Difference between revisions of "Money" - New World Encyclopedia

From New World Encyclopedia
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[[Category:Politics and social sciences]]
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{{short description|Object or record accepted as payment}}
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[[Category:Economics]]
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{{Other uses}}
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[[File:Dollar bill and small change.jpg|thumb|upright=1.5|A [[United States dollar bill]], two [[Nickel (United States coin)|five-cent coin]]s and a [[Penny (United States coin)|penny]]]]
  
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[[Image:Moneybillscoins3.jpg|right|thumb|250px|Various denominations of [[currency]], one form of money]]
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'''Money''' is any item or verifiable record that is generally accepted as [[payment]] for [[goods and services]] and repayment of [[debt]]s, such as [[taxes]], in a particular country or socio-economic context.<ref>{{cite book |title=The Economics of Money, Banking, and Financial Markets |last=Mishkin |first=Frederic S. |author-link=Frederic Mishkin |year=2007 |publisher=Addison Wesley |location=Boston |isbn=978-0-321-42177-7 |page=8|edition=Alternate }}</ref><ref>[https://books.google.com/books?id=MDU-NTEJziMC&pg=PA47 ''What Is Money?''] {{Webarchive|url=https://web.archive.org/web/20221205182603/https://books.google.com/books?id=MDU-NTEJziMC&pg=PA47 |date=2022-12-05 }} By John N. Smithin. Retrieved July-17-09.</ref><ref>{{cite web |url=http://www.dictionaryofeconomics.com/article?id=pde2008_M000217&edition=current&q=money&topicid=&result_number=5 |title=money : The New Palgrave Dictionary of Economics |website=The New Palgrave Dictionary of Economics |access-date=18 December 2010}}</ref> The primary functions which distinguish money are as a [[medium of exchange]], a [[unit of account]], a [[store of value]] and sometimes, a [[standard of deferred payment]].
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'''Money''' is whatever serves as the "'''''medium of exchange'''''." That is, as the quotation from Adam Smith says,  
 
  
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“……..''money is a commodity or token that everyone will accept in exchange for the things they have to sell''……..”
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Money was historically an [[Emergence#Economics|emergent market phenomenon]] that possessed intrinsic value as a [[Commodity money|commodity]]; nearly all contemporary money systems are based on unbacked [[fiat money]] without [[use value]].<ref name="mankiw"/> 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]].
  
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Different societies may have different monies. Some historical examples are, for instance:
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The [[money supply]] of a country comprises all [[currency in circulation]] ([[banknote]]s and [[coin]]s currently issued) and, depending on the particular definition used, one or more types of [[Demand deposit|bank money]] (the balances held in [[transactional account|checking accounts]], [[savings account]]s, 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.
  
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== Etymology ==
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The word money derives from the Latin word {{lang|la|moneta}} with the meaning "coin" via French {{lang|fr|monnaie}}. The Latin word is believed to originate from a temple of [[Juno (mythology)|Juno]], on [[Capitoline]], one of Rome's seven hills. In the ancient world, Juno was often associated with money. The temple of [[Juno Moneta]] at Rome was the place where the mint of Ancient Rome was located.<ref>D'Eprio, Peter & Pinkowish, Mary Desmond (1998). ''What Are the Seven Wonders of the World?'' First Anchor Books, p. 192. {{ISBN|0-385-49062-3}}</ref> The name "Juno" may have derived from the Etruscan goddess [[Uni (mythology)|Uni]] (which means "the one", "unique", "unit", "union", "united") and "Moneta" either from the Latin word "monere" (remind, warn, or instruct) or the Greek word "moneres" (alone, unique).
  
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*Gold coins (in medieval Europe); and
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In the Western world a prevalent term for coin-money has been ''[[wikt:specie|specie]]'', stemming from Latin {{lang|la|in specie}}, meaning "in kind".<ref>{{cite web |url=http://www.etymonline.com/index.php?search=specie&searchmode=phrase |title=Online Etymology Dictionary |publisher=etymonline.com |access-date=2009-04-20}}</ref>
  
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*Cowrie shells (in West Africa).
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== History ==
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{{Main|History of money}}
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[[File:BMC 06.jpg|thumb|left|A 640 B.C.E. one-third [[stater]] [[electrum]] coin from [[Lydia#First coinage|Lydia]]]]
  
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The use of [[barter]]-like methods may date back to at least 100,000 years ago, though there is no evidence of a society or economy that relied primarily on barter.<ref>[[Marcel Mauss|Mauss, Marcel]]. ''The Gift: The Form and Reason for Exchange in Archaic Societies''. pp. 36–37.</ref><ref>{{Cite web|url=https://bellacaledonia.org.uk/2016/06/08/the-myth-of-the-myth-of-the-myth-of-barter-and-the-return-of-the-armchair-ethnologists/|title=The Myth of the Myth of the Myth of Barter and the Return of the Armchair Ethnologists|date=2016-06-08|website=[[Bella Caledonia]]|language=en-GB|access-date=2020-02-12}}</ref> Instead, non-monetary societies operated largely along the principles of [[gift economy]] and [[debt]].<ref>{{cite web |url=http://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html |title=What is Debt? – An Interview with Economic Anthropologist David Graeber |publisher=[[Naked Capitalism]]|date=2011-08-26 }}</ref><ref>David Graeber: ''Debt: The First 5000 Years'', Melville 2011. Cf. [http://socialtextjournal.org/a-history-of-debt/ review] {{Webarchive|url=https://web.archive.org/web/20200420132635/https://socialtextjournal.org/a-history-of-debt/ |date=2020-04-20 }}</ref> When barter did in fact occur, it was usually between either complete strangers or potential enemies.<ref name="Graeber, David pp. 153-154">{{cite book |author=David Graeber |title=Toward an anthropological theory of value: the false coin of our own dreams |url=https://books.google.com/books?id=uo8tttilAlQC&pg=PA153 |access-date=10 February 2011 |year=2001 |publisher=Palgrave Macmillan |isbn=978-0-312-24045-5 |pages=153–154}}</ref>
  
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The cowrie shells used in West Africa are small seashells. This may sound "quaint," but cowrie-money was very successful. It continued to be used into the twentieth century, after the West African countries had become colonies. The colonies were required to use European money, and they did—but when the European monetary systems collapsed in hyperinflation, the West African people went back to using their cowrie-money to get past the crisis. It was the cowrie-money that proved most reliable for many years of the twentieth century.  
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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 [[Grain (unit)|grains]] of [[barley]].<ref>Kramer, ''History Begins at Sumer'', pp. 52–55.</ref> The first usage of the term came from [[Mesopotamia]] circa 3000 B.C.E.. 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|gold]] and [[silver coin]]s.<ref>Herodotus. ''Histories'', I, 94</ref> It is thought by modern scholars that these first stamped [[coins]] were minted around 650 to 600 B.C.E.<ref>{{cite web |url=http://rg.ancients.info/lion/article.html |author=Goldsborough, Reid |title=World's First Coin |publisher=rg.ancients.info |date=2003-10-02 |access-date=2009-04-20}}</ref>
  
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[[Image:Blombosbeads3.jpg|thumb|left|250px| Shells of the pea-sized snail Nassarius kraussianus. Blombos Cave, South Africa, 75,000 B.C.E. Wear marks indicate the shells were strung on a necklace or bracelet.]]
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[[File:Jiao zi.jpg|thumb|upright|Song Dynasty ''Jiaozi'', the world's earliest paper money]]
  
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We should say that the "commodity" that serves as money can be a purely symbolic token, like dollar bills in America. Indeed, all money has primarily symbolic value. Even the gold coins used in medieval Europe were probably valued more for their symbolic value than for the gold they contained.
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The system of [[commodity money]] eventually evolved into a system of [[representative money]].{{Citation needed|date=December 2009}} 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 (currency)|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]]<!-- Giljom de Rubruk —>.<ref>{{cite book |last=Moshenskyi |first=Sergii |title=History of the weksel: Bill of exchange and promissory note |year=2008 |isbn=978-1-4363-0694-2 |page=55}}</ref> 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 "[[s:The Travels of Marco Polo/Book 2/Chapter 24|How the Great Kaan Causeth the Bark of Trees, Made Into Something Like Paper, to Pass for Money All Over his Country]]."<ref name="Marco Polo">{{cite book |author=Marco Polo |title=The Travels of Marco Polo, a Venetian, in the Thirteenth Century: Being a Description, by that Early Traveller, of Remarkable Places and Things, in the Eastern Parts of the World |url=https://books.google.com/books?id=JetQAAAAcAAJ&pg=PA353 |access-date=19 September 2012 |year=1818 |pages=353–355}}</ref> 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.
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===Etymology of the word “money”===
 
  
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The origin of the word '''money''' comes from the [[Latin]] word ''moneta'', an epithet of [[Juno (mythology)|Juno]] ([[Hera]])—Juno Moneta, "June the Alone"—the deity that protected and oversaw finances in the [[History of Rome#Roman Republic|early days of Rome]].  
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After [[World War II]] and the [[Bretton Woods Conference]], most countries adopted fiat currencies that were fixed to the [[United States dollar|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|modern money theory]], fiat money is also backed by taxes. By imposing taxes, states create demand for the currency they issue.<ref>{{cite book |last1=Wray |first1=L. Randall |title=Modern money theory: a primer on macroeconomics for sovereign monetary systems |date=2012 |publisher=Palgrave Macmillan |location=Houndmills, Basingstoke, Hampshire |isbn=978-0230368897 |pages=45–50}}</ref>
  
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In [[Greek language]], ''Hera Mone tas'' means the lonely Hera (''Mone tas'' in [[Doric Greek]], ''Mone tes'' in [[Ionic dialect]]). [[Zeus]] punished Hera and tied her with a golden chain between the earth and sky. Hera, because she was alone between the sky and earth tied with gold, was called ''moneres'' or ''mone'' (μόνη) (lonely in Greek), and the word money was derived from this. Hera, with the help of [[Hephaestus]], broke the golden chain and released herself. It is said that all gold found on earth (which forms approximately a single cube 20 m a side) originates from the fragments of this golden chain, which fall from the sky and became humankind's "mone" (money).
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== Functions ==
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{{see also|Monetary economics}}
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{{Macroeconomics sidebar}}
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In ''Money and the Mechanism of Exchange (1875)'', [[William Stanley Jevons]] famously analyzed money in terms of four functions: a ''[[medium of exchange]]'', a ''common measure of value'' (or [[unit of account]]), a ''standard of value'' (or [[standard of deferred payment]]), and a ''[[store of value]]''. By 1919, Jevons's four functions of money were summarized in the [[couplet]]:
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:Money's a matter of functions four,
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:A Medium, a Measure, a Standard, a Store.<ref name="a_milnes">{{cite book |last=Milnes |first=Alfred |title=The economic foundations of reconstruction |url=https://archive.org/details/in.ernet.dli.2015.22790 |publisher=Macdonald and Evans |year=1919 |page=[https://archive.org/details/in.ernet.dli.2015.22790/page/n67 55]}}</ref>
  
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Perhaps because of this fable, [[gold]] was used in ancient Greece only in temples, graves and jewels and there is not any ancient Greek golden coin, until the days around 390 B.C.E., when the Greek king [[Philip II of Macedon]] minted golden coins.
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This couplet would later become widely popular in macroeconomics textbooks.<ref name="dwivedi">{{cite book |last=Dwivedi |first=DN |title=Macroeconomics: Theory and Policy |publisher=Tata McGraw-Hill |year=2005 |page=182}}</ref> 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.<ref name="mankiw">{{cite book |title=Macroeconomics |last=Mankiw |first=N. Gregory |author-link=N. Gregory Mankiw |year=2007 |edition=6th |pages=[https://archive.org/details/macroeconomics0000mank/page/22 22–32] |chapter=2 |publisher=Worth Publishers |location=New York |isbn=978-0-7167-6213-3 |chapter-url=https://archive.org/details/macroeconomics0000mank/page/22 }}</ref><ref name="krugman">Krugman, Paul & Wells, Robin, ''Economics'', Worth Publishers, New York (2006)</ref><ref name="abel_bernanke">{{cite book |last1=Abel |first1=Andrew |last2=Bernanke |first2=Ben |author-link2=Ben Bernanke |title=Macroeconomics |publisher=Pearson |year=2005 |edition=5th |pages=266–269 |chapter=7 |isbn=978-0-201-32789-2}}</ref>
  
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==Money, types of money, and general overview==
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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.<ref name="greco">[[Thomas H. Greco, Jr.|T.H. Greco]]. ''Money: Understanding and Creating Alternatives to Legal Tender'', White River Junction, Vt: Chelsea Green Publishing (2001). {{ISBN|1-890132-37-3}}</ref> 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.
  
