Product Code Database
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of , such as taxes, in a particular country or socio-economic context. What Is Money? By John N. Smithin. Retrieved July-17-09. The primary functions which distinguish money are: medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.
Money was historically an emergent market phenomenon that possessed intrinsic value as a Commodity money; nearly all contemporary money systems are based on unbacked fiat money without use value. Its value is consequently derived by social convention, having been declared by a government or regulatory entity to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private", in the case of the United States dollar.
The money supply of a country comprises all currency in circulation ( and currently issued) and, depending on the particular definition used, one or more types of Demand deposit (the balances held in checking accounts, , and other types of bank accounts). Bank money, whose value exists on the books of financial institutions and can be converted into physical notes or used for cashless payment, forms by far the largest part of broad money in developed countries.
In the Western world, a prevalent term for coin-money has been , stemming from Latin in specie, meaning "in kind".
Many cultures around the world eventually developed the use of commodity money. The Mesopotamian shekel was a unit of weight, and relied on the mass of something like 160 grains of barley.Kramer, History Begins at Sumer, pp. 52–55. The first usage of the term came from Mesopotamia circa 3000 BC. Societies in the Americas, Asia, Africa and Australia used shell money—often, the shells of the cowry ( Cypraea moneta L. or C. annulus L.). According to Herodotus, the Lydians were the first people to introduce the use of gold coin and .Herodotus. Histories, I, 94 It is thought by modern scholars that these first stamped coins were minted around 650 to 600 BC.
The system of commodity money eventually evolved into a system of representative money. This occurred because gold and silver merchants or banks would issue receipts to their depositors, redeemable for the commodity money deposited. Eventually, these receipts became generally accepted as a means of payment and were used as money. Paper money or banknotes were first used in China during the Song dynasty. These banknotes, known as "jiaozi", evolved from promissory notes that had been used since the 7th century. However, they did not displace commodity money and were used alongside coins. In the 13th century, paper money became known in Europe through the accounts of travellers, such as Marco Polo and William of Rubruck. Marco Polo's account of paper money during the Yuan dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled "." Banknotes were first issued in Europe by Stockholms Banco in 1661 and were again also used alongside coins. The gold standard, a monetary system where the medium of exchange are paper notes that are convertible into pre-set, fixed quantities of gold, replaced the use of gold coins as currency in the 17th–19th centuries in Europe. These gold standard notes were made legal tender, and redemption into gold coins was discouraged. By the beginning of the 20th century, almost all countries had adopted the gold standard, backing their legal tender notes with fixed amounts of gold.
After World War II and the Bretton Woods Conference, most countries adopted fiat currencies that were fixed to the U.S. dollar. The U.S. dollar was in turn fixed to gold. In 1971 the U.S. government suspended the convertibility of the dollar to gold. After this many countries de-pegged their currencies from the U.S. dollar, and most of the world's currencies became unbacked by anything except the governments' fiat of legal tender and the ability to convert the money into goods via payment. According to proponents of modern money theory, fiat money is also backed by taxes. By imposing taxes, states create demand for the currency they issue. (2025). 9780230368897, Palgrave Macmillan. ISBN 9780230368897
This couplet would later become widely popular in macroeconomics textbooks. Most modern textbooks now list only three functions, that of medium of exchange, unit of account, and store of value, not considering a standard of deferred payment as a distinguished function, but rather subsuming it in the others.Krugman, Paul & Wells, Robin, Economics, Worth Publishers, New York (2006) (2025). 9780201327892, Pearson. ISBN 9780201327892
There have been many historical disputes regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. One of these arguments is that the role of money as a medium of exchange conflicts with its role as a store of value: its role as a store of value requires holding it without spending, whereas its role as a medium of exchange requires it to circulate.T.H. Greco. Money: Understanding and Creating Alternatives to Legal Tender, White River Junction, Vt: Chelsea Green Publishing (2001). Others argue that storing of value is just deferral of the exchange, but does not diminish the fact that money is a medium of exchange that can be transported both across space and time. The term "financial capital" is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender.
Money acts as a standard measure and a common denomination of trade. It is thus a basis for quoting and bargaining of prices. It is necessary for developing efficient accounting systems like double-entry bookkeeping.
Economists employ different ways to measure the stock of money or money supply, reflected in different types of monetary aggregates, using a categorization system that focuses on the Market liquidity of the financial instrument used as money. The most commonly used monetary aggregates (or types of money) are conventionally designated M1, M2, and M3. These are successively larger aggregate categories: M1 is currency (coins and bills) plus (such as checking accounts); M2 is M1 plus and under $100,000; M3 is M2 plus larger time deposits and similar institutional accounts. M1 includes only the most liquid financial instruments, and M3 relatively illiquid instruments. The precise definition of M1, M2, etc. may be different in different countries.
