Money
Economics offers various definitions for money, though it is now commonly defined by the functions attached to any good or token that functions in trade as a medium of exchange, store of value, and unit of account. Some authors explicitly require money to be a standard of deferred payment, too [1]. In common usage, money refers more specifically to currency, particularly the many circulating currencies with legal tender status conferred by a national state; deposit accounts denominated in such currencies are also considered part of the money supply, although these characteristics are historically comparatively recent. Other older functions a money may possess are a means of rationing access to scarce resources, and a means of accumulating power of command over others.
The use of money provides an alternative to bartering, which is often considered to be inefficient because it requires a coincidence of wants between traders, and an agreement that these needs are of equal value, before a transaction can occur. The efficiency gains through the use of money are thought to encourage trade and the division of labour, in turn increasing productivity and wealth.
A number of commodity money systems were amongst the earliest forms of money to emerge. For example
- the shekel referred to a specific volume of barley in ancient Babylon
- iron sticks were used in Argos, before Pheidon's reforms.
- cowries were used as a money in ancient China and throughout the South Pacific.
- salt was used as a currency in pre-coinage societies in Europe.
- ox-shaped ingots of copper seem to have functioned as a currency in the Bronze Age eastern Mediterranean.
- state certified weights of gold and silver have functioned as currency since the reign of Croesus of Lydia, if not before.
- rum-currency operated in the early European settlement of Sydney cove in Australia.
Under a commodity money system, the objects used as money have intrinsic value, i.e., they have value beyond their use as money. For example, gold coins retain value because of gold's useful physical properties besides its value due to monetary usage, whereas paper notes are only worth as much as the monetary value assigned to them. Commodity money is usually adopted to simplify transactions in a barter economy, and so it functions first as a medium of exchange[citation needed]. It quickly begins functioning as a store of value[citation needed], since holders of perishable goods can easily convert them into durable money.
Fiat money is a relatively modern invention. A central authority (government) creates a new money object that has negligible inherent value. The widespread acceptance of fiat money is most frequently enhanced by the central authority mandating the money's acceptance under penalty of law and demanding this money in payment of taxes or tribute. At various times in history, government-issued promissory notes have later become fiat currencies (e.g. the US Dollar) and fiat currencies have gone on to become a form of commodity currency (e.g. the Swiss Dinar) [2].
Etymology
See the Indo-European and Semitic etymology at History_of_money.
In many languages, the word for money is the same as or similar to the word for silver or gold. The French, appart from the word Monnaie, they also use the word argent (which means 'silver'), to mean money 1. The word translated "money" Old Testament is "keseph," but this word actually means "silver". Likewise, the Greek words underlying the translation "money" in the New Testament actually mean silver or a certain weight of silver. The modern notion of the word "money" as currency (fiat money or paper notes) is a very recent development in the meaning of the word "money." This shift began in 1913 with the creation of the Federal Reserve. The change in meaning to pure paper notes was aided by Roosevelt in 1933 when Americans were required to turn in their gold for paper, but the silver coins in use continued to be "money" in the original sense (with a brief period of debasement during WWII) until 1964 when the silver was removed from U.S. coins. Despite the attempt by the central bank to enforce the new meaning of the word money as standing for paper currency or electronic credits, there has always been a significant number of scholars who point out that this is just a deception and that "money" must be real substance, i.e. gold, silver, or some other commodity that functions well as a unit of exhange.
History
Money has developed over the years from gold, silver, copper, brass, iron, stones, or shells to paper, or electronic entries being managed by complex international banking systems.
The history of money is a story spanning thousands of years. Related to this, Numismatics is the scientific study of money and its history in all its varied forms.
Money itself must be a scarce good. Many items have been used as money, from naturally scarce precious metals and conch shells through cigarettes to entirely artificial money such as banknotes. Modern money (and most ancient money too) is essentially a token — in other words, an abstraction. Paper currency is perhaps the most common type of physical money today. However, goods such as gold or silver retain many of money's essential properties.