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Symbolic or not, money is an asset. Thus we claim that in any society, money is the asset, commodity or token, that serves as a medium of exchange. However, "''asset''" is the key words in excluding credit cards, also known as "plastic money," from the monetary environment.
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=== Medium of exchange ===
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{{Main|Medium of exchange}}
  
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====Credit card is not money====
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When money is used to intermediate the exchange of goods and services, it is performing a function as a ''medium of exchange''. It thereby avoids the inefficiencies of a barter system, such as the inability to permanently ensure "[[coincidence of wants]]". For example, between two parties in a barter system, one party may not have or make the item that the other wants, indicating the non-existence of the coincidence of wants. Having a medium of exchange can alleviate this issue because the former can have the freedom to spend time on other items, instead of being burdened to only serve the needs of the latter. Meanwhile, the latter can use the medium of exchange to seek for a party that can provide them with the item they want.
  
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Economists do not regard credit cards as money, because a '''''credit card is not an asset but a line of credit'''''.
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=== Measure of value ===
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{{Main|Unit of account}}
  
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A ''unit of account'' (in economics)<ref>{{cite web|date=2017-10-11|title=Functions of Money|url=https://www.boundless.com/business/textbooks/boundless-business-textbook/the-functions-of-money-and-banking-21/money-as-a-tool-123/functions-of-money-568-3194/|url-status=dead|archive-url=https://web.archive.org/web/20151018115939/https://www.boundless.com/business/textbooks/boundless-business-textbook/the-functions-of-money-and-banking-21/money-as-a-tool-123/functions-of-money-568-3194/|archive-date=October 18, 2015|website=[[Boundless (company)|boundless.com]]}}</ref> is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt.
  
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What is a "line of credit?" A "line of credit" is an agreement between a lender and a potential borrower, whereby the borrower can borrow up to some limit without any further approval.  
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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]].
  
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'''EXAMPLE''': If you are to build a house and act as your own prime contractor, you would need money to buy lumber and other supplies and to pay subcontractors from week to week.  
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=== Standard of deferred payment ===
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{{Main|Standard of deferred payment}}
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While ''standard of deferred payment'' is distinguished by some texts,<ref name="greco" /> particularly older ones, other texts subsume this under other functions.{{r|"mankiw"|"krugman"|"abel_bernanke"}}{{clarify|date=December 2018|reason=Specify which other functions are sometimes said to subsume this function, and in that way.}} A "standard of deferred payment" is an accepted way to settle a [[debt]]—a unit in which debts are denominated, and the status of money as [[legal tender]], in those jurisdictions which have this concept, states that it may function for the discharge of debts. When debts are denominated in money, the real value of debts may change due to inflation and [[deflation]], and for sovereign and international debts via [[debasement]] and [[devaluation]].
  
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To do those things more conveniently, you might arrange with your banker to write checks for these expenses, even though you have no funds in the bank.  
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=== Store of value ===
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{{Main|Store of value}}
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To act as a ''store of value'', money must be able to be reliably saved, stored, and retrieved—and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time. Some have argued that inflation, by reducing the value of money, diminishes the ability of the money to function as a store of value.<ref name="mankiw"/>{{failed verification|date=October 2022}}
  
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Each check would be a loan, and the bank would honor them up to some agreed-on limit. Once your house is complete, you could refinance your loan as a long-term mortgage. This way, you wouldn't have to borrow the money ( and thus pay interest on it ) until you actually needed it.
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==Properties==
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The functions of money are that it is a medium of exchange, a unit of account, and a store of value.<ref>{{cite web |url=https://www.imf.org/external/pubs/ft/fandd/2012/09/basics.htm |title=What is Money? |access-date=28 December 2022| publisher=International Monetary Fund}}</ref> To fulfill these various functions, money must be:<ref name="dallasFedMoney">{{cite web |url=https://www.dallasfed.org/~/media/documents/educate/everyday/money.pdf |title=Money |publisher=Federal Reserve Bank of Dallas|access-date=28 December 2022}}</ref>
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* [[Fungibility|Fungible]]: its individual units must be capable of mutual substitution (i.e., interchangeability).
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* [[Durability|Durable]]: able to withstand repeated use.
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* Divisible: divisible to small units.
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* Portable: easily carried and transported.
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* Acceptable: most people must accept the money as payment
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* Scarce: its supply in circulation must be limited.<ref name="dallasFedMoney" />
  
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== Money supply ==
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If you, on the other hand, have a credit card with XYZ bank, that means you have a line of credit with that bank, and the card is the proof that the bank is willing to loan you money.
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{{Main|Money supply}}
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[[File:MB, M1 and M2 aggregates from 1981 to 2012.png|upright=1.5|thumb|right|Money Base, M1 and M2 in the U.S. from 1981 to 2012]]
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[[File:RIAN archive 978776 Printing paper money at Goznak factory in Perm.jpg|thumb|right|Printing paper money at a printing press in [[Perm, Russia|Perm]]]]
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[[File:Pengar - 2019.jpg|thumb|A person counts a bundle of different [[Sweden|Swedish]] banknotes.]]
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In economics, money is any [[Instrument (finance)|financial instrument]] that can fulfill the functions of money (detailed above). These financial instruments together are collectively referred to as the [[money supply]] of an economy. In other words, the money supply is the number of financial instruments within a specific economy available for purchasing goods or services. Since the money supply consists of various financial instruments (usually currency, demand deposits, and various other types of deposits), the amount of money in an economy is measured by adding together these financial instruments creating a ''monetary aggregate''.
  
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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|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 [[demand deposit]]s (such as checking accounts); M2 is M1 plus [[savings account]]s and [[time deposit]]s 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.
  
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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]].
  
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==Major types of money in a historical context==
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=== Creation of money ===
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In current economic systems, money is created by two procedures:{{cn|date=January 2023}}
  
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As we have hinted, different societies have quite different money systems. The major historical types of money are:
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'''Legal tender''', or '''narrow money''' (M0) is the cash created by a Central Bank by minting coins and printing banknotes.
  
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'''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.
  
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===Commodity money===
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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.<ref>{{cite book |last1=Boyle |first1=David |author-link1=David Boyle (author) |title=The Little Money Book |publisher=The Disinformation Company |year=2006 |page=37 |isbn=978-1-932857-26-9}}</ref><ref>{{cite web|title=History of Money|url=http://zzaponline.com/history-of-money/|url-status=dead|archive-url=https://archive.today/20150224234654/http://zzaponline.com/history-of-money/|archive-date=24 February 2015|access-date=24 February 2015|website=Zzaponline.com}}</ref><ref>Bernstein, Peter, ''A Primer on Money and Banking, and Gold'', Wiley, 2008 edition, pp. 29–39</ref>
  
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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.<ref>{{Cite web|url=https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy|title=Money creation in the modern economy {{!}} Bank of England|website=www.bankofengland.co.uk|date=14 March 2014 |language=en|access-date=2018-01-14}}</ref>
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These are moneys that have value in non-monetary uses equivalent to the monetary value of the commodity. Any commodity used as a medium of exchange is commodity money. Well-known examples are gold, copper and silver metals, but sea-shells (that is, cowrie shells) tobacco, and cigarettes have all been used.Other commodities were used too; apart from the seashells and tobacco, sometimes perhaps, oxen.
 
  
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One interesting example of commodity money is the huge [[limestone]] coins from the [[Micronesia]]n island of [[Yap]], quarried with great peril from a source several hundred miles away.  
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=== Market liquidity ===
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{{Main|Market liquidity}}
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"Market liquidity" describes how easily an item can be traded for another item, or into the common currency within an economy. Money is the most liquid asset because it is universally recognized and accepted as a common currency. In this way, money gives consumers the [[liberty|freedom]] to trade goods and services easily without having to barter.
  
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[[Image:Yap Stone Money.jpg|thumb|left|160px|An 8-foot "coin" from the village of Gachpar, on [[Yap]].]]
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Liquid financial instruments are easily [[tradable]] and have low [[transaction cost]]s. There should be no (or minimal) [[Bid/offer spread|spread]] between the prices to buy and sell the instrument being used as money.
  