Another measure of money, M0, is also used. M0 is base money, or the amount of money actually issued by the central bank of a country. It is measured as currency plus deposits of banks and other institutions at the central bank. M0 is also the only money that can satisfy the reserve requirements of commercial banks.
Legal tender, or narrow money (M0) is the cash created by a Central Bank by minting coins and printing banknotes.
Bank money, or broad money (M1/M2) is the money created by private banks through the recording of loans as deposits of borrowing clients, with partial support indicated by the cash ratio. Currently, bank money is created as electronic money.
Bank money, whose value exists on the books of financial institutions and can be converted into physical notes or used for cashless payment, forms by far the largest part of broad money in developed countries. (2025). 9781932857269, The Disinformation Company. ISBN 9781932857269Bernstein, Peter, A Primer on Money and Banking, and Gold, Wiley, 2008 edition, pp. 29–39
In most countries, the majority of money is mostly created as M1/M2 by commercial banks making loans. Contrary to some popular misconceptions, banks do not act simply as intermediaries, lending out deposits that savers place with them, and do not depend on central bank money (M0) to create new loans and deposits.
Liquid financial instruments are easily tradable and have low . There should be no (or minimal) spread between the prices to buy and sell the instrument being used as money.
Some bullion coins such as the Australian Gold Nugget and American Eagle are legal tender, however, they trade based on the market price of the metal content as a commodity, rather than their legal tender face value (which is usually only a small fraction of their bullion value). usmiNT.gov . Retrieved July-18-09. Retrieved July-18-09
Fiat money, if physically represented in the form of currency (paper or coins), can be accidentally damaged or destroyed. However, fiat money has an advantage over representative or commodity money, in that the same laws that created the money can also define rules for its replacement in case of damage or destruction. For example, the U.S. government will replace mutilated Federal Reserve Notes (U.S. fiat money) if at least half of the physical note can be reconstructed, or if it can be otherwise proven to have been destroyed. Shredded & Mutilated: Mutilated Currency, Bureau of Engraving and Printing. Retrieved 2007-05-09. By contrast, commodity money that has been lost or destroyed cannot be recovered.
In most major economies using coinage, copper, silver, and gold formed three tiers of coins. Gold coins were used for large purchases, payment of the military, and backing of state activities. Silver coins were used for midsized transactions, and as a unit of account for taxes, dues, contracts, and fealty, while copper coins represented the coinage of common transaction. This system had been used in ancient Indian coinage since the time of the Mahajanapadas. In Europe, this system worked through the medieval period because there was virtually no new gold, silver, or copper introduced through mining or conquest. Thus the overall ratios of the three coinages remained roughly equivalent.
At around the same time in the medieval Islamic world, a vigorous monetary economy was created during the 7th–12th centuries on the basis of the expanding levels of circulation of a stable high-value currency (the dinar). Innovations introduced by economists, traders and merchants of the Muslim world include the earliest uses of credit, , , transactional accounts, loaning, trusts, , the transfer of credit and debt, and banking institutions for loans and deposit account.
In Europe, paper money was first introduced in Sweden in 1661. Sweden was rich in copper, thus, because of copper's low value, extraordinarily big coins (often weighing several kilograms) had to be made. The advantages of paper currency were numerous: it reduced transport of gold and silver, and thus lowered the risks; it made loaning gold or silver at interest easier since the specie (gold or silver) never left the possession of the lender until someone else redeemed the note; and it allowed for a division of currency into credit and specie backed forms. It enabled the sale of stock in joint stock companies, and the redemption of those shares in the paper.
However, these advantages are held within their disadvantages. First, since a note has no intrinsic value, there was nothing to stop issuing authorities from printing more of it than they had specie to back it with. Second, because it increased the money supply, it increased inflationary pressures, a fact observed by David Hume in the 18th century. The result is that paper money would often lead to an inflationary bubble, which could collapse if people began demanding hard money, causing the demand for paper notes to fall to zero. The printing of paper money was also associated with wars, and financing of wars, and therefore regarded as part of maintaining a standing army. For these reasons, paper currency was held in suspicion and hostility in Europe and America. It was also addictive since the speculative profits of trade and capital creation were quite large. Major nations established mints to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.
At this time both silver and gold were considered legal tender, and accepted by governments for taxes. However, the instability in the ratio between the two grew over the 19th century, with the increase both in the supply of these metals, particularly silver, and of trade. This is called bimetallism and the attempt to create a bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of inflationists. Governments at this point could use currency as an instrument of policy, printing paper currency such as the United States greenback, to pay for military expenditures. They could also set the terms at which they would redeem notes for specie, by limiting the amount of purchase, or the minimum amount that could be redeemed.
By 1900, most of the industrializing nations were on some form of a gold standard, with paper notes and silver coins constituting the circulating medium. Private banks and governments across the world followed Gresham's law: keeping gold and silver paid but paying out in notes. This did not happen all around the world at the same time, but occurred sporadically, generally in times of war or financial crisis, beginning in the early part of the 20th century and continuing across the world until the late 20th century, when the regime of floating fiat currencies came into force. One of the last countries to break away from the gold standard was the United States in 1971.
