Money
Senior 5 · Economics
Money
Lesson 1 of 4
40 min
Imagine a market with no money. A potter wants beans, but the bean farmer wants a goat, and the herder with the goat wants pots. Every one of them has something to trade, yet no two of them can swap. Today the same three people would sell for francs, perhaps paid by mobile money, and buy what they want. This lesson traces how money grew out of the problems of barter, and sorts the many forms it takes.
Definition
Money: anything that is generally accepted as payment for goods and services and in settlement of debts.
Barter: the direct exchange of goods and services for other goods and services, without money.
Double coincidence of wants: the situation, needed for barter, in which each party has exactly what the other wants and wants exactly what the other has.
| Problem | Example |
|---|---|
| Lack of a double coincidence of wants | The potter, the farmer and the herder above |
| No common measure of value | How many pots is a goat worth? Every pair of goods needs its own rate of exchange |
| Indivisibility of some goods | A goat cannot be cut up to buy one pot without destroying its value |
| Difficulty of storing wealth | Beans rot and animals fall sick, so saving for the future is risky |
| Difficulty of deferred payment | A debt of "one goat next year" leaves open which goat, and of what size |
| High cost of carrying and searching | Traders must carry goods to market and search for the right partner |
The number of exchange rates alone shows the problem. With goods, barter needs a separate price for every pair:
With money, each good needs only one price.
Worked example 1: counting prices
A village market trades 50 different goods. Under barter it needs
separate rates of exchange (beans for salt, beans for pots, salt for pots, and so on). With money it needs only 50 prices, one for each good in francs. Money reduces the information traders must keep in their heads by a factor of .
Rwanda's own currency, the Rwandan franc (Frw), was introduced in 1964, when the National Bank of Rwanda (BNR) was set up. Today BNR is the only body allowed to issue Rwandan notes and coins.
Definition
Commodity money: money whose value comes from the good it is made of (cattle, salt, gold coins). Representative money: paper that can be exchanged for a fixed amount of a commodity such as gold.
Fiat money: money that has value because the government declares it legal tender and people trust it, not because of what it is made of. Modern notes and coins, including the Rwandan franc, are fiat money.
Legal tender: money that must by law be accepted in payment of debts. Notes are usually unlimited legal tender; coins may be limited legal tender, acceptable only up to a set amount.
Bank (deposit) money: balances in bank accounts that can be transferred by cheque, card or transfer. Near money (quasi-money): assets such as savings and fixed-term deposits or treasury bills that can be turned into money fairly quickly but are not themselves used for payment. Electronic money: value stored electronically, as on a mobile money wallet, and accepted as payment.
| Type | Where its value comes from | Example in Rwanda today |
|---|---|---|
| Fiat currency (notes and coins) | Legal tender status and public trust | Frw 5,000 note; Frw 100 coin |
| Bank deposit money | A claim on a bank, protected by regulation | A current account at a commercial bank or SACCO |
| Electronic (mobile) money | A claim backed by deposits held in banks | A balance in a mobile money wallet |
| Near money | Can be converted to cash, with some delay or cost | Fixed deposits; treasury bills |
| Foreign currency | Accepted for some payments and held as a store of value | US dollar deposits held in Rwandan banks |
Bank deposits are by far the largest part of money in Rwanda. In June 2025, notes and coins held by the public were Frw 373 billion, against Frw 5,649 billion of broad money (M3) in total (BNR). Lesson 4 looks at these measures.
Worked example 2: how much of Rwanda's money is cash?
Only about one franc in fifteen of Rwanda's broad money existed as notes and coins in June 2025; the rest was deposits in banks, in francs and in foreign currency.
Warning
Money is not the same as wealth or income. A farmer who owns land and cattle is wealthy, but those assets are not money because they are not generally accepted in payment. And "money" in economics means the stock of means of payment, not a person's income over a month.
Important
Discuss. A mobile money balance can be spent in a shop, sent to a relative and saved for next month. Is it money in the same sense as a Frw 1,000 note? What could make people stop accepting it?
Be Smart (PBS), "The History of Money (From Barter To Bitcoin)" (about 11 minutes). Note each problem of barter he mentions, and place each kind of money he shows on the timeline above.
Practice
Sources and credits
Written by Ganzaa: the text, both diagrams, the tables, the worked examples and the practice items. The village market is illustrative.