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== Types ==
  
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The value of the coin was determined by its size; the largest of which could range from nine to twelve feet in diameter and weigh several tons. Displaying a large coin, often outside one's home, was a considerable [[status symbol]] and source of prestige in that society.
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=== Commodity ===
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{{Main|Commodity money}}
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[[File:1914 Sydney Half Sovereign - St. George.jpg|thumb|upright|A 1914 British [[Sovereign (British coin)|gold sovereign]]]]
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Many items have been used as [[commodity money]] such as naturally scarce [[precious metal]]s, [[conch shell]]s, [[barley]], beads, etc., as well as many other things that are thought of as having [[Intrinsic theory of value|value]]. Commodity money value comes from the commodity out of which it is made. The commodity itself constitutes the money, and the money is the commodity.<ref name="Mises">Mises, Ludwig von. ''[[The Theory of Money and Credit]]'', (Indianapolis, IN: [[Liberty Fund, Inc.]], 1981), trans. H. E. Batson. Ch.3 Part One: The Nature of Money, Chapter 3: The Various Kinds of Money, Section 3: Commodity Money, Credit Money, and Fiat Money, Paragraph 25.</ref> Examples of commodities that have been used as mediums of exchange include gold, silver, copper, rice, [[Wampum]], salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, etc. These items were sometimes used in a metric of perceived value in conjunction with one another, in various commodity valuation or [[price system]] economies. The use of commodity money is similar to barter, but a commodity money provides a simple and automatic [[unit of account]] for the commodity which is being used as money. Although some [[gold coins]] such as the [[Krugerrand]] are considered [[legal tender]], there is no record of their face value on either side of the coin. The rationale for this is that emphasis is laid on their direct link to the prevailing value of their [[Millesimal fineness|fine gold]] content.<ref>[http://www.randrefinery.com/products_krugerrands.htm randRefinery.com] {{Webarchive|url=https://web.archive.org/web/20130722234722/http://www.randrefinery.com/products_krugerrands.htm |date=2013-07-22 }}. Retrieved July-18-09.</ref> [[American Gold Eagle|American Eagles]] are imprinted with their gold content and legal tender [[face value]].<ref name="usmint.gov"/>
  
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Commodity based currencies are often viewed as more stable, but this is not always the case. The value of a commodity based currency as a medium of exchange depends on its supply relative to other goods and services available in the economy.  
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=== Representative ===
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{{Main|Representative money}}
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In 1875, the British economist [[William Stanley Jevons]] described the money used at the time as "[[representative money]]". Representative money is money that consists of [[token coin]]s, [[paper money]] or other physical tokens such as certificates, that can be reliably exchanged for a fixed quantity of a commodity such as gold or silver. The value of representative money stands in direct and fixed relation to the commodity that backs it, while not itself being composed of that commodity.<ref name="Jevons">{{cite book |last=Jevons |first=William Stanley |title=Money and the Mechanism of Exchange |year=1875 |chapter=XVI: Representative Money |chapter-url=https://archive.org/details/moneyandmechani00goog |access-date=2009-06-28 |isbn=978-1-59605-260-4}}</ref>
  
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Historically, gold, silver and other metals commonly used in commodity based monetary systems have been subject to regular and sometimes extraordinary fluctuations in purchasing power. This not only damages its stability as a medium of exchange; it also reduces its effectiveness as a store of value. 
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=== Fiat ===
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{{Main|Fiat money}}
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[[File:2006 AEGold Proof Rev.png|thumb|upright|Gold coins are an example of legal tender that are traded for their intrinsic value, rather than their face value.]]
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Fiat money or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order (fiat). Usually, the government declares the fiat currency (typically notes and coins from a central bank, such as the [[Federal Reserve System]] in the U.S.) to be [[legal tender]], making it unlawful not to accept the fiat currency as a means of repayment for all debts, public and private.<ref name="www-personal.umich">{{cite web |author=Deardorff, Prof. Alan V. |year=2008 |title=Deardorff's Glossary of International Economics |url=http://www-personal.umich.edu/~alandear/glossary/f.html |publisher=Department of Economics, University of Michigan |access-date=2008-07-12}}</ref><ref name="BlackHenry">Black, Henry Campbell (1910). ''A Law Dictionary Containing Definitions Of The Terms And Phrases Of American And English Jurisprudence, Ancient And Modern'', p. 494. West Publishing Co. [[Black’s Law Dictionary]] defines the word "fiat" to mean "a short order or warrant of a Judge or magistrate directing some act to be done; an authority issuing from some competent source for the doing of some legal act"</ref>
  
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In the 1500s and 1600s huge quantities of gold and even larger amounts of silver were discovered in the New World and brought back to Europe for conversion into coin.  As a result, the purchasing power of those coins fell by 60% to 80%, i.e. the prices of goods rose, because the supply of goods did not keep pace with the increased supply of money (Galbraith, 1975)
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Some [[bullion coins]] such as the [[Australian Gold Nugget]] and [[American Gold Eagle|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).<ref name="usmint.gov">[http://www.usmint.gov/mint_programs/american_eagles/index.cfm?flash=no&action=American_Eagle_Gold usmiNT.gov] {{Webarchive|url=https://web.archive.org/web/20160820232134/http://www.usmint.gov/mint_programs/american_eagles/index.cfm?flash=no&action=American_Eagle_Gold |date=2016-08-20 }}. Retrieved July-18-09.</ref><ref>{{cite news |title=Crazy as a Gold Bug |author=Tom Bethell |work=New York |date=1980-02-04 |volume=13 |issue=5 |page=34 |publisher=New York Media |url=https://books.google.com/books?id=6OUCAAAAMBAJ&q=silver+krugerrand&pg=PA33}} Retrieved July-18-09</ref>
  
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===Metal coins===
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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 Note]]s (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.<ref>[https://web.archive.org/web/20091018013943/http://www.bep.treas.gov/section.cfm/8/39 Shredded & Mutilated: Mutilated Currency], ''Bureau of Engraving and Printing''. Retrieved 2007-05-09.</ref> By contrast, commodity money that has been lost or destroyed cannot be recovered.
  
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Historically, copper, gold and silver coins have been the most used in European and East Asian societies. The typical feature of these metallic coins  is that have values roughly equal to the price the metal would command as jewelry.  
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=== Coinage ===
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{{main|Coin}}
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These factors led to the shift of the store of value being the metal itself: at first silver, then both silver and gold, and at one point there was bronze as well. Now we have copper coins and other non-precious metals as coins. Metals were mined, weighed, and stamped into coins. This was to assure the individual taking the coin that he was getting a certain known weight of precious metal. Coins could be counterfeited, but they also created a new [[unit of account]], which helped lead to banking. [[Archimedes' principle]] provided the next link: coins could now be easily tested for their [[Fineness|fine]] weight of the metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with (see [[Numismatics]]).
  
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'''EXAMPLE''': Standardized coinage
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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|India]] 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.{{Citation needed|date=March 2010}} Thus the overall ratios of the three coinages remained roughly equivalent.
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[[Image:Maximinus denarius.jpg|right|frame|A [[Ancient Rome|Roman]] [[denarius]], a standardized [[silver coin]].]]
 
  
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It was the discovery of the [[touchstone]] which led the way for metal-based commodity money and coinage. Any soft metal can be tested for purity on a touchstone, allowing one to quickly calculate the total content of a particular metal in a lump. Using such a system still required several steps and mathematical calculation. The touchstone allows one to estimate the amount of gold in an [[alloy]], which is then multiplied by the weight to find the amount of gold alone in a lump.
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=== Paper ===
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{{main|Banknote}}
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[[File:Hui zi.jpg|thumb|upright|[[Huizi (currency)|Huizi currency]], issued in 1160]]
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In [[History of China|premodern China]], the need for credit and for circulating a medium that was less of a burden than exchanging thousands of [[Coin|copper coins]] led to the introduction of [[paper money]]. This economic phenomenon was a slow and gradual process that took place from the late [[Tang dynasty]] (618–907) into the [[Song dynasty]] (960–1279). It began as a means for merchants to exchange heavy coinage for [[receipt]]s of deposit issued as [[promissory note]]s from shops of wholesalers, notes that were valid for temporary use in a small regional territory. In the 10th century, the [[Song dynasty]] government began circulating these notes amongst the traders in their [[monopolized]] salt industry. The Song government granted several shops the sole right to issue banknotes, and in the early 12th century the government finally took over these shops to produce state-issued currency. Yet the banknotes issued were still regionally valid and temporary; it was not until the mid 13th century that a standard and uniform government issue of paper money was made into an acceptable nationwide currency. The already widespread methods of [[woodblock printing]] and then [[Pi Sheng]]'s [[movable type]] printing by the 11th century was the impetus for the massive production of paper money in premodern China.
  
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[[File:Money poster.JPG|thumb|left|Paper money from different countries]]
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At around the same time in the [[Islamic Golden Age|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 (finance)|credit]],<ref name=Banaji>{{cite journal |last=Banaji |first=Jairus |year=2007 |title=Islam, the Mediterranean and the Rise of Capitalism |journal=Historical Materialism |volume=15 |issue=1 |pages=47–74 |issn=1465-4466 |doi=10.1163/156920607X171591 |oclc=440360743 |url=https://www.scribd.com/doc/14246569/Banaji-Jairus-Islam-The-Mediterranean-and-the-Rise-of-Capitalism |access-date=August 28, 2010 |url-status=dead |archive-url=https://web.archive.org/web/20090523015524/http://www.scribd.com/doc/14246569/Banaji-Jairus-Islam-The-Mediterranean-and-the-Rise-of-Capitalism |archive-date=May 23, 2009}}</ref> [[cheque]]s, [[savings account]]s, [[transactional account]]s, loaning, [[trusts]], [[exchange rate]]s, the transfer of credit and [[debt]],<ref name=Labib>{{cite journal |last=Labib |first=Subhi Y. |date=March 1969 |title=Capitalism in Medieval Islam |journal=The Journal of Economic History |volume=29 |issue=1 |pages=79–86 |issn=0022-0507 |oclc=478662641 |jstor=2115499|doi=10.1017/S0022050700097837 |s2cid=153962294 }}</ref> and [[banking institution]]s for loans and [[deposit account|deposits]].<ref name=Labib />{{request quote|date=September 2019}}
  
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Gold is a soft metal, which is also hard to come by, dense, and storable. As a result, monetary gold spread very quickly from [[Asia Minor]], where it first gained wide usage, to the entire world.
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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.
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                    [[Image:Shapuri.jpg|right|200px|thumb|A [[Persian Empire|Persian]] coin.]]
 
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To make this process easier, the concept of standard coinage was introduced. [[Coin]]s were pre-weighed and pre-alloyed, so as long as the manufacturer was aware of the origin of the coin, no use of the touchstone was required. Coins were typically [[mint (coin)|minted]] by governments in a carefully protected process, and then stamped with an emblem that guaranteed the weight and value of the metal. It was, however, extremely common for governments to assert the value of such money lay in its emblem and thus to subsequently debase the currency by lowering the content of valuable metal.
 
  
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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 [[mint (coin)|mints]] to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.
  
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Although gold and silver were commonly used to mint coins, other metals could be used. For instance, Ancient [[Sparta]] minted coins from [[iron]] to discourage its citizens from engaging in foreign trade. In the early seventeenth century Sweden lacked more precious metal and so produced "plate money," which were large slabs of copper approximately 50 cm or more in length and width, appropriately stamped with indications of their value.
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At this time both silver and gold were considered [[legal tender]], and accepted by governments for taxes. However, the [[Gresham's law|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 Note|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.
  
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[[File:Billets de 5000.jpg|thumb|upright|Banknotes of different currencies with a face value of 5000]]
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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.
  
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Metal based coins had the advantage of carrying their value within the coins themselves; on the other hand, they induced manipulations: the clipping of coins in the attempt to get and recycle the precious metal.  
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No country anywhere in the world today has an enforceable gold standard or [[silver standard]] currency system.
  