No country anywhere in the world today has an enforceable gold standard or silver standard currency system.
Commercial bank money is created by commercial banks whose bank reserves (held as cash and other highly liquid assets) typically constitute only a fraction of their demand deposit, while the banks maintain an obligation to redeem all these deposits upon demand - a practise known as fractional-reserve banking. Commercial bank money differs from commodity and fiat money in two ways: firstly it is non-physical, as its existence is only reflected in the account ledgers of banks and other financial institutions, and secondly, there is some element of risk that the claim will not be fulfilled if the financial institution becomes insolvent.
The money multiplier theory presents the process of creating commercial bank money as a multiple (greater than 1) of the amount of Monetary base created by the country's central bank, the multiple itself being a function of the bank regulation of banks imposed by financial regulators (e.g., potential reserve requirements) beside the business policies of and the preferences of - factors which the central bank can influence, but not control completely. (2025). 9781349951215, Palgrave Macmillan UK. ISBN 9781349951215 Contemporary central banks generally do not control the creation of money, nor do they try to, though their interest rate-setting monetary policies naturally affect the amount of loans and deposits that commercial banks create.
Anonymous digital currencies were developed in the early 2000s. Early examples include Ecash, bit gold, RPOW, and b-money. Not much innovation occurred until the conception of Bitcoin in 2008, which introduced the concept of a decentralised currency that requires no trusted third party.
Modern-day monetary systems are based on fiat money and are no longer tied to the value of gold. The amount of money in the economy is influenced by monetary policy, which is the process by which a central bank influences the economy to achieve specific goals. Often, the goal of monetary policy is to maintain low and stable inflation, directly via an inflation targeting strategy, or indirectly via a fixed exchange rate system against a major currency with a stable inflation rate. In some cases, the central bank may pursue various supplementary goals. For example, it is clearly stated in the Federal Reserve Act that the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."The Federal Reserve. 'Monetary Policy and the Economy". (PDF) Board of Governors of the Federal Reserve System, (2005-07-05). Retrieved 2007-05-15.
A failed monetary policy can have significant detrimental effects on an economy and the society that depends on it. These include hyperinflation, stagflation, recession, high unemployment, shortages of imported goods, inability to export goods, and even total monetary collapse and the adoption of a much less efficient barter economy. This happened in Russia, for instance, after the fall of the Soviet Union.
Monetary policy strategies have changed over time. Some of the tools used to conduct contemporary monetary policy include:
In the U.S., the Federal Reserve is responsible for conducting monetary policy, while in the eurozone the respective institution is the European Central Bank. Other central banks with a significant impact on global finances are the Bank of Japan, People's Bank of China and the Bank of England.
During the 1970s and 1980s monetary policy in several countries was influenced by an Economics known as monetarism. Monetarism argued that management of the money supply should be the primary means of regulating economic activity. The stability of the demand for money prior to the 1980s was a key finding of Milton Friedman and Anna Schwartz (1971). 9780691003542, Princeton University Press. ISBN 9780691003542 supported by the work of David Laidler, and many others. It turned out, however, that maintaining a monetary policy strategy of targeting the money supply did not work very well: The relation between money growth and inflation was not as tight as expected by monetarist theory, and the short-run relation between the money supply and the interest rate, which is the chief instrument through which the central bank can influence output and inflation, was unreliable. Both problems were due to unpredictable shifts in the demand for money. Consequently, starting in the early 1990s a fundamental reorientation took place in most major central banks, starting to target inflation directly instead of the money supply and using the interest rate as their main instrument. (2025). 9780134897899, Pearson. ISBN 9780134897899
Some places do maintain two or more currencies, particularly in border towns or high-travel areas. Shops in these locations might list prices and accept payment in multiple currencies. Otherwise, foreign currency is treated as a financial asset in the local market. Foreign currency is commonly bought or sold on foreign exchange markets by travelers and traders.
Communities can change the money they use, which is known as currency substitution. This can happen intentionally, when a government issues a new currency. For example, when Brazil moved from the Brazilian cruzeiro to the Brazilian real. It can also happen spontaneously, when the people refuse to accept a currency experiencing hyperinflation (even if its use is encouraged by the government).
The money used by a community can change on a smaller scale. This can come through innovation, such as the adoption of cheque. Gresham's law says that "bad money drives out good". That is, when buying a good, a person is more likely to pass on less-desirable items that qualify as "money" and hold on to more valuable ones. For example, coins with less silver in them (but which are still valid coins) are more likely to circulate in the community. This may effectively change the money used by a community.
The money used by a community does not have to be a currency issued by a government. A famous example of community adopting a new form of money is prisoners-of-war using cigarettes to trade.
|
|