The emergence of money
The use of proto-money may date back to at least 100,000 B.P [3]. Trading in red ochre is attested in Swaziland, from about that date, and ochre seems to have functioned as a proto-money in Aboriginal Australia. Shell jewellery in the form of strung beads would have served as good with the basic attributes needed of early money. In cultures where metal working was unknown, shell or ivory jewellery were the most divisible, easily storable and transportable, scarce, and hard to counterfeit objects that could be made. It is highly unlikely that there were formal markets in 100,000 B.P (any more than there are in recently observed hunter-gatherer cultures). Nevertheless, proto-money would have been useful in reducing the costs of less frequent transactions that were crucial to hunter-gatherer cultures, especially bride purchase, splitting property upon death, tribute, and intertribal trade in hunting ground rights (“starvation insurance”) and implements. In the absence of a medium of exchange, all of these transactions suffer from the basic problem of barter — they require an improbable coincidence of wants or events. Jewellery has often been used for currency and wealth storage in some historical and contemporary societies, especially those in which modern forms of money are scarce, in addition to being used for decoration and display of status and wealth.
In cultures, of any era, that lack money, bartering and some system of in-kind "credit" or "gift exchange" would be the only ways to exchange goods. Bartering has several problems, most notably the coincidence of wants problem. If one wishes to trade fruit for wheat, it can only be done when the fruit and wheat are both available at the same time and place, which may be for a very brief time, or may be never. With an intermediate commodity (whether it be shells, rum, gold, etc.) fruit can be sold when it is ripe in exchange for the intermediate commodity. This intermediate commodity can then be used to buy wheat when the wheat harvest comes in. Thus the use of money makes all commodities become more liquid.
Where trade is common, barter systems usually lead quite rapidly to several key goods being imbued with monetary properties. In the early British colony of New South Wales in Australia, rum emerged quite soon after settlement as the most monetary of goods. When a nation is without a fiat currency system it is quite common for the fiat currency of a neighbouring nation to emerge as the dominant monetary good. In some prisons where conventional money is prohibited, it is quite common for goods such as cigarettes to take on a monetary quality. Gold has emerged naturally from the world of barter again and again to take on a monetary function. It should be noted that the emergence of monetary goods is not dependent on central authority or government. It is a quite natural market phenomenon.
Commodity money
Many early instances of money were objects which were useful for their intrinsic value as well as their monetary properties. This has been called commodity money; historical examples include iron nails (in Scotland), pigs, rare seashells, whale's teeth, and (often) cattle. In medieval Iraq, bread was used as an early form of currency.
The use of shells or ivory was nearly universal before humans discovered how to work with precious metals; in China, Africa, and many other areas, use of cowrie shells was common. In China the use of cowrie shells was superseded by metal representations of the shells, as well as representations of metal tools. These imitations may have been the precursors of coinage.
Salt and spices have been used as money. From 550 B.C.E., accepting salt from a person was synonymous with receiving a salary, taking pay, or being in that person's service. Definite indications are available that both black and white pepper have been used as commodity money for hundreds of years before Christ, and several centuries thereafter. Being a valuable commodity, pepper has naturally been used as payment. Alaric reportedly demanded 3,000 pounds in weight of pepper in 408 C.E. as part of a ransom for the city of Rome. In the Middle Ages, there was a French saying, 'As dear as pepper'. In England, rent could be paid in pounds of pepper, and so a symbolic minimal amount is known as a "peppercorn rent".
Even in the modern world, in the absence of other types of money, people have occasionally used commodities such as tobacco as money. This happened on a wide scale after World War II when cigarettes became used unofficially in Europe, in parallel with other currencies, for a short time. It also occurs in some remote parts of countries such as Colombia and Bolivia, where cocaine, or its precursor, coca paste, is used as commodity money.
Another example of "commodity money" is shell money in the Solomon Islands. Shells are painstakingly chipped into rough circles, filed down, and threaded onto large necklaces, which are then used during marriage proposals; for instance, a father may charge twenty shell money necklaces for his daughter's hand in marriage.
One interesting example of commodity money is the huge limestone coins from the Micronesian island of Yap, quarried with great peril from a source several hundred miles away. 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. (Owing to the great inconvenience, islanders would often trade only promises of ownership of an individual coin instead of actually moving it. In some cases, coins which had been lost at sea were still used for exchange in this way. These agreements could be thought of as a kind of representative money, described below.)
Once a commodity becomes used as money, it takes on a value that is often different from its intrinsic worth or usefulness. Having the propety of money adds an extra use to the commodity, and so increases its value. This extra use is a convention of society, and the scope of its use as money within the society affects the value of the monetary commodity. So although commodity money is real, it should not be seen as having a fixed value in absolute terms. To a large extent its value is still socially determined. A prime example is gold, which has been valued differently by many different societies, but perhaps valued most by those who used it as money. Fluctuations in the value of commodity money can be strongly influenced by supply and demand, whether current or predicted (if a local gold mine is about to run out of ore, the relative market value of gold may go up in anticipation of a shortage).