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A greater problem was the simultaneous co-existence of gold, silver and copper coins in Europe. English and Spanish traders valued gold coins more than silver coins, as many of their neighbors did, with the effect that the English gold-based guinea coin began to rise against the English silver based crown in the 1670s and 1680s.  
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=== Commercial bank ===
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{{Main|Demand deposit}}
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[[File:Sweet success.jpg|thumb|right|A check, used as a means of converting funds in a [[demand deposit]] to cash]]
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Commercial bank money or [[demand deposit]]s are claims against financial institutions that can be used for the purchase of goods and services. A demand deposit account is an account from which funds can be withdrawn at any time by check or [[cash]] withdrawal without giving the bank or financial institution any prior notice. Banks have the legal obligation to return funds held in demand deposits immediately upon demand (or 'at call'). Demand deposit withdrawals can be performed in person, via checks or bank drafts, using [[automatic teller machine]]s (ATMs), or through [[online banking]].<ref>{{cite book |last1=O'Sullivan |first1=Arthur |author-link=Arthur O'Sullivan (economist) |first2=Steven M. |last2=Sheffrin |author-link2=Steven M. Sheffrin |title=Economics: Principles in Action |url=https://archive.org/details/economicsprincip00osul |url-access=limited |publisher=Pearson Prentice Hall |year=2003 |location=Upper Saddle River, New Jersey |page=[https://archive.org/details/economicsprincip00osul/page/n274 258] |isbn=978-0-13-063085-8}}</ref>
  
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Consequently, silver was ultimately pulled out of England for dubious amounts of gold coming into the country at a rate no other European nation would share. The effect was worsened with Asian traders not sharing the European appreciation of gold altogether; gold left Asia and silver left Europe in quantities, European bankers --- like [http://www.pierre-marteau.com/editions/1701-25-mint-reports.html Isaac Newton], Master of the Royal Mint --- watched with unease.
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Commercial bank money is created through [[fractional-reserve banking]], the banking practise where banks keep only a fraction of their [[demand deposit|deposits]] in [[bank reserves|reserve]] (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.<ref>''The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers, and Investors'' by Jonathan Golin. Publisher: John Wiley & Sons (2001). {{ISBN|978-0-471-84217-0}}</ref>{{Page needed|date=June 2014}}<ref>{{cite web |url=http://www.bankintroductions.com/definition.html |website=Bankintroductions.com |title=Economic Definitions |access-date=7 October 2014 |archive-url=https://web.archive.org/web/20150202090722/http://www.bankintroductions.com/definition.html |archive-date=2 February 2015 |url-status=dead }}</ref> 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 process of fractional-reserve banking has a cumulative effect of [[money creation]] by commercial banks, as it expands the [[money supply]] (cash and demand deposits) beyond what it would otherwise be. Because of the prevalence of fractional reserve banking, the [[M2 (economics)|broad money supply]] of most countries is a multiple (greater than 1) of the amount of [[Monetary base|base money]] created by the country's [[central bank]]. That multiple (called the [[money multiplier]]) is determined by the [[reserve requirement]] or other [[financial ratio]] requirements imposed by financial regulators.
  
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The money supply of a country is usually held to be the total amount of currency in circulation plus the total value of checking and savings deposits in the commercial banks in the country. In modern economies, relatively little of the money supply is in physical currency. For example, in December 2010 in the U.S., of the $8853.4 billion in broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money.<ref>{{cite web|url=http://www.federalreserve.gov/releases/h6/20110127/|title=FRB: H.6 Release – Money Stock and Debt Measures|date=January 27, 2011|website=www.federalreserve.gov}}</ref>
  
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===Fiat money===
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===Digital or electronic===
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{{Main|Digital money}}
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The development of computer technology in the second part of the twentieth century allowed money to be represented digitally. By 1990, in the United States all money transferred between its central bank and commercial banks was in electronic form. By the 2000s most money existed as [[digital currency]] in bank databases.<ref>{{cite web|url=https://money.howstuffworks.com/currency6.htm|title=How Currency Works|date=2 September 2003|access-date=22 October 2018|archive-url=https://web.archive.org/web/20190730143424/https://money.howstuffworks.com/currency6.htm|archive-date=30 July 2019|url-status=dead}}</ref> In 2012, by number of transaction, 20 to 58 percent of transactions were electronic (dependent on country).<ref>{{cite web|url=http://www.bbc.com/future/story/20150724-the-truth-about-the-death-of-cash|title=The truth about the death of cash|first=Rose|last=Eveleth}}</ref>
  
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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]].<ref>{{cite news |author = Wallace, Benjamin |title = The Rise and Fall of Bitcoin |url = https://www.wired.com/magazine/2011/11/mf_bitcoin/ |publisher = Wired |date = 23 November 2011 |access-date = 13 October 2012 |archive-url = https://web.archive.org/web/20131031043919/http://www.wired.com/magazine/2011/11/mf_bitcoin |archive-date = 31 October 2013 |url-status=live }}</ref>
  
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Fiat money is a monetary standard ( usually paper money ) that people are required by law to accept as a medium of exchange and/or a standard of deferred payment. It is money by the "fiat",i.e. the command, of the sovereign.  
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== Monetary policy ==
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{{Main|Monetary policy}}
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[[File:USCurrency Federal Reserve.jpg|thumbnail|US dollar banknotes]]
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When gold and silver are used as money, the money supply can grow only if the supply of these metals is increased by mining. This rate of increase will accelerate during periods of [[gold rush]]es and discoveries, such as when Columbus traveled to the [[New World]] and brought back gold and silver to Spain, or when gold was [[California Gold Rush|discovered in California in 1848]]. This causes inflation, as the value of gold goes down. However, if the rate of [[gold mining]] cannot keep up with the growth of the economy, gold becomes relatively more valuable, and prices (denominated in gold) will drop, causing deflation. Deflation was the more typical situation for over a century when gold and paper money backed by gold were used as money in the 18th and 19th centuries.
  
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Fiat money provides solutions to several limitations of commodity money. Depending on the laws, there may be little or no need to physically transport the money - an electronic exchange may be sufficient. Its sole use is as a medium of exchange so its supply is not limited by competing alternate uses. It can be printed without limit, so there is no limit on trade volumes.
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Modern-day monetary systems are based on fiat money and are no longer tied to the value of gold. The control of the amount of money in the economy is known as monetary policy. Monetary policy is the process by which a government, central bank, or [[monetary authority]] manages the [[money supply]] to achieve specific goals. Usually, the goal of monetary policy is to accommodate economic growth in an environment of stable prices. 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."<ref>The Federal Reserve. [http://www.federalreserve.gov/pf/pdf/pf_2.pdf 'Monetary Policy and the Economy".] {{Webarchive|url=https://web.archive.org/web/20070620161302/http://www.federalreserve.gov/pf/pdf/pf_2.pdf |date=2007-06-20 }} ([[PDF]]) ''Board of Governors of the Federal Reserve System'', (2005-07-05). Retrieved 2007-05-15.</ref>
  
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On the other hand, fiat money, especially in the form of paper or coins, can be easily damaged or destroyed.  However, it has an advantage over commodity money in that the same laws that created the money can also define rules for its replacement in case of damage or destruction.
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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 [[History of the Soviet Union (1985-1991)|fall of the Soviet Union]].
  
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Governments and central banks have taken both regulatory and [[free market]] approaches to monetary policy. Some of the tools used to control the money supply include:
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* changing the [[interest rate]] at which the central bank loans money to (or borrows money from) the commercial banks
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* currency purchases or sales
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* increasing or lowering [[Government debt|government borrowing]]
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* increasing or lowering [[government spending]]
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* manipulation of [[exchange rate]]s
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* raising or lowering bank reserve requirements
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* regulation or prohibition of [[Private currency|private currencies]]
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* taxation or tax breaks on imports or exports of capital into a country
  
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For example, the US government will replace mutilated paper money if at least half of the bill can be reconstructed ( [http: //www. bep.treas.gov/section.cfm/8/39 Shredded and mutilated]. )
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In the U.S., the [[Federal Reserve]] is responsible for controlling the money supply, while in the [[Euro area]] 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]].
  
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For many years much of monetary policy was influenced by an [[Economics|economic theory]] known as monetarism. [[Monetarism]] is an economic theory which argues 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]]<ref>{{cite book |author1=Milton Friedman |author2=Anna Jacobson Schwartz |title=Monetary History of the United States, 1867–1960 |publisher=[[Princeton University Press]] |location=Princeton, N.J |year=1971 |isbn=978-0-691-00354-2 }}</ref> supported by the work of [[David Laidler]],<ref>{{cite book |author1=David Laidler |title=Money and Macroeconomics: The Selected Essays of David Laidler (Economists of the Twentieth Century) |publisher=Edward Elgar Publishing |year=1997 |isbn=978-1-85898-596-1 |url=https://archive.org/details/moneymacroeconom0000laid }}</ref> and many others. The nature of the demand for money changed during the 1980s owing to technical, institutional, and legal factors{{Clarify|date=September 2011}} and the influence of monetarism has since decreased.
  
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Still, some of the benefits of fiat money can be a double-edged sword.  
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== Locality ==
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[[File:FIN-10m-1980-anv.jpg|thumb|upright=1.1|President [[J. K. Paasikivi]] illustrated in a former Finnish [[Finnish markka|10 mark]] banknote from 1980]]
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The definition of money says it is money only "in a particular country or socio-economic context". In general, communities only use a single measure of value, which can be identified in the prices of goods listed for sale. There might be multiple media of exchange, which can be observed by what is given to purchase goods ("medium of exchange"), etc. In most countries, the government acts to encourage a particular forms of money, such as requiring it for taxes and punishing [[fraud]].
  
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'''EXAMPLE''': If the amount of money in active circulation outstrips the available goods and services for sale, the effect can be inflationary. This can easily happen if governments print money without attention to the level of economic activity or counterfeiters are allowed to flourish.
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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 market]]s by travelers and traders.
  
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But perhaps the biggest criticism of paper money relates to the fact that its stability is highly dependent on the stability of the legal system backing the currency. Should the legal system fail, so would the currency that depends on it.
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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 (disambiguation)|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).
  
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The money used by a community can change on a smaller scale. This can come through innovation, such as the adoption of [[cheque|cheques (checks)]]. [[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.
  
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===Fiduciary money===
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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.<ref>{{cite journal |last1=Radford |first1=R. A. |title=The Economic Organisation of a P.O.W. Camp |journal=Economica |date=November 1945 |volume=12 |issue=48 |pages=189–201 |doi=10.2307/2550133 |jstor=2550133 |url=https://www.jstor.org/stable/2550133}}</ref>
  
−
+
== Financial crimes ==
−
Whenever a bank issues credible promises to pay in some other form of money, and the promises are transferable, they can circulate as money. Bank money is also called "fiduciary money," since it is based on the trust people have that the bank will keep faith (fides) and pay as promised.
 
