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Kids' Corner :  Learn About Money

History of Money

Once upon a time, there was a no such thing as money. Each person would provide for his own food clothing and shelter. This was very time consuming and inconvenient. Through time, people began to realise that they had for what they wanted. The Stone Age man could exchange food for an axe by bartering.

Thus began a system of barter by exchange of needs. One family, for instance, could raise cows and exchange them for rice or bread produced by another.

Barter trade, however, was not always that simple. Sometimes, it was difficult to find someone who had exactly the item that was needed and who at the same time, also needed the goods such as bread sometimes went bad before an exchange was made, and some good (a cow, for instance) could not be cut up into small pieces (divisible) to exchange for a loaf of bread.

Some goods were commonly used for barter trade because they could easily be carried, have a common value and be easily divided. This commodity money became a medium of exchange - a single item that would be generally accepted in exchange for other goods. Common goods such as salt, tea, shells, bread, grain and tobacco were among the item that had served as money.

The first true money appeared when the ruler or king issued a constant value. For example, in historical times in Malaysia, blocks of tin were a kind of commodity money. Gradually these coins became smaller (easier to carry) and were made of gold, silver and copper (these being scarce) with standard size and weight. They also carried the sign of the king to prevent forgery. Gradually such coins became money in use.

As businesses developed, it became inconvenient to move large sums of coins around the country. In the Middle Ages, people preferred to deposit their coins with trustworthy goldsmiths, in exchange for paper receipts. Whenever a depositor wanted to make payments, he would exchange these receipts back for coins. As long as the goldsmith was trustworthy, the paper receipt was as good as the coins. Thus, the first paper money and first banks were developed.

This marked the beginning of "fiat" money. That is, they are money because the government says they are, and because we accept them as such. The currency and coins we use today are fiat money. The coins we usually use are issued by the government or the central bank.

In Malaysia, only Bank Negara Malaysia is allowed to issue coins and paper currency notes. The value of ringgit is "legal tender" and is backed by gold and foreign exchange held by Bank Negara Malaysia. "Legal tender" means the ringgit is recognised by law for settling of a debt or paying for goods and services within the country.

The ringgit is money, because:

  • It is a medium of exchange (we can exchange a loaf of bread for cash)

  • It is a measure of value (goods are expressed in ringgit terms - a loaf bread is RM1, a car is RM20,000)

  • It is a store of value (we hold cash or deposit of ringgit in banks as our savings - the value of the ringgit is backed by gold and foreign exchange held by Bank Negara Malaysia)

  • It is difficult to forge (there is heavy penalty to copy or falsify the ringgit - our currency note has many security features that make copying difficult)

  • It is divisible (100 sen = RM1; there are 1 sen, 5 sen, 10 sen, 20 sen, 50 sen coins as well as RM1, RM5, RM10, RM50 and RM100 notes)

Basically, there are now three forms of money in Malaysia: coins, paper currency and transaction account (cheques and credit cards).

While coins and paper currency are used to transfer money at the present time, cheques and credit cards commit money that will be earned in the future.

The most common instrument used to transfer funds are cheques. Cheques and credit cards are becoming more popular as they provide their holders with the power to purchase without having to carry around a lot of cash or coins.

Through the development of computers, money can now be moved around Malaysia electronically. The Automated Teller Machine (ATM) is a place where we can obtain cash from the bank through a computerized machine. We can also send money through ATMs. Similarly, money for deposit can be accepted by ATMs.

Very recently, money can now be moved around the country and the whole world through the use of Internet. Internet banking and electronic money is set to become the new way to handle money.