THE EVOLUTION AND NATURE OF MONEY

This unit explained the historical background to the discovery of modern 

money through explicit explanation of different historical phases. This unit 

would equally make students to understand that, there are different types of money and that some money do have used and face value (commodity money) 

while other only have face value but no use value (fiat money). The unit also 

establish that inflation does affect some functions of money and that it affect 

economic decision making.

Student should be able to;

i) Explain historical phases through which money evolved. 

ii) Clearly explain nature and types of money.

iii) Understand what is meant by commodity money.

iv) Understand the different between commodity money and fiat money 

v) Understand metallic money and its variants

vi) Explain effect of inflation on money.

vii) Differentiate between commodity money and fiat money. 

viii) Explain different types of money.

ix) Establish relationship between inflation and quantity of money

Historical Background of the Evolution of Modern Money

The origin of money can be traced back to barter system and its attendance 

problems. Barter trade is a trade where products are exchange for products. 

Because of this nature of trade, a number of limiting problems are inevitable, 

such problems include double coincidence of wants, no standard measurement, specialization problem, problem of weight, indivisibility of some products, 

distance and transportation problem.

However, these problems put together made the exchange system too 

cumbersome, therefore this led to realization that some commodities that are often demanded, so people started to exchange their product for these 

commodities to later exchange for the product of their choice. These  commodities are referred to as third commodities which include salt, pepper and palm oil etc. These third commodities vary from one society to another and it paved way for acceptance and recognition of some addition commodities as money (i.e. commodity money). This commodity money include cowries, elephant tusk, hide and skin etc this later led to discovery of precious metals as money (metallic money) the metallic money retain its use value as commodity and still use for exchange of goods and services. These precious metals include gold, silver and bronze. This afterwards metamorphosed to fiat money (i.e. modern day money) through the activities of the gold smith in the then roman empire who accepts deposit of gold and in return a receipt is issue whose value is attach against the gold deposited but alas! Most people that deposit gold don‘t usually come back for this gold but rather make use of the gold smith receipt in transacting business. When authority discovered this they started issuing more receipts that are not backed-up with gold, this was the genesis of fiat money�money that does not have any commodity value except is been recognised by the authority.

Self Assessment Exercise

i. Explain in brief the historical background to the evolution of money.

ii. What was the first phase in solving problem limitating against barter trade?

iii. Account for modern money discovery

iv. Evaluate metallic money as a commodity money. 

v. What is intrinsic value or used value?

vi. What is face value? Is the face value of commodity money differs from fiat 

money. Justify your answer.

Nature of Money

The nature of money is usually discussed under three headings:

a. Legal tender: 

money which by nature must be accepted in payment for goods and in discharge of debts obligations. Currency notes and coins are legal tender in all modern economies.

b. Fiat money: 

money that is not a commodity and it is not redeemable in any commodity. What gives such money value and acceptability is their being declared as legal tender by the government. Money in the form of 

currency notes fit into this description.

c. Token money: 

this refers to money whose face value is greater than the actual value of the material of which it is made. In most economies, coins are token money, whose value as metal is less than their monetary value, same apply to naira notes (Nigerian case).

Self Assessment Exercise

i. Discuss the meaning and nature of money.

ii. Fiat and token money mean the same, discuss.

iii. Examine legal tender in the light of intrinsic value

iv. Should a country use real gold as coin? Under what condition could this 

be done.

TYPES OF MONEY

The three main types of money are classified as:

a. Paper money and coins: 

These are issued exclusively by the Central Bank of a country. For example, Naira and Kobo are issued by the Central 

Bank of Nigeria, Cedis and Pesewas by Bank of Ghana, pound sterling and pence by Bank of England, etc. paper money (or currency notes) and coins are legal tender, hence, they command general acceptability in all transactions.

b. Bank deposits: 

These are money deposited with financial institutions, especially commercial banks and the central bank. The three types of depo money are:

i. Demand deposits: 

it is a deposit of funds (usually paper money and coins) with a bank which are withdrawable or transferable without prior notice by writing a cheque. Such deposits are held in current account of the customer, and a fee is charged for processing the cheque.

ii. Saving deposit: 

it is a deposit of fund with a bank which can be withdrawn with or without a notice of withdrawal. Saving deposits are held in savings account and they yield interest for 

the depositor.

iii. Time deposit: 

it is deposits of fund that cannot legally be withdraw from the bank without at least 30 days notice of withdrawal. Time deposits are held in fixed deposits accounts 

open for depositors and they yield comparable higher interests.

c. Quasi – money or near money: 

these are assets which adequately serve 

as a store of value but do not fulfil the medium of exchange function. 

Examples include saving and time deposits, stock and shares, postal and money orders, treasury bills, treasury certificate, call money, vouchers, etc. what constitute quasi – money varies from one country to another

Self Assessment Exercise

i. Differentiate between Near Money and Bank Deposit. 

ii. What other name is given to demand deposit?

iii. What is metallic money?

iv. Explain the different between paper money and coin 

v. what determine the value of money.

