Money is anything that is generally accepted by society as a medium of exchange and a means of settling debts. It is any good that is generally accepted for final payment of goods and services. Money represents a stock of assets used to carry out transactions.

In modern economies, money takes various forms including:

• Bank notes and coins
• Credit and debit cards
• Written cheques
• Electronic money (e-money) and mobile money

Money performs four essential functions in any economy:

1. Medium of Exchange

Money provides the most efficient means of purchasing goods and services. In the market, money acts as an intermediary between a buyer and a seller. Instead of exchanging a cow for a piece of cloth, a consumer may buy cloth using money. Money is the only medium generally accepted by most buyers and sellers to settle transactions.

2. Store of Value

Holding money is an effective way of storing value because of its durability. During barter trade, livestock keepers had to accumulate goods that could deteriorate or die, making storage inefficient. With money, wealth can be stored safely and cheaply for future purchases.

3. Unit of Account

Money facilitates the pricing of goods and services. With the barter system, it was difficult to determine the worth of exchanged items. For example, if 1 kg of rice costs TShs 2,000 and 1 kg of maize flour costs TShs 1,000, we can say that rice is worth twice as much as maize flour. Money provides clear price information to consumers.

4. Standard of Deferred Payment

Money facilitates borrowing and repayment of loans because its value fluctuates less compared to individual commodities. If a maize farmer borrows maize and the value declines due to poor harvests, the creditor loses value. Money reduces this risk in lending transactions.

For an item to function well as money, it should possess the following qualities:

• Divisibility: Easily divided into small units without losing value (e.g., Tanzanian notes: TShs 500, 1,000, 2,000, 5,000, 10,000)
• Acceptability: Accepted by all society members as a medium of exchange
• Homogeneity: Units of equal value must be identical in size, shape, and quality
• Durability: Able to withstand wear and tear from repeated use
• Stability in value: Value remains relatively constant over time
• Portability: Easy to carry and transport
• Cognisability: Easily recognized as money
• Scarcity: Relatively scarce to command value

Barter Trade

Before money emerged, barter trade was used—direct exchange of goods for goods without money. However, barter faced serious challenges:

• Double coincidence of wants: A butcher with meat wanting beans must find someone who has beans AND wants meat
• Lack of common measure of value: No standard unit to express exchange ratios
• Lack of standard of deferred payment: Future payment contracts were impossible
• Lack of store of value: Most goods were perishable; wealth could not be stored
• Indivisibility: Some items (like a house) could not be divided for exchange
• Immobility: Bulk goods like land could not be transported

Commodity Money

Societies chose specific commodities with intrinsic value as money. Examples include:

• Hunting societies: animal skins
• Pastoral societies: livestock
• Agricultural societies: grains
• Romans: cattle and salt

Commodity money had inconveniences: difficulties in transporting, measuring, and storing.

Metallic Money

Gold, silver, and copper were used as they were easily handled and their quantity could be verified. Coins were minted from precious metals. However, carrying large amounts of metal coins became inconvenient and risky.

Fiat Money

Fiat money is government-issued money that holds value because of legal recognition rather than intrinsic commodity value. It includes paper money (bank notes) and coins. The value is determined by government decree. In Tanzania, the Bank of Tanzania issues fiat money.

Note: Commodity money and metallic money are NOT fiat money because they have intrinsic value with alternative uses.

Electronic Money

E-money is money exchanged electronically using computer networks and the internet. It includes:

• Credit cards: Allow borrowing pre-approved funds for purchases; users must repay the bank
• Debit cards: Deduct money directly from the holder's bank account
• Mobile money: Electronic transfers between accounts (common in Tanzania like M-Pesa)

Money supply is measured in several ways:

The Bank of Tanzania uses M3 as its primary measure of money supply.

According to Keynes's liquidity preference theory, people demand money for three motives:

1. Transactionary Motive

People hold money to carry out day-to-day transactions. Transaction demand is positively related to income—higher income means more purchases.

2. Precautionary Motive

People hold money to meet unforeseen emergencies like hospital bills. This demand is also positively related to income.

3. Speculative Motive

People hold money as a store of wealth rather than investing in interest-bearing assets. When interest rates are low, people hold more money; when high, they invest more.

The demand for money is affected by:

• Price level: Higher prices require more money for transactions
• Interest rate: Inverse relationship—higher rates reduce money demand
• Real income: Higher income increases money demand

Monetary policy refers to actions by the central bank to control the quantity of money and credit in the economy. In Tanzania, the Bank of Tanzania is the monetary authority.

Types of Monetary Policy

• Expansionary monetary policy: Increases money supply by lowering interest rates and buying securities (used to combat unemployment)
• Contractionary monetary policy: Decreases money supply by raising interest rates and selling securities (used to control inflation)

Objectives of Monetary Policy

1. Full employment: Achieve maximum utilization of labor resources
2. Price stability: Control inflation and deflation
3. High economic growth: Promote sustainable economic development
4. Exchange rate stability: Maintain stable currency exchange rates

Instruments of Monetary Policy

Quantitative (Indirect) Instruments:

• Bank rate: Interest rate at which central bank lends to commercial banks. Raising the bank rate reduces lending; lowering it encourages borrowing.
• Open market operations: Sale and purchase of government securities. Buying securities injects money; selling withdraws money.
• Reserve requirements: Percentage of deposits banks must keep as reserves. Raising reserves reduces lending capacity.

Qualitative (Direct) Instruments:

• Selective credit controls: Control specific types of credit for particular sectors
• Moral suasion: Central bank advises banks on lending practices
• Credit controls: Quantitative restrictions on loan amounts
• Special deposits: Require banks to hold additional deposits at central bank

Limitations of Monetary Policy in Developing Countries

Monetary policy is less effective in developing countries due to:

• Non-monetised transactions: Large informal sectors not affected by monetary policy
• Underdeveloped money and capital markets: Limited financial assets for policy tools
• Large non-bank financial institutions: Informal institutions not controlled by central bank
• High liquidity preference: Banks prefer holding excess reserves
• Money held outside banks: Wealth stored in jewelry, real estate rather than banks

In Tanzania, mobile money services like M-Pesa demonstrate how money functions in daily life. When a market vendor in Dodoma receives TShs 50,000 from selling vegetables via mobile money, they are using money as a medium of exchange (no barter needed), a store of value (saved for future use), and a unit of account (knowing the price of goods in shillings). If the Bank of Tanzania raises the bank rate to control inflation, commercial banks may increase lending rates, affecting how much a small business owner can borrow to expand their shop—connecting monetary policy directly to everyday economic decisions.