Professional Documents
Culture Documents
Date: 7/18/06
Class: Intro to Business BA11 5040
Professor: McNamara
This reaction paper is in regards to chapter 21 which deals with money and
financial institutions and how they work. First of all we need to know what money is.
Money is anything that people generally accept as payment for goods and services.
Money to be useful must be portable, divisible, stable, durable, and unique. Money has
since become a very graduated system since the times of the conch shell. Money is now
managed by a very complex global system. When something is consistently used as an
intermediate object of trade, as opposed to direct barter, then it is regarded as a medium
of exchange. Such a thing simplifies the process of trade by allowing trade to take place
without the need for double coincidences. A double coincidence is defined in the
following manner: The coincidence of wants problem is an important category of
transaction costs that impose severe limitations on economies lacking money and thus
dominated by barter or other in-kind transactions. The problem is caused by the
improbability of the wants, needs or events that cause or motivate a transaction occurring
at the same time and the same place. In-kind transactions have several problems, most
notably timing constraints. If you wish to trade fruit for wheat, you can only do this when
the fruit and wheat are both available at the same time and place. That may be a very
brief time, or it may be never. With money, (broadly speaking, any commodity used as a
medium of exchange) you can sell your fruit when it is ripe and take the money. You can
then use the money to buy wheat when the wheat harvest comes in. Thus the use of
money makes all commodities become more liquid. Besides barter, other kinds of in-
kind transactions also suffer from the coincidence of wants problem in the absence of
money. For example, when wealth is transferred during marriage, divorce, inheritance,
and other crucial life events, or during the collection of taxes or tribute, it is improbable
that this event will coincide with the recipient's desire for the commodities the payor can
readily obtain, unless they are intermediate commodities, i.e. money. In the absence of
money, all of these transactions suffer from the basic problem of barter -- they require an
improbable coincidence of wants and events. Because of the severe costs imposed by the
coincidence of wants in an in-kind economy, money tends to emerge naturally as some
form of commodity money.
When the value of a market good is frequently used to measure or compare the value of
other goods or where its value is used to denominate debts then it is functioning as a unit
of account. A debt or an IOU can not serve as a unit of account because its value is
specified by comparison to some external reference value, some actual unit of account
that may be used for settlement. Unless, of course, the debt or IOU is also an accepted
medium of exchange, in which case we have money. For example, if in some culture
people are inclined to measure the worth of things with reference to goats then we would
regard goats as the dominant unit of account in that culture. For instance we may say that
today a horse is worth 10 goats and a good hut is worth 45 goats. We would also say that
an IOU denominated in goats would change value at much the same rate as real goats.
When something is purchased primarily to store value for future trade then it is being
used as a store of value. For example, a sawmill might maintain an inventory of lumber
that has market value. Likewise it might keep a cash box that has some currency that
holds market value. Both would represent a store of value because through trade they can
be reliably converted to other goods at some future date. Most non-perishable goods have
this quality. Most goods are capable of possessing all of the characteristics outlined
above to a greater or lesser degree. However, the more successful a money is the greater
the degree in which it will typically satisfy all three criteria.
This is just one example of how financial institutions can work and how money
can be made.
Much of this material was obtained from our text and an online source Wikipedia.org