Red Sea University
Faculty of Economics Management
Introduction to Money and Banking
Prepared by
Lecturer Ilyas Adam Eid

Money

Course Contents
• Introduction of Money and Banking
• Definition of Money
• Monetary system
• Financial Markets
• Financial institutions
• Banking &scope of banks Operations
• Functions of banking
• Monetary theories
• Inflation
• Use of Gold and silver as money

Money and Banking
• Money is “a current medium of exchange,
which is recognized and widely accepted. in
payments for goods and services and for the
settlement of debts”.
• Money is the stock of assets that can be
readily used to make transactions.
• money is a current medium of exchange in the
form of coins and banknotes; money.

Types of Money
Money comes in three forms:
•commodity money, fiat money, and fiduciary
money.
•Most modern monetary systems are based on fiat
money.
•Commodity money derives its value from the
commodity of which it is made,
•fiat money has value only by the order of the
government.

Cont…
• Fiduciary money includes demand deposits
(such as checking accounts) of banks.
Fiduciary money is accepted on the basis of
the trust its issuer (the bank) commands.
• Most modern monetary systems are based on
fiat money. However, for most of history,
almost all money was commodity money, such
as gold and silver coins.

Functions of Money
• Medium of Exchange: When money is used to
intermediate the exchange of goods and services,
it is performing a function as a medium of
exchange.
• Unit of Account: It is a standard numerical unit of
measurement of market value of goods, services,
and other transactions.
• Store of Value: To act as a store of value, money
must be reliably saved, stored, and retrieved. It
must be predictably usable as a medium of
exchange when it is retrieved.

Cont..
The Basis of Credit:
• Money facilitates loans. Borrowers can use
money to obtain goods and services when they
are needed most.
A Standard of Postponed Payment:
• This is an extension of the first function
• the use of money permits postponement of
spending from the present to some future
occasion.

Cont….
• A Measure of Value:
• Money is the measuring rod of everything.
This serves two basic purposes:
• (1) Households (consumers) can plan their
expenditure and
• (2) Business people can keep records of in-
come and costs in order to work out their
profit and loss figures.

Characteristics of Money
1.Durability. A cow is fairly durable, but a long trip to
market runs the risk of sickness or death for the
cow and can severely reduce its value.
2. Portability. While the cow is difficult to transport
to the store, the currency can be easily put in my
pocket.
3. Divisibility. A 20-dollar bill can be exchanged for
other denominations, say a 10, a 5, four 1s, and 4
quarters. A cow, on the other hand, is not very
divisible.

Cont….
4.Uniformity. Cows come in many sizes and shapes and
each has a different value; cows are not a very
uniform form of money. Twenty-dollar bills are all
the same size and shape and value; they are very
uniform.
5. Limited supply. In order to maintain its value, money
must have a limited supply.
• The supply, and therefore the value, of 20-dollar bills
and money in general are regulated by the Federal
Reserve so that the money retains its value over
time.

Cont….
7. Acceptability.
• Money is generally accepted through out the
world.
• Even though cows have intrinsic value, some
people may not accept cattle as money. In
contrast, people are more than willing to
accept 20-dollar bills. In fact, the U.S.
government protects your right to use U.S.
currency to pay your bills.

Advantages of Money
1. Economical:
• Paper money practically costs nothing to the
Government.
• Currency notes, therefore, are the cheapest
media of exchange.
• (ii) Convenient:
• Paper money is the most convenient form of
money.
• A large amount can be carried conveniently in
the pocket without anybody knowing it.

Cont…
(iii) Homogeneous:
• One essential quality in money is that it must
be exactly of the same type.
• Even among the coins there are good and bad
coins.
• currency notes are all exactly similar.
• It is a very suitable medium of exchange.

Cont..
(iv) Stability:
• The value of paper money can be kept
stable by properly regulating its issue.
(v) Elasticity
• Paper money is absolutely elastic.
• Its quantity can be increased or decreased
at the will of the currency authority.

Cont..
(vi) Cheap Remittance:
• Money in the form of currency notes can be
cheaply remitted from one place to another in
an insured cover.
(vii) Advantageous to Banks:
Paper money is of very great advantage to the
banks. They can keep their cash reserves
against liabilities.

END