  
−
Fiduciary money may be based on promises to pay in commodity money (gold coin, for example) or in fiat money. We will go into much more detail later, because modern monetary systems are largely fiduciary. Two major instances of fiduciary money are:
+
=== Counterfeiting ===
−
*Bank notes: These are bills issued by banks. They were widely used in the nineteenth century and are still used in some countries.  
+
{{Main|Counterfeit money}}
−
[[Image:Banknotes.jpg|thumb|250px|right|Banknotes from all around the world donated by visitors to the [[British Museum]], London]]
+
Counterfeit money is imitation currency produced without the legal sanction of the state or government. Producing or using counterfeit money is a form of fraud or forgery. Counterfeiting is almost as old as money itself. Plated copies (known as [[Fourrée]]s) have been found of [[Lydia#First coinage|Lydian coins]] which are thought to be among the first western coins.<ref>{{cite web |title=A Case for the World's Oldest Coin |url=http://rg.ancients.info/lion/article.html |access-date=29 January 2013}}</ref> Historically, objects that were difficult to counterfeit (e.g. shells, rare stones, precious metals) were often chosen as money.<ref>{{Cite journal|last1=Gourinchas|first1=Pierre-Olivier|last2=Rey|first2=Hélène|last3=Sauzet|first3=Maxime|date=2019|title=The International Monetary and Financial System|url=https://www.annualreviews.org/doi/10.1146/annurev-economics-080217-053518|journal=Annual Review of Economics|language=en|volume=11|issue=1|pages=859–893|doi=10.1146/annurev-economics-080217-053518|s2cid=169545752|issn=1941-1383}}</ref> Before the introduction of [[Banknotes|paper money]], the most prevalent method of counterfeiting involved mixing base metals with pure gold or silver. A form of counterfeiting is the production of documents by legitimate printers in response to fraudulent instructions. During [[World War II]], the [[Nazis]] forged British pounds and American dollars. Today some of the finest counterfeit banknotes are called ''[[Superdollar]]s'' because of their high quality and likeness to the real U.S. dollar. There has been significant counterfeiting of [[Euro]] banknotes and coins since the launch of the currency in 2002, but considerably less than for the U.S. dollar.<ref name="autogenerated1">{{cite web |url=http://itsamoneything.com/money/counterfeiting-cash-money-infographic/#.VB71g5R_uJQ |title=Counterfeiting statistics for several currencies |publisher=Itsamoneything.com |access-date=2014-09-21|date=2012-06-09 }}</ref>
−
*Checking accounts: In our society, checks are acceptable as money, so by the definition of money—a commodity or token that serves as a medium of exchange—checks are money, just as real as any other kind of money.
 
  
−
Both fiat money and fiduciary money are tokens, of course, as distinct from commodity moneys. These token moneys are much the most important kinds of money in the modern world.
+
=== Money laundering ===
 +
{{Main|Money laundering}}
 +
Money laundering is the process in which the proceeds of crime are transformed into ostensibly legitimate money or other assets. However, in several legal and regulatory systems the term money laundering has become [[Conflation|conflated]] with other forms of financial crime, and sometimes used more generally to include misuse of the financial system (involving things such as securities, [[digital currency|digital currencies]], credit cards, and traditional currency), including [[terrorism financing]], [[tax evasion]], and evading of [[international sanctions]].
  
−
== Functions of Money==
+
== See also ==
 +
{{Portal|Money}}
 +
{{cols|colwidth=16em}}
 +
* [[Calculation in kind]]
 +
* [[Coin of account]]
 +
* [[Commons-based peer production]]
 +
* [[Counterfeit money]]
 +
* [[Digital currency]]
 +
* [[Finance]]
 +
* [[Foreign exchange market]]
 +
* [[Free Money Day]]
 +
* [[Gift economy]]
 +
* [[Intelligent banknote neutralisation system]]
 +
* [[Labour voucher]]
 +
* [[Leprosy colony money]]
 +
* [[Local exchange trading system]]
 +
* [[Monetary economics]]
 +
* [[Money bag]]
 +
* [[Money management]]
 +
* [[Non-monetary economy]]
 +
* [[Seigniorage]]
 +
* [[Slang terms for money]]
 +
* [[Social capital]]
 +
* [[Universal basic income]]
 +
* [[Velocity of Money]]
 +
* [[World currency]]
 +
{{colend}}
  
−
We say, traditionally, that money has four major functions. The money is:
+
== References ==
 +
{{reflist}}
  
−
*'''Medium of exchange.'''  
+
==Further reading==
 +
* Chown, John F. ''A History of Money: from AD 800'' (Psychology Press, 1994).
 +
* Davies, Glyn, and Duncan Connors. ''A History of Money'' (4th ed. U of Wales Press, 2016) [https://www.amazon.com/History-Money-Fourth-Glyn-Davies/dp/1783163097/ excerpt] .
 +
* [[Niall Ferguson|Ferguson, Niall]]. ''The Ascent of Money: A Financial History of the World'' (2009) [https://www.amazon.com/Ascent-Money-Financial-History-World/dp/0143116177/ excerpt]
 +
* [[Steve Keen|Keen, Steve]] (February 2015). [https://www.forbes.com/sites/stevekeen/2015/02/28/what-is-money-and-how-is-it-created/ "What Is Money and How Is It Created?"] argues, "Banks create money by issuing a loan to a borrower; they record the loan as an asset, and the money they deposit in the borrower’s account as a liability. This, in one way, is no different to the way the Federal Reserve creates money ... money is simply a third party’s promise to pay which we accept as full payment in exchange for goods. The two main third parties whose promises we accept are the government and the banks ... money ... is not backed by anything physical, and instead relies on trust. Of course, that trust can be abused ... we continue to ignore the main game: what the banks do (for good and for ill) that really drives the economy." ''[[Forbes (magazine)|Forbes]]''
 +
* Kuroda, Akinobu. ''A Global History of Money'' (Routledge, 2020). [https://www.amazon.com/Global-History-Routledge-Explorations-Economic/dp/1032237619/ excerpt]
 +
* {{Cite news |last=Hartman |first=Mitchell |date=October 30, 2017 |title=How Much Money Is There in the World? |url=https://www.marketplace.org/2017/10/30/world/how-much-money-there-world |department=I've Always Wondered... (story series) |work=[[Marketplace (radio program)|Marketplace]] |publisher=[[American Public Media]] |access-date=October 31, 2017}}
 +
* [[John Lanchester|Lanchester, John]], "The Invention of Money: How the heresies of two bankers became the basis of our modern economy", ''[[The New Yorker]]'', 5 & 12 August 2019, pp.&nbsp;28–31.
 +
* Weatherford, Jack. ''The history of money'' (2009). by a cultural anthropologist. [https://www.amazon.com/History-Money-Jack-Weatherford/dp/0609801724/ excerpt]
  
−
+
==External links==
−
Whatever people usually give in exchange for the things that they buy is the medium of exchange. As we have seen, this is the function that defines money.
+
* {{Commons and category-inline|Money|Money}}
−
 
+
* {{Wikiquote-inline|Money}}
−
 
+
* {{Wiktionary-inline}}
−
*'''Unit of account.'''
+
* {{Wikisource-inline}}
−
 
+
* [http://www.bbc.co.uk/programmes/p00547ch "Money"], BBC Radio 4 discussion with Niall Ferguson, Richard J. Evans and Jane Humphries (''In Our Time'', Mar. 1, 2001)
−
 
−
The unit of account is the unit in which values are stated, recorded and settled. The differences between this and the medium of exchange may seem subtle, but there are a few cases in which the unit of account is different from the unit in which the medium of exchange is expressed.
 
−
 
 
−
'''EXAMPLE''': In Britain a few decades ago, '''''Guineas''''' were often used as the unit of account, while the medium of exchange was expressed in '''''Pounds'''''. Both Guineas and Pounds in turn could be expressed in shillings—the Pound was 20 shillings and the Guinea was 21 shillings  ( NOTE: British currency has since been redefined. )
 
−
 
 
−
 
 
−
*'''Standard of deferred payment.'''
 
−
 
 
−
This is the unit in which debt contracts are stated. Deferred payment means a payment made in the future, not now.
 
−
 
 
−
Here, again, it is usually the same as the medium of exchange; but not always. During periods of inflation, people may accept paper money for immediate payment, but insist on some other medium, such as real goods and services or gold, for deferred payment; '''''because the medium of exchange might lose much of its value in the meantime.'''''
 
−
 
 
−
*'''Store of value.'''
 
−
 
−
Similarly to the above notions, this is something that people keep, in order to maintain the value of their wealth. And again, while it would usually be the same as the medium of exchange, in inflationary times other media might be substituted, such as jewelry, land or collectable goods. In this sense, money is "set aside" for the future.
 
−
 
 
−
However, the fact that money – and sometimes the ultimate commodity for which it freely exchanges, such as  ‘gold’—also serves as a store of value creates a problem .
 
−
 
 
−
This encourages hoarding ( in other circumstances known as "saving" ) and takes the commodity money out circulation, reducing the supply. The supply of circulating commodity currency is further reduced by the fact that commodity moneys also have competing non-monetary uses.
 
−
 
 
−
'''EXAMPLE''': Gold and silver are used in jewelry, and nickel and copper have important industrial uses.
 
−
 
 
−
==Early History of Money==
 
−
 
 
−
Money has been used for something like 3000 years. City-states in the ancient near east had extensive trade from city to city, and they used precious metals as a medium of exchange. When trades were settled a certain amount of metal could be used to settle the difference. There was a problem of quality control, however. Problems of determining that of the quantity and, above all, the purity of the metal was were the source of agreements.
 
−
 
 
−
The answer was quality control and certification. The early kings of Lydia standardized the hunks of metal and guaranteed their quality by stamping the king's picture on them.
 
−
 
 
−
These were the first coins. This guarantee of quality by the Lydian kingdom—already a rich and powerful one—was very successful, and made the Kingdom of Lydia even richer, indeed proverbially rich.
 
−
 
 
−
[[Croesus]] and [[Midas]]—of all kings the most, proverbially, wealthy ones—were among the kings of Lydia.
 
−
 
 
−
But what Lydia could do, other kingdoms could do too. By 1000 C.E., metallic coin monetary systems had spread through much of the old world.
 
−
 
−
As in so many other things, the Chinese were the innovators in so far the the next step went. The Chinese invented printing, and not too much later, they also invented paper money. It was widespread in China by around 1000 C.E., but the Chinese abandoned it after about 1500 C.E., in the general decline of Chinese society after the Mongol conquest.
 
−
 
−
Instead, paper money was to evolve much more indirectly in Europe, though.
 
−
 
 
−
===A Tale about Money and Banking===
 
−
 
 
−
 
 
−
Let us start with a short story:
 
−
 
 
−
*Fred, as a goldsmith, has a strong vault.
 
−
 
−
*He stores the gold owned by other citizens for a small fee. ( NOTE: A business that stores money in its vaults for a fee is called a '''''Bank of Deposit'''''.)
 
−
 
−
*Fred gives his customers receipts for their deposits.
 
−
 
 
−
*After a while, some of Fred's customers use receipts for the gold they have deposited to make payments and settle debts.
 
−
 
−
'''EXAMPLE''': One customer may hand over a receipt in payment for a wagon. Then the wagon-maker may leave the gold on deposit, and pass the receipt on to the cooper ( that is, the barrel-maker ) to pay for some barrels.  
 
−
 
 
−
Fred's receipts have become "banknotes" and the Bank of Fred is now a '''''Bank of Issue ''''' and new environment and issues have taken place ever since:
 
−
 
 
−
*'''The Bank of Issue''': One day Johann the Peasant comes in to ask for a loan. Johann is doing pretty well, and wants to buy a second ox so he can use a two-ox team to cultivate a larger field. Fred doesn't have any gold to loan—so he writes out some bank-notes and gives them to Johann the Peasant as a loan. The ox-seller accepts the bank-notes in payment for the ox, and at the end of the year, Johann sells some of his crop for bank-notes, and uses those bank-notes to repay the loan with interest. Fred has created money out of nothing (but trust)! And creating money is a profitable business.
 
