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What is Money?

20 August, 2021 |

All the money that is used in Kenya is either a coin or note marked with some information. It is not possible that you have used an unmarked blank coin to purchase something. The Ksh1, Ksh5, 10Ksh, Ksh20, and Ksh40 coins were once blank before they were converted to money with some sort of marking. Most coins in Kenya are stamped with Presidents’ portraits on one side and coat of arms on the other side. New coins do not have any face but are engraved with some markings to signify our unique diversity and national heritage. Stamping suddenly transforms pieces of metal to money.

You may wonder why that is the case. Why shouldn’t we use any piece of metal as money? Is the true value of the metal reflected on what the coin can buy? You may be justified by asking that but the value of a coin is not inherent on the value of the metal used to make it. Sometimes, it is even more expensive to make money. In other words, more money is spent while making money. Why go through such? The government has the power to decide the value of a coin by simply stamping some figures on it. That is what finance experts and economic gurus call it fiat money– a system where the government has the mandate and authority to assign value to a piece of metal.

In the past, money used to be something precious and rare to find, such as gold, salt, cowry shells, cigarettes, etc. These types of currencies are called commodity money because you are exchanging a valuable thing with another valuable thing. Before that, people used to exchange goods for goods. You have your two dogs and you swap it with something that someone else has that you need.

Much of the money we use today is useless if it were not for the trust you have bestowed in it. When Kenyan citizens lose trust in the ability of the coins to purchase something, they will realise that are holding useless pieces of metal. It is already happening for the case of the Ksh1 coin. Most shop attendants will not accept 1 shilling coins even when they are selling an egg at Ksh12. You wonder where they expect you to get a single-12-shilling coin!

Because Kenyans are slowly agreeing not to hold the Ksh1 coin as valuable, you will find it impossible to by sweets with 1 shilling coins. Money is money when we agree it is and decide to hold it as valuable as it is marked. Otherwise, it just metal or paper with meaningless markings.

The success of money is dependent on the ability for people to play along with the assigned value and regularly use it to buy things. That is why the 1,000 shilling note is said to hold the value of 1,000 shillings. Thus, fiat money depends on people’s trust on the government institutions that issue and uphold it. Today, if the CBK governor announced that all 500 shilling notes are valueless, other citizens won’t accept them. We saw it happening when the 1,000 shilling note was withdrawn and rendered useless. It is impossible to see one circulating today.

A 1964 100-shilling-note

When we do not trust in the government and the value of money deteriorates, we will experience hyperinflation just as Zimbabwe did. The form of money most Kenyans are accustomed to is coins and paper bills, called currency. But is that what money is in Kenya? I bet when you count all the money you have you include bank deposits and financial assets, if you have any.

So, how do we know which of these is money? Economists are divided on this question and you will find many variations of the definition of money. When trying to understand how money is created, the varying explanations on what money is will help you understand how money is created. After all, only a small percentage of physical currency accounts for the the total money supply in the Kenyan economy.

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