From barter to money
Before money existed, people traded by barter — exchanging goods directly for other goods without any money. This system created several problems. The main one was the need for a double coincidence of wants: a farmer who wanted to swap rice for shoes could only do so if he met a shoemaker who, at that very moment, wanted rice. Barter was also hard because there was no common measure of value, large items such as a cow could not be divided, and many goods were not durable enough to store.
Money was introduced to solve these problems. Money is anything that is generally accepted as a means of payment for goods, services and debts.
The four functions of money
- Medium of exchange — money is accepted in buying and selling, so a double coincidence of wants is no longer needed.
- Measure of value — the prices of all goods are stated in the same unit, the Ringgit (RM), so values are easy to compare.
- Store of value — money can be kept and used in the future because its value stays fairly stable.
- Standard of deferred payment — future debts and instalments can be stated in a fixed money value.
Example
A seller sells nasi lemak at RM3. That RM3 acts as a measure of value, can be used to buy other goods (medium of exchange), can be saved for tomorrow (store of value), and can settle next week’s credit at the shop (deferred payment).
Bank Negara Malaysia and commercial banks
Bank Negara Malaysia (BNM) is the country’s central bank. BNM has the sole power to issue the Ringgit, acts as banker to the government, keeps the national reserves, and regulates and supervises the other banks so that the financial system stays stable. BNM does not accept deposits from the public.
Commercial banks deal directly with the public. Their main functions are to accept deposits (savings and current accounts) and to give loans to individuals and businesses. A commercial bank earns its profit from the gap between the interest it charges on loans and the interest it pays on deposits.
Characteristics of good money
To carry out its functions, money must have several important features. It must be generally accepted by everyone, durable so it does not wear out quickly, and portable so it can be carried anywhere. Money must also be divisible into small units such as sen so that small transactions can be made, uniform in value, and have a limited and controlled supply so that its value stays stable. The Ringgit notes and coins issued by Bank Negara Malaysia meet all these features, making them far more efficient than the barter system.
Remember
Malaysia’s central bank is Bank Negara Malaysia; it issues the Ringgit and supervises banks. Commercial banks accept deposits and give loans to the public.