−
 
 
−
*'''The Limit''': If many customers want to redeem their bank notes at once, the bank will not be able to comply. This is a "run" on the bank. The Bank of Fred will then be unable to redeem its notes, faith in them will collapse, and the bank-notes will cease to be money.
 
−
 
 
−
Fred has to be careful to keep enough gold coins in reserve to avoid this danger. Suppose experience has taught Fred that he needs to keep one Florin in the vault for every three banknotes he has issued. That is, Fred has adopted a reserve ratio—a ratio of reserves to money issue—of 1/3.
 
−
 
−
'''EXAMPLE''': This determines how much money Fred can issue. If Fred has 1,000 Florins in the vault, then he can issue 3,000 Florins of bank-notes. If someone deposits another 100 Florins, Fred would then be able to issue 300 new bank-notes. Fred would give 100 to the new depositor as receipts for his deposits, but the other 200 Florins would be available for Fred to loan out and so increase his profits.
 
−
 
 
−
So much for the story.
 
−
 
 
−
 
 
−
It is, however, not a fairy tale but a reasonably fitting account of steps that had been done, before the real banking system became the  real power behind the “thrones” of the world.
 
  
−
( NOTE: Among the real early bankers were the Medici(s), who started out as medical doctors, and ended as monarchs, and the Fuggers, who owned a silver mine. )
+
{{Means of Exchange}}
 +
{{Economics}}
 +
{{Authority control}}
  
−
The above “story”  gives also an accurate portrayal of the workings of a bank of issue in a system of fiduciary money. The Bank of Fred is a good example of a bank of issue. But the story goes on:
+
[[Category:Money| ]]
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+
[[Category:Monetary economics| ]]
−
*'''Paper money system''': By the 1700's, bank notes (called "fiduciary money") circulated widely in Western Europe, along with metallic coins. However, the Napoleonic Wars created problems.
+
[[Category:Currency]]
−
 
+
[[Category:Economic anthropology]]
−
*'''Gold Standard''': After the war, the ( British ) government brought in a consultant: a gentleman-economist [[David Ricardo]]. Ricardo designed a new, somewhat more streamlined monetary system.
+
[[Category:Trade]]
−
 
−
In the new monetary system, paper Pound notes were the main medium of exchange. They would be issued only in proportion to gold bullion held by the Bank of England, and redeemable for bullion in large quantities, mostly for international trade.
 
−
 
 
−
This is the '''''"classical" gold standard of the nineteenth century'''''—strictly speaking, not a gold coin system but a paper money system with the paper (fiduciary) money exchangeable for gold bullion.
 
−
 
 
−
*'''Federal Reserve System''': During the 19th century, then, Britain was "on the gold standard." America was not. America was never on any very consistent monetary standard at all. In 1913, Congress established the Federal Reserve System (the "fed") to be the American central banking system—the "bankers' bank" and main control on the monetary system.
 
−
 
−
The Federal Reserve system consists of 12 Banks for 12 districts in different parts of the country.
 
−
 
 
−
These federal reserve banks are also bankers' banks. By controlling the amount of reserves, and regulating the reserve ratio, the Federal Reserve System controls the American Money Supply.
 
−
 
 
−
Something similar could be said about most developed economies. '''''In the modern world, money is not a commodity but a service provided by banks.'''''  This causes some concern. People worry about whether money is "based on" some commodity, and what commodity. But why worry?
 
−
 
 
−
The answer comes in two stages:
 
−
 
 
−
*From many points of view, the effectiveness of the monetary system requires a fairly stable average price level. As we have seen in a previous chapter, inflation can and sometimes has destroyed the purchasing power of a monetary unit very rapidly.
 
−
 
−
*The danger of inflation was seen as being connected to the quantity of money in circulation by way of the "quantity theory of money" ( which is quite another topic altogether.)
 
−
 
 
−
====Summary====
 
−
 
 
−
*Checking accounts are money, fiduciary money, created by banks.
 
−
 
−
*Creation of fiduciary money is limited by the supply of bank reserves.
 
−
 
−
*Bank reserves are obligations of the Federal Reserve, including deposits and vault cash.
 
−
 
−
*Checks are "cleared" by the Federal Reserve by transferring deposits from the bank that issued the check to the bank that deposits it.
 
−
 
−
*A bank that has excess reserves may be able to create money and loan it, by establishing a checking account in the amount of the loan.
 
−
 
−
*Nevertheless, banks have to limit their lending to allow for "clearing" through the Federal Reserve.
 
−
 
 
−
*An increase in reserves, for example by importing currency from abroad, increases the total money supply by a multiple of the increase in reserves.
 
−
 
 
−
*The multiple is the inverse of the required reserve ratio.
 
−
 
 
−
==Conclusion==
 
−
 
 
−
“……Money is not, properly speaking, one of the subjects of commerce; only the instrument which men have agreed upon to facilitate the exchange of one commodity for another. It is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy. If we consider any one kingdom by itself, it is evident, that the greater or less plenty of money is of no consequence; since the prices of commodities are always proportioned to the plenty of money, and a crown in Harry VII's time served the same purpose as a pound does at present…..” ( Hume, 1752. )
 
−
 
 
−
 
 
−
“……It seems a maxim, almost self-evident, that the prices of every thing depend on the proportion between commodities and money, and that any considerable alteration on either has the same effect, either of heightening or lowering the price. Increase the commodities, they become cheaper; increase the money, they rise in their value. As, on the other hand, a diminution of the former, and that of the latter, have contrary tendencies…….” ( ibid.,1752. )
 
−
 
 
−
 
 
−
“…..Because of  the money increase ( in the certain economic area and era ) , every thing must become much cheaper in times of industry and refinement, than in rude, uncultivated ages. It is the proportion between the circulating money, and the commodities in the market, which determines the prices…….. After money enters into all contracts and sales, and is every where the measure of exchange, the same national cash has a much greater task to perform; all commodities are then in the market; the sphere of circulation is enlarged; it is the same case as if that individual sum were to serve a larger kingdom; and therefore, the proportion being here lessened on the side of the money, every thing must become cheaper, and the prices gradually fall……”( ibid., 1752. )
 
−
 
 
−
 
 
−
And finally: We may have heard the fallacy circulated within the historians as well among the common folks:
 
−
 
 
−
“…… that any particular state is weak, though fertile, populous, and well cultivated, merely because it wants money. …….It appears, that the want of money can never injure any state within itself: For men and commodities are the real strength of any community. It is the simple manner of living which here hurts the public, by confining the gold and silver to few hands, and preventing its universal diffusion and circulation. On the contrary, industry and refinements of all kinds incorporate it with the whole state, however small its quantity may be: They digest it into every vein, so to speak; and make it enter into every transaction and contract. No hand is entirely empty of it. And as the prices of every thing fall by that means, the sovereign has a double advantage: He may draw money by his taxes from every part of the state; and what he receives, goes farther in every purchase and payment……..” ( ibid., 1752. )
 
−
 
 
−
==Quotations on money==
 
−
 
 
−
*''"No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. Ye cannot serve God and [[Mammon]]"'' ( [[Gospel of Matthew]] 6:24 (KJV. )
 
−
 
 
−
*For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows. ([[First Epistle to Timothy]] 6:10 (KJV.)
 
−
 
 
−
*When it's a question of money, everybody is of the same religion. ([[Voltaire]])
 
−
 
 
−
*Only when the last tree has died and the last river been poisoned and the last fish been caught will we realize we cannot eat money. ([[Cree]] proverb)
 
−
 
 
−
*So you think that money is the root of all evil? Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil? ([[Ayn Rand]])
 
−
 
 
−
*The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. ([[John Kenneth Galbraith]])
 
−
 
 
−
==References==
 
−
 
 
−
*Galbraith, John Kenneth, ''Money: Whence it came, where it went'', Penguin, UK, 1975, p.20-21
 
−
*Hume, David , “Of Money,” in: ''Political Discourses'', 1752
 
−
*Jevons, W. S., Money and the Mechanism of Exchange, London, Macmillan, 1875
 
−
*Menger, Carl, [http://socserv.mcmaster.ca/econ/ugcm/3ll3/menger/money.txt On the Origin of Money] ''Economic Journal'', volume 2, (1892) p. 239-55. translated by C.A. Foley. Retrieved October 16, 2007.
 
−
*Szabo, Nick, 2005. [http://szabo.best.vwh.net/shell.html Shelling Out—The Origins of Money] Retrieved October 16, 2007.
 
−
 
 
−
==External links==
 
−
All links Retrieved October 16, 2007.
 
−
*[http://www.usmint.gov/ United States Mint]
 
−
*[http://www.royalmint.com/RoyalMint/web/site/Corporate/Home/corporate_homepage.asp Royal Mint]
 
−
*[http://www.money.org/AM/Template.cfm?Section=Home American Numismatic Association]
 
−
*[http://www.worldbank.org/index.html World Bank]
 
−
*[http://www.bep.treas.gov/section.cfm/8/39 Shredded and mutilated]. Bureau of engraving and printing.
 
−
*[https://creditcritics.com/a-brief-history-of-money/ A Brief History of Money]
 
  
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{{Credits|Money|157404388|History_of_money|155730686|}}
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{{credits|1158379770}}

Revision as of 18:53, 14 June 2023

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For other uses, see Money (disambiguation).

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A United States dollar bill, two five-cent coins and a penny

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context.[1][2][3] The primary functions which distinguish money are as a 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; nearly all contemporary money systems are based on unbacked fiat money without use value.[4] 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 (banknotes and coins currently issued) and, depending on the particular definition used, one or more types of bank money (the balances held in checking accounts, savings 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.

Etymology

The word money derives from the Latin word moneta with the meaning "coin" via French monnaie. The Latin word is believed to originate from a temple of Juno, on Capitoline, one of Rome's seven hills. In the ancient world, Juno was often associated with money. The temple of Juno Moneta at Rome was the place where the mint of Ancient Rome was located.[5] The name "Juno" may have derived from the Etruscan goddess Uni (which means "the one", "unique", "unit", "union", "united") and "Moneta" either from the Latin word "monere" (remind, warn, or instruct) or the Greek word "moneres" (alone, unique).

In the Western world a prevalent term for coin-money has been specie, stemming from Latin in specie, meaning "in kind".[6]

History

A 640 B.C.E. one-third stater electrum coin from Lydia

The use of barter-like methods may date back to at least 100,000 years ago, though there is no evidence of a society or economy that relied primarily on barter.[7][8] Instead, non-monetary societies operated largely along the principles of gift economy and debt.[9][10] When barter did in fact occur, it was usually between either complete strangers or potential enemies.[11]

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.[12] The first usage of the term came from Mesopotamia circa 3000 B.C.E. 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 and silver coins.[13] It is thought by modern scholars that these first stamped coins were minted around 650 to 600 B.C.E.[14]

Song Dynasty Jiaozi, the world's earliest paper money

The system of commodity money eventually evolved into a system of representative money.[citation needed] 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.[15] 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 "How the Great Kaan Causeth the Bark of Trees, Made Into Something Like Paper, to Pass for Money All Over his Country."[16] 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.[17]

Functions

Template:Macroeconomics sidebar In Money and the Mechanism of Exchange (1875), William Stanley Jevons famously analyzed money in terms of four functions: a medium of exchange, a common measure of value (or unit of account), a standard of value (or standard of deferred payment), and a store of value. By 1919, Jevons's four functions of money were summarized in the couplet:

Money's a matter of functions four,
A Medium, a Measure, a Standard, a Store.[18]

This couplet would later become widely popular in macroeconomics textbooks.[19] 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.[4][20][21]

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.[22] 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.

