be fairly long-lasting yet easily replaced if it
becomes worn. Coins are highly durable and modern-day banknotes arc made from polymer rather
than paper. Polymer banknotes, first introduced in Australia in 1988, are significantly more durable
and so are used extensively in countries such as Bermuda, New Zealand, Romania and Vietnam.

Acceptability: Money is widely recognised and accepted as a medium of payment for goods and
services. Legal tender is the official money of a country (such as Canada's dollar or the UK's pound
sterling or Mozambique’s metical). Other forms of money might also be accepted, such as tourists
using US dollars. Gold is universally accepted as a form of money. By contrast, the Zimbabwean
dollar ceased to be accepted as a medium of exchange in 2009 when the country, which had been
suffering from civil unrest, experienced hyperinflation.

Divisibility: This means the money can be divided into small units. This is what happens when you
buy goods worth $17, pay using a $20 note and are given a change of $3. Cows are not divisible, as
you can’t be given change of half of a cow.

Uniformity: For money to be easily recognisable there must be uniformity within a country. This
means all 50 Meticais banknotes will look virtually identical in terms of shape, size and design. The
same applies to all legal tender denominations of banknotes and coins. Cows come in many sizes
and shapes and each has a different value; cows are not a uniform type of money.

Scarcity: Money must be limited in supply in order for it to keep its value. Both seashells and salt
have been used as money in the past, although the high level of supply meant that they soon lost
much of their value as a medium of exchange. By contrast, silver and gold arc better forms of money
due to their scarcity. The supply of money, including banknotes and coins, is regulated by the
country’s Central Bank so that the money retains its value over time.

Portability: Money must be conveniently portable. For example, the approximate weight of a
banknote, regardless of its denomination, is just one gram. Whilst almost every country uses
government-issued banknotes and coins as their official currency, there are other forms of money.
For example, money in bank accounts and the use of credit cards enable payment to be made
electronically, without the customer having to use cash. The first coins used as money appeared
around 2000 BC. In those days, the value of coins was determined by their weight, which hindered
their effectiveness as money due to the difficulties of portability.

Why do we need money?

We need money if we are to exchange goods and services with one another. This is because we
aren’t self-sufficient- we can’t produce all our wants by ourselves. Thus, there is a need for
exchange.

In the past, barter system (exchanging a good or service for another good or service) prevailed. This
had a lot of problems such as:
  the need for the double coincidence of wants (if the person wants a table and he has a chair
to exchange, he must find a person who has a table to exchange and also is willing to buy a
chair),
 the goods being perishable and non-durable,
 the indivisibility of goods,
 lack of portability etc.

Thus the money we use today are in the form of currency notes and coins, which are durable, non-
perishable, divisible (can be divided into $10s, $50s, $100s etc), portable and is generally accepted.

The functions of money:

1. Money is a medium of exchange, as explained above.

2. Money is a measure of value. Money acts as a unit of account, allowing us to compare and
state the worth of different goods and services.

3. Money is a store of value. It holds its value for a long, long time, allowing us to save it for
future purposes.

4. Money is a means of deferred payment. Deferred payments are purchases on credit- where
the consumer can pay later for the goods or service they buy.

Banks and Stock Exchanges

Banks are financial institutions that act as an intermediary between borrowers and savers.

Commercial banks are those banks that have many retail branches located in most cities and towns.
Example: BCI, Millennium Bim.

On the other hand, there is only one Central Bank that governs all other commercial banks in a
country. Example: The Reserve Bank of Mozambique (Banco de Moçambique).

Functions of a commercial bank:

1. Accepting deposits of money and savings.

2. Aid customers in making and receiving payments.

3. Giving loans to businesses and private individuals.

4. Buying and selling shares on customer’s behalf.

5. Providing insurance (protection in the form of money against damage/theft of personal

property).

6. Exchanging foreign currencies.

7. Providing financial planning advice.

Functions of a central bank:

1. It issues notes and coins for the nation’s currency.

2. It manages all payments relating to the government.

 3. It manages national debt. Central banks can issue and repay public debts on the
government’s behalf.

4. It supervises and controls all the other banks in the whole economy, even holding their
deposits and transferring funds between them.

5. It is the lender of ‘last resort’ to commercial banks. When other banks are having financial
difficulties, the central bank can lend them money to prevent them from going bankrupt.

6. It manages the country’s gold and foreign currency reserves. These reserves are used to
make international payments and adjust their currency value (adjust the exchange rate).

7. It operates the monetary policy in an economy.(This will be explained in a later chapter)

A stock exchange is a business organization that enables individuals, companies and the government
to buy and sell shares on the global stock market. It is the most important source of finance for most
businesses. Example: New York Stock Exchange (NYSE).

Functions of stock exchange:

1. It brings together buyers and sellers of stocks(shares)

2. It provides information on the market prices of stocks.

3. It supervises the conduct of firms of brokers that buy and sell shares on behalf of investors.