Unit 1 – Additional Notes updated.ppt

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• _{1. Commodity Money}

• _{Money made of precious metals or another valuable}

commodity.

– _{E.g. Silver or gold}

• _{The face value of the commodity money is equal to its}

intrinsic value

• _{Often heavy and cumbersome}

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• _{2. Fiat Money}

• _{Paper currency decreed by government as legal tender.}

– _{Money must be accepted legally in settling debts} • _{It must be difficult to counterfeit}

• _{Consumers has trust in the money}

• _{Seigniorage – revenue derived from issuing fiat money}

• _{If government prints too much fiat money, persons might lose} trust in govt due to inflation and refuse to accept money.

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• _{3. Cheques}

• _{Since large sums of money can be stolen and may not be}

easily portable, a system of cheques was developed

• _{Cheques are I O U’s payable on demand.}

• _{Cheques have improved the efficiency of the payment}

system.

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• _{Advantages and Disadvantages of Cheques:}

• _{Advantages of Cheques:}

• _{payments made back and forth cancel themselves, cheques allow} such transactions to be carried out without the movement of

cash. We can simply cancel the cheque.

• _{Cheques can be written for payment of any amount making} transactions for large amounts much easier.

• They can be written for the exact amount required to be paid.

• _{Cheques also serve as receipts}

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The Evolution of Money

• _{Advantages and Disadvantages of Cheques:}

• _{Disadvantages of Cheques:}

• _{It takes long to clear cheques, if cash is needed urgently,}

disappointments may occur if payment is made with a cheque.

• _{The paper clearing process is expensive}

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_{4. Electronic Means of Payment (EMOP)}

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_{These have developed as a result of the computer and}

advanced telecommunication technology.

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_{All payments are made using electronic}

telecommunications

• _{E.g. CHIPS – clearing house interbank payment systems} • _{SWIFT – society of worldwide intercommunications}

financial transfers

• _{EFTS – electronic funds transfer system}

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• _{Private EMOPs used to wire funds among banks}

internationally.

• _{All these electronic payment systems allow large}

amounts of money (in excess of $1 million) to be paid

internationally among financial institutions

• _{ACHS – automatic clearing house system allows}

smaller amount of payments to be made to

individuals

• _{This allows companies to send their employees pay}

straight to the bank.

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• _{5. E-Money}

• _{This is money that is stored electronically; it is now}

common because of cheaper development of

computer technology

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• _{Examples of E-Money}

• _{Debit Cards}

• _{Stored-Value Cards}

• _{Smart Cards}

• _{Electronic Cash}

• _{Electronic Cheques}

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The Evolution of Money

• _{Debit Cards}

• _{Enables consumers to purchase goods by electronically}

transferring funds directly from their bank accounts to the sellers account.

• _{They are used by all those that accept credit cards and are}

now faster to use than cash.

• _{Stored-Value Cards}

• _{These are like debit and credit cards, however, they differ in}

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The Evolution of Money

• _{Smart Cards}

• _{Stored value cards with an extra sophistication.}

• _{Card contains its own computer chip that can be loaded with}

digital cash from its owners bank account whenever it is needed.

• _{Smart cards can be loaded from one owns PC, ATMs and}

specially equipped telephones.

• _{Stored valued cards are used by many countries including}

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The Evolution of Money

• _{Electronic Cash}

• _{A form of e-money that can be used on the internet to purchase goods}

and services.

• _{To get e-cash an account is set up with a bank that has links to the}

internet, the e-cash is then transferred to one’s PC.

• _{To make a purchase one surfs the internet, picks the item and using}

the buy option, the e-cash can be transferred from one’s account to the sellers account.

• _{The seller upon getting the actual cash, will ship the item to the buyer.}

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The Evolution of Money

• _{Electronic Cheques}

• _{This allows users of the internet, to pay their bills directly}

over the internet without having to send a paper cheque.

• _{The users write an equivalent of the cheque on their PCs and}

email the cheques to the other parties who then send it

electronically to their banks for verification and then transfer money from the originators bank account to the recipients bank account. Countries that use this include the