Medium of exchange

When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. It thereby avoids the inefficiencies of a barter system, such as the inability to permanently ensure "coincidence of wants". For example, between two parties in a barter system, one party may not have or make the item that the other wants, indicating the non-existence of the coincidence of wants. Having a medium of exchange can alleviate this issue because the former can have the freedom to spend time on other items, instead of being burdened to only serve the needs of the latter. Meanwhile, the latter can use the medium of exchange to seek for a party that can provide them with the item they want.

Measure of value

A unit of account (in economics)[23] is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt.

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.

Standard of deferred payment

While standard of deferred payment is distinguished by some texts,[22] particularly older ones, other texts subsume this under other functions.[4]<span title="{{#invoke:DecodeEncode|encode|s={{#invoke:Plain text|main|1=Page / location: {{#invoke:String2|hyphen2dash|}}|encode=false}}|charset=<>"}}">:&hairsp;{{#invoke:String2|hyphen2dash||&hairsp;}}&hairsp;[20]<span title="{{#invoke:DecodeEncode|encode|s={{#invoke:Plain text|main|1=Page / location: {{#invoke:String2|hyphen2dash|}}|encode=false}}|charset=<>"}}">:&hairsp;{{#invoke:String2|hyphen2dash||&hairsp;}}&hairsp;[21]<span title="{{#invoke:DecodeEncode|encode|s={{#invoke:Plain text|main|1=Page / location: {{#invoke:String2|hyphen2dash|}}|encode=false}}|charset=<>"}}">:&hairsp;{{#invoke:String2|hyphen2dash||&hairsp;}}&hairsp;{{ safesubst:#invoke:Unsubst||date=__DATE__ |$B= {{#invoke:Category handler|main}}{{#invoke:Category handler|main}}[clarification needed] }} A "standard of deferred payment" is an accepted way to settle a debt—a unit in which debts are denominated, and the status of money as legal tender, in those jurisdictions which have this concept, states that it may function for the discharge of debts. When debts are denominated in money, the real value of debts may change due to inflation and deflation, and for sovereign and international debts via debasement and devaluation.

Store of value

To act as a store of value, money must be able to be reliably saved, stored, and retrieved—and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time. Some have argued that inflation, by reducing the value of money, diminishes the ability of the money to function as a store of value.[4]{{ safesubst:#invoke:Unsubst||date=__DATE__ |$B=

}}

Properties

The functions of money are that it is a medium of exchange, a unit of account, and a store of value.[24] To fulfill these various functions, money must be:[25]

  • Fungible: its individual units must be capable of mutual substitution (i.e., interchangeability).
  • Durable: able to withstand repeated use.
  • Divisible: divisible to small units.
  • Portable: easily carried and transported.
  • Acceptable: most people must accept the money as payment
  • Scarce: its supply in circulation must be limited.[25]

Money supply

Main article: Money supply
File:MB, M1 and M2 aggregates from 1981 to 2012.png
Money Base, M1 and M2 in the U.S. from 1981 to 2012
File:RIAN archive 978776 Printing paper money at Goznak factory in Perm.jpg
Printing paper money at a printing press in Perm
File:Pengar - 2019.jpg
A person counts a bundle of different Swedish banknotes.

In economics, money is any financial instrument that can fulfill the functions of money (detailed above). These financial instruments together are collectively referred to as the money supply of an economy. In other words, the money supply is the number of financial instruments within a specific economy available for purchasing goods or services. Since the money supply consists of various financial instruments (usually currency, demand deposits, and various other types of deposits), the amount of money in an economy is measured by adding together these financial instruments creating a monetary aggregate.

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 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 demand deposits (such as checking accounts); M2 is M1 plus savings accounts and time deposits 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.

Creation of money

In current economic systems, money is created by two procedures:[citation needed]

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.[26][27][28]

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.[29]

Market liquidity

"Market liquidity" describes how easily an item can be traded for another item, or into the common currency within an economy. Money is the most liquid asset because it is universally recognized and accepted as a common currency. In this way, money gives consumers the freedom to trade goods and services easily without having to barter.

Liquid financial instruments are easily tradable and have low transaction costs. There should be no (or minimal) spread between the prices to buy and sell the instrument being used as money.

Types

Commodity

File:1914 Sydney Half Sovereign - St. George.jpg
A 1914 British gold sovereign

Many items have been used as commodity money such as naturally scarce precious metals, conch shells, barley, beads, etc., as well as many other things that are thought of as having value. Commodity money value comes from the commodity out of which it is made. The commodity itself constitutes the money, and the money is the commodity.[30] Examples of commodities that have been used as mediums of exchange include gold, silver, copper, rice, Wampum, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, etc. These items were sometimes used in a metric of perceived value in conjunction with one another, in various commodity valuation or price system economies. The use of commodity money is similar to barter, but a commodity money provides a simple and automatic unit of account for the commodity which is being used as money. Although some gold coins such as the Krugerrand are considered legal tender, there is no record of their face value on either side of the coin. The rationale for this is that emphasis is laid on their direct link to the prevailing value of their fine gold content.[31] American Eagles are imprinted with their gold content and legal tender face value.[32]

Representative

In 1875, the British economist William Stanley Jevons described the money used at the time as "representative money". Representative money is money that consists of token coins, paper money or other physical tokens such as certificates, that can be reliably exchanged for a fixed quantity of a commodity such as gold or silver. The value of representative money stands in direct and fixed relation to the commodity that backs it, while not itself being composed of that commodity.[33]

Fiat

File:2006 AEGold Proof Rev.png
Gold coins are an example of legal tender that are traded for their intrinsic value, rather than their face value.

Fiat money or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order (fiat). Usually, the government declares the fiat currency (typically notes and coins from a central bank, such as the Federal Reserve System in the U.S.) to be legal tender, making it unlawful not to accept the fiat currency as a means of repayment for all debts, public and private.[34][35]

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).[32][36]

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.[37] By contrast, commodity money that has been lost or destroyed cannot be recovered.

Coinage

Main article: Coin

These factors led to the shift of the store of value being the metal itself: at first silver, then both silver and gold, and at one point there was bronze as well. Now we have copper coins and other non-precious metals as coins. Metals were mined, weighed, and stamped into coins. This was to assure the individual taking the coin that he was getting a certain known weight of precious metal. Coins could be counterfeited, but they also created a new unit of account, which helped lead to banking. Archimedes' principle provided the next link: coins could now be easily tested for their fine weight of the metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with (see Numismatics).

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 India 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.[citation needed] Thus the overall ratios of the three coinages remained roughly equivalent.

Paper

Huizi currency, issued in 1160

In premodern China, the need for credit and for circulating a medium that was less of a burden than exchanging thousands of copper coins led to the introduction of paper money. This economic phenomenon was a slow and gradual process that took place from the late Tang dynasty (618–907) into the Song dynasty (960–1279). It began as a means for merchants to exchange heavy coinage for receipts of deposit issued as promissory notes from shops of wholesalers, notes that were valid for temporary use in a small regional territory. In the 10th century, the Song dynasty government began circulating these notes amongst the traders in their monopolized salt industry. The Song government granted several shops the sole right to issue banknotes, and in the early 12th century the government finally took over these shops to produce state-issued currency. Yet the banknotes issued were still regionally valid and temporary; it was not until the mid 13th century that a standard and uniform government issue of paper money was made into an acceptable nationwide currency. The already widespread methods of woodblock printing and then Pi Sheng's movable type printing by the 11th century was the impetus for the massive production of paper money in premodern China.

Paper money from different countries

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,[38] cheques, savings accounts, transactional accounts, loaning, trusts, exchange rates, the transfer of credit and debt,[39] and banking institutions for loans and deposits.[39]Template:Request quote

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.

File:Billets de 5000.jpg
Banknotes of different currencies with a face value of 5000

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

File:Sweet success.jpg
A check, used as a means of converting funds in a demand deposit to cash

Commercial bank money or demand deposits are claims against financial institutions that can be used for the purchase of goods and services. A demand deposit account is an account from which funds can be withdrawn at any time by check or cash withdrawal without giving the bank or financial institution any prior notice. Banks have the legal obligation to return funds held in demand deposits immediately upon demand (or 'at call'). Demand deposit withdrawals can be performed in person, via checks or bank drafts, using automatic teller machines (ATMs), or through online banking.[40]

Commercial bank money is created through fractional-reserve banking, the banking practise where banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.[41]{{ safesubst:#invoke:Unsubst||date=__DATE__ |$B=

}}[42] 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 process of fractional-reserve banking has a cumulative effect of money creation by commercial banks, as it expands the money supply (cash and demand deposits) beyond what it would otherwise be. Because of the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple (greater than 1) of the amount of base money created by the country's central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators.

The money supply of a country is usually held to be the total amount of currency in circulation plus the total value of checking and savings deposits in the commercial banks in the country. In modern economies, relatively little of the money supply is in physical currency. For example, in December 2010 in the U.S., of the $8853.4 billion in broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money.[43]

Digital or electronic

The development of computer technology in the second part of the twentieth century allowed money to be represented digitally. By 1990, in the United States all money transferred between its central bank and commercial banks was in electronic form. By the 2000s most money existed as digital currency in bank databases.[44] In 2012, by number of transaction, 20 to 58 percent of transactions were electronic (dependent on country).[45]

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.[46]

Monetary policy

Main article: Monetary policy
US dollar banknotes

When gold and silver are used as money, the money supply can grow only if the supply of these metals is increased by mining. This rate of increase will accelerate during periods of gold rushes and discoveries, such as when Columbus traveled to the New World and brought back gold and silver to Spain, or when gold was discovered in California in 1848. This causes inflation, as the value of gold goes down. However, if the rate of gold mining cannot keep up with the growth of the economy, gold becomes relatively more valuable, and prices (denominated in gold) will drop, causing deflation. Deflation was the more typical situation for over a century when gold and paper money backed by gold were used as money in the 18th and 19th centuries.

Modern-day monetary systems are based on fiat money and are no longer tied to the value of gold. The control of the amount of money in the economy is known as monetary policy. Monetary policy is the process by which a government, central bank, or monetary authority manages the money supply to achieve specific goals. Usually, the goal of monetary policy is to accommodate economic growth in an environment of stable prices. 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."[47]

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.

Governments and central banks have taken both regulatory and free market approaches to monetary policy. Some of the tools used to control the money supply include:

  • changing the interest rate at which the central bank loans money to (or borrows money from) the commercial banks
  • currency purchases or sales
  • increasing or lowering government borrowing
  • increasing or lowering government spending
  • manipulation of exchange rates
  • raising or lowering bank reserve requirements
  • regulation or prohibition of private currencies
  • taxation or tax breaks on imports or exports of capital into a country

In the U.S., the Federal Reserve is responsible for controlling the money supply, while in the Euro area 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.