INFLATION AND MONEY

Inflation is defined as the continuous and general rise in price level due to a number of factors namely; the volume of money in circulation in relation to productivity capacity of the economy, imported commodities (if goods or services are from an importing country suffering for chronic inflation), high cost of production and so on and so forth. However, inflation affect price level but price level are measured in monetary terms, hence the link between inflation and money.

Inflation affects two major functions of money, namely, standard for deferred 

payment and store of value, as explained earlier in this module that money made 

it possible for someone to work today and receive payment in the future date or to sell today and receive payment for the goods in future date, but with inflation 

money losses it value, meaning that, what an individual effort worth as at the date the work was done or goods were sold is not the same with what the payment the individual eventually received at that future date. Also money serve as store of value, that is , selling a property that is not needed at a particular time and keeping the worth till when it would be needed again, in that wise, money as served as store of value, however, during in inflation such value will be eroded.

Therefore it is obvious that inflation affect the value of money value through the 

price system- a system in which the value of goods and services and determine in 

a market place through the forces of demand and supply. By implication, if the 

volume of money is greater than the available goods and services, market prices 

rises unjustifiable and money loses its purchasing power-the loss in the 

purchasing power of money is otherwise known as inflation. Therefore inflation 

and money are linked through prices of goods and services that are determined in 

the market place.

Self Assessment Exercise

i. Establish the link between inflation and money in an economy. 

ii. Advent of money is the source of inflation . Discuss.

iii. Value of money and inflation are inversely related. Discuss.

iv. Evaluate the relationship among these variables, Money, Inflation rate and prices.

v. Explain the impact of inflation on purchasing power.

Conclusion

This unit concludes that advent of fiat money was the beginning of solution to

the problem of barter system. Also this unit explored the types and nature of 

money and relate inflation to money through the price system. We therefore 

conclude that inflation majorly affects two functions of money, namely, standard

for deferred payment and store of value.

Summary

The main discussion of this unit is basically on the different nature and types of money in the economy. It also revealed that, it is necessary for the government to 

ensure consistency between the quantity of money and the amount of goods and 

services available in the economy in order to reduce inflation and promote price

stability and rapid economic growth. This unit equally, explores the evolution of

modern day money and show the students various phases of what is known today 

as money went through.

Marked Assignment

i. Give an account of the evolution of money

ii. Differentiate between feature and function of money and list the element of 

each.

iii. Write short note on the following;

a. Token money 

b. Fiat money

c. Commodity money

d. Nature of money 

e. Types of money.

iv. Explain the relationship between inflation and money.

v. Value of money and inflation are inversely related. Discuss.

vi. Evaluate the relationship among these variables, Money, Inflation rate and 

prices.

vii. Explain the impact of inflation on purchasing power. 

viii. What other name is given to demand deposit?

ix. What is metallic money?

x. Explain the different between paper money and coin 

xi. What determine the value of money?

xii. What was the first phase in solving problem limitating against barter trade?

xiii. Account for modern money discovery

xiv. Evaluate metallic money as a commodity money. 

xv. What is intrinsic value or used value?

xvi. What is face value? Is the face value of commodity money differs from fiat 

money. Justify your answer.

References/Further Readings

Attah B.O, Bakare, T.A. & Daisi, O.R., (2011); Anatomy of Economics 

Principles, Q&A (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, 

Lagos, Nigeria

Amacher, R and Ulbrich, H, (1986); Principles of Economics, South Western

Publications Co. Cincinnafi, Oliso

Bakare –Aremu T.A, (2013); Fundamental of Economics Principles

(Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria

Bakare I.A.O, Daisi, O.R., Jenrola, O.A., & Okunnu, M.A., (1999): Principles 

and Practice of Economics (Macro Approach), Raamson Printing Press, 

Mushin, Lagos, NigeriaDennis R. A. et-al; International Economics, Mcgraw 

Hill Irwin, 8th edition.

Familoni K.A, (1990); Development in Macroeconomics Policy, Concept

Publications, Lagos, Nigeria

Fashina E.O, (2000); Foundations of Economics Analysis (Macro Theories),

F.E.F International Company, Ikeja, Lagos, Nigeria

Jhingan M.L, (2010); Macroeconomics Theory, 12th edition, Vrinda

Publications (P) Ltd. Delhi, India

Jhingan M.L, (2010); International Economics, Vrinda Publications (P) Ltd. 

Delhi, India

Lipsey R.G, (1979); An Introduction to Positive Economics, Hayper & Raw, 

London

Umo J.U, (1986); Economics; An African Perspectives , Johnwest, Lagos Nigeria.

Gordon Robert J. (2009). Macroeconomics(Eleventh ed.). Boston: Pearson Addison Wesley. ISBN 9780321552075