For many years much of monetary policy was influenced by an economic theory known as monetarism. Monetarism is an economic theory which argues 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[48] supported by the work of David Laidler,[49] and many others. The nature of the demand for money changed during the 1980s owing to technical, institutional, and legal factors{{ safesubst:#invoke:Unsubst||date=__DATE__ |$B= {{#invoke:Category handler|main}}{{#invoke:Category handler|main}}[clarification needed] }} and the influence of monetarism has since decreased.

Locality

File:FIN-10m-1980-anv.jpg
President J. K. Paasikivi illustrated in a former Finnish 10 mark banknote from 1980

The definition of money says it is money only "in a particular country or socio-economic context". In general, communities only use a single measure of value, which can be identified in the prices of goods listed for sale. There might be multiple media of exchange, which can be observed by what is given to purchase goods ("medium of exchange"), etc. In most countries, the government acts to encourage a particular forms of money, such as requiring it for taxes and punishing fraud.

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 cheques (checks). 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.[50]

Financial crimes

Counterfeiting

Counterfeit money is imitation currency produced without the legal sanction of the state or government. Producing or using counterfeit money is a form of fraud or forgery. Counterfeiting is almost as old as money itself. Plated copies (known as Fourrées) have been found of Lydian coins which are thought to be among the first western coins.[51] Historically, objects that were difficult to counterfeit (e.g. shells, rare stones, precious metals) were often chosen as money.[52] Before the introduction of paper money, the most prevalent method of counterfeiting involved mixing base metals with pure gold or silver. A form of counterfeiting is the production of documents by legitimate printers in response to fraudulent instructions. During World War II, the Nazis forged British pounds and American dollars. Today some of the finest counterfeit banknotes are called Superdollars because of their high quality and likeness to the real U.S. dollar. There has been significant counterfeiting of Euro banknotes and coins since the launch of the currency in 2002, but considerably less than for the U.S. dollar.[53]

Money laundering

Money laundering is the process in which the proceeds of crime are transformed into ostensibly legitimate money or other assets. However, in several legal and regulatory systems the term money laundering has become conflated with other forms of financial crime, and sometimes used more generally to include misuse of the financial system (involving things such as securities, digital currencies, credit cards, and traditional currency), including terrorism financing, tax evasion, and evading of international sanctions.

See also

Portal Money Portal

Template:Cols

  • Calculation in kind
  • Coin of account
  • Commons-based peer production
  • Counterfeit money
  • Digital currency
  • Finance
  • Foreign exchange market
  • Free Money Day
  • Gift economy
  • Intelligent banknote neutralisation system
  • Labour voucher
  • Leprosy colony money
  • Local exchange trading system
  • Monetary economics
  • Money bag
  • Money management
  • Non-monetary economy
  • Seigniorage
  • Slang terms for money
  • Social capital
  • Universal basic income
  • Velocity of Money
  • World currency

Template:Colend

References
ISBN links support NWE through referral fees

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  2. ↑ What Is Money? {{#invoke:webarchive|webarchive}} By John N. Smithin. Retrieved July-17-09.
  3. ↑ money : The New Palgrave Dictionary of Economics.
  4. ↑ 4.0 4.1 4.2 4.3 Mankiw, N. Gregory (2007). "2", Macroeconomics, 6th, New York: Worth Publishers, 22–32. ISBN 978-0-7167-6213-3. 
  5. ↑ D'Eprio, Peter & Pinkowish, Mary Desmond (1998). What Are the Seven Wonders of the World? First Anchor Books, p. 192. Template:ISBN
  6. ↑ Online Etymology Dictionary. etymonline.com.
  7. ↑ Mauss, Marcel. The Gift: The Form and Reason for Exchange in Archaic Societies. pp. 36–37.
  8. ↑ The Myth of the Myth of the Myth of Barter and the Return of the Armchair Ethnologists (in en-GB) (2016-06-08).
  9. ↑ What is Debt? – An Interview with Economic Anthropologist David Graeber. Naked Capitalism (2011-08-26).
  10. ↑ David Graeber: Debt: The First 5000 Years, Melville 2011. Cf. review {{#invoke:webarchive|webarchive}}
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  12. ↑ Kramer, History Begins at Sumer, pp. 52–55.
  13. ↑ Herodotus. Histories, I, 94
  14. ↑ Goldsborough, Reid (2003-10-02). World's First Coin. rg.ancients.info.
  15. ↑ Moshenskyi, Sergii (2008). History of the weksel: Bill of exchange and promissory note. ISBN 978-1-4363-0694-2. 
  16. ↑ Marco Polo (1818). The Travels of Marco Polo, a Venetian, in the Thirteenth Century: Being a Description, by that Early Traveller, of Remarkable Places and Things, in the Eastern Parts of the World, 353–355. 
  17. ↑ (2012) Modern money theory: a primer on macroeconomics for sovereign monetary systems. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan, 45–50. ISBN 978-0230368897. 
  18. ↑ Milnes, Alfred (1919). The economic foundations of reconstruction. Macdonald and Evans. 
  19. ↑ Dwivedi, DN (2005). Macroeconomics: Theory and Policy. Tata McGraw-Hill. 
  20. ↑ 20.0 20.1 Krugman, Paul & Wells, Robin, Economics, Worth Publishers, New York (2006)
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  22. ↑ 22.0 22.1 T.H. Greco. Money: Understanding and Creating Alternatives to Legal Tender, White River Junction, Vt: Chelsea Green Publishing (2001). Template:ISBN
  23. ↑ Functions of Money (2017-10-11).
  24. ↑ What is Money?. International Monetary Fund.
  25. ↑ 25.0 25.1 Money. Federal Reserve Bank of Dallas.
  26. ↑ (2006) The Little Money Book. The Disinformation Company. ISBN 978-1-932857-26-9. 
  27. ↑ History of Money.
  28. ↑ Bernstein, Peter, A Primer on Money and Banking, and Gold, Wiley, 2008 edition, pp. 29–39
  29. ↑ Money creation in the modern economy | Bank of England (in en) (14 March 2014).
  30. ↑ Mises, Ludwig von. The Theory of Money and Credit, (Indianapolis, IN: Liberty Fund, Inc., 1981), trans. H. E. Batson. Ch.3 Part One: The Nature of Money, Chapter 3: The Various Kinds of Money, Section 3: Commodity Money, Credit Money, and Fiat Money, Paragraph 25.
  31. ↑ randRefinery.com {{#invoke:webarchive|webarchive}}. Retrieved July-18-09.
  32. ↑ 32.0 32.1 usmiNT.gov {{#invoke:webarchive|webarchive}}. Retrieved July-18-09.
  33. ↑ Jevons, William Stanley (1875). "XVI: Representative Money", Money and the Mechanism of Exchange. ISBN 978-1-59605-260-4. 
  34. ↑ Deardorff, Prof. Alan V. (2008). Deardorff's Glossary of International Economics. Department of Economics, University of Michigan.
  35. ↑ Black, Henry Campbell (1910). A Law Dictionary Containing Definitions Of The Terms And Phrases Of American And English Jurisprudence, Ancient And Modern, p. 494. West Publishing Co. Black’s Law Dictionary defines the word "fiat" to mean "a short order or warrant of a Judge or magistrate directing some act to be done; an authority issuing from some competent source for the doing of some legal act"
  36. ↑ Tom Bethell. "Crazy as a Gold Bug", New York, New York Media, 1980-02-04, p. 34. Retrieved July-18-09
  37. ↑ Shredded & Mutilated: Mutilated Currency, Bureau of Engraving and Printing. Retrieved 2007-05-09.
  38. ↑ Banaji, Jairus (2007). Islam, the Mediterranean and the Rise of Capitalism. Historical Materialism 15 (1): 47–74.
  39. ↑ 39.0 39.1 Labib, Subhi Y. (March 1969). Capitalism in Medieval Islam. The Journal of Economic History 29 (1): 79–86.
  40. ↑ (2003) Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall. ISBN 978-0-13-063085-8. 
  41. ↑ The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers, and Investors by Jonathan Golin. Publisher: John Wiley & Sons (2001). Template:ISBN
  42. ↑ Economic Definitions.
  43. ↑ FRB: H.6 Release – Money Stock and Debt Measures (January 27, 2011).
  44. ↑ How Currency Works (2 September 2003).
  45. ↑ Eveleth, Rose. The truth about the death of cash.
  46. ↑ Wallace, Benjamin. "The Rise and Fall of Bitcoin", Wired, 23 November 2011.
  47. ↑ The Federal Reserve. 'Monetary Policy and the Economy". {{#invoke:webarchive|webarchive}} (PDF) Board of Governors of the Federal Reserve System, (2005-07-05). Retrieved 2007-05-15.
  48. ↑ (1971) Monetary History of the United States, 1867–1960. Princeton, N.J: Princeton University Press. ISBN 978-0-691-00354-2. 
  49. ↑ (1997) Money and Macroeconomics: The Selected Essays of David Laidler (Economists of the Twentieth Century). Edward Elgar Publishing. ISBN 978-1-85898-596-1. 
  50. ↑ (November 1945)The Economic Organisation of a P.O.W. Camp. Economica 12 (48): 189–201.
  51. ↑ A Case for the World's Oldest Coin.
  52. ↑ (2019)The International Monetary and Financial System. Annual Review of Economics 11 (1): 859–893.
  53. ↑ Counterfeiting statistics for several currencies. Itsamoneything.com (2012-06-09).

Further reading

  • Chown, John F. A History of Money: from AD 800 (Psychology Press, 1994).
  • Davies, Glyn, and Duncan Connors. A History of Money (4th ed. U of Wales Press, 2016) excerpt .
  • Ferguson, Niall. The Ascent of Money: A Financial History of the World (2009) excerpt
  • Keen, Steve (February 2015). "What Is Money and How Is It Created?" argues, "Banks create money by issuing a loan to a borrower; they record the loan as an asset, and the money they deposit in the borrower’s account as a liability. This, in one way, is no different to the way the Federal Reserve creates money ... money is simply a third party’s promise to pay which we accept as full payment in exchange for goods. The two main third parties whose promises we accept are the government and the banks ... money ... is not backed by anything physical, and instead relies on trust. Of course, that trust can be abused ... we continue to ignore the main game: what the banks do (for good and for ill) that really drives the economy." Forbes
  • Kuroda, Akinobu. A Global History of Money (Routledge, 2020). excerpt
  • Hartman, Mitchell, "How Much Money Is There in the World?", Marketplace, American Public Media, October 30, 2017.
  • Lanchester, John, "The Invention of Money: How the heresies of two bankers became the basis of our modern economy", The New Yorker, 5 & 12 August 2019, pp. 28–31.
  • Weatherford, Jack. The history of money (2009). by a cultural anthropologist. excerpt

External links

  • Template:Commons and category-inline
  • 16x16px Quotations related to Money at Wikiquote
  • Wiktionary-logo-en.pngThe Wiktionary definition of Money.
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  • "Money", BBC Radio 4 discussion with Niall Ferguson, Richard J. Evans and Jane Humphries (In Our Time, Mar. 1, 2001)

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