Money can be anything which the trading parties agree has transferable value, but the usability of a particular sort of money varies widely. Desirable features of a good basis for money include being able to be stored for long periods of time, dense so it can be carried about easily, and difficult to find on its own so it is actually worth something.
Metals like gold and silver have been used as commodity money for thousands of years, being in the form of metal dust, nuggets, rings, bracelets and assorted pieces. Eventually the Lydians began coining gold and silver around 560 B.C.E.
Gold and silver are both quite soft metals, and coins minted from the pure metals suffer from wear or deformation in daily use. Fortunately these metals are also easily alloyed with a less expensive metal, frequently copper, to improve durability of the resulting coins. Typically alloys of coinage metals, such as sterling silver or 22 carat (92%) gold, are used to make coins more durable. These are alloys of 90% or more precious metal, for alloys of less than 90% do not improve hardness or durability much, and so are typically considered to be liable to fall into monetary debasement.
Standardized coinage
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. 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.
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.
To make this process easier, the concept of standard coinage was introduced. Coins 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 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.
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 50cm or more in length and width, appropriately stamped with indications of their value.
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. 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. 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 observers like Isaac Newton, Master of the Royal Mint observed with unease.
Stability came into the system with national Banks guaranteeing to change money into gold at a promised rate; it did, however, not come easily. The Bank of England risked a national financial catastrophe in the 1730s when customers demanded their money be changed into gold in a moment of crisis. Eventually London's merchants saved the bank and the nation with financial guarantees.
See also: Roman currency, coinage metal, for conversions of the European coins before the introduction of paper money: The Marteau Early 18th-Century Currency Converter.
Representative money
The system of commodity money in many instances evolved into a system of representative money. This occurred because banks would issue a paper receipt to their depositors, indicating that the receipt was redeemable for whatever precious goods were being stored (usually gold or silver money). It didn't take long before the receipts were traded as money, because everyone knew they were "as good as gold". Representative paper money made possible the practice of fractional reserve banking, in which bankers would print receipts above and beyond the amount of acutal precious metal on deposit.
So in this system, paper currency and non-precious coinage had very little intrinsic value, but achieved significant market value by being backed by a promise to redeem it for a given weight of precious metal, such as silver. This is the origin of the term "British Pound" for instance; it was a unit of money backed by a Tower pound of sterling silver, hence the currency Pound Sterling. For much of the nineteenth and twentieth centuries, many currencies were based on representative money through use of the gold standard.
Fiat money
Fiat money refers to money that is not backed by reserves of another commodity. The money itself is given value by government fiat (Latin for "let it be done") or decree, enforcing legal tender laws, previously known as "forced tender", whereby debtors are legally relieved of the debt if they (offer to) pay it off in the government's money. By law the refusal of "legal tender" money in favor of some other form of payment is illegal, and has at times in history (Rome under Diocletian, and post-revolutionary France during the collapse of the assignats) invoked the death penalty.
Governments through history have often switched to forms of fiat money in times of need such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed. When governments produce money more rapidly than economic growth, the money supply overtakes economic value. Therefore, the excess money eventually dilutes the market value of all money issued. This is called inflation. See open market operations.
In 1971 the US finally switched to fiat money indefinitely. At this point in time many of the economically developed countries' currencies were fixed to the US dollar (see Bretton Woods Conference), and so this single step meant that much of the western world's currencies became fiat money based.
Following the first Gulf War the president of Iraq, Saddam Hussein, repealed the existing Iraqi fiat currency and replaced it with a new currency. Despite having no backing by a commodity and with no central authority mandating its use or defending its value the old currency continued to circulate within the politically isolated Kurdish regions of Iraq. It became known as the Swiss Dinar. This currency remained relatively strong and stable for over a decade. It was formally replaced following the second Gulf War.
Credit money
Credit money often exists in conjunction with other money such as fiat money or commodity money, and from the user's point of view is indistinguishable from it. Most of the western world's money is credit money derived from national fiat money currencies.
In a modern economy, a bank will lend all but a small portion of its deposits to borrowers, this is known as fractional reserve banking. In doing so, it increases the total money supply above that of the total amount of the fiat money in existence (also known as M0). While a bank will not have access to sufficient cash (fiat money) to meet all the obligations it has to depositors if they wish to withdraw the balance of their cheque accounts (credit money), the majority of transactions will occur using the credit money (cheques and electronic transfers).
Strictly speaking a debt is not money, primarily because debt can not act as a unit of account. All debts are denominated in units of something external to the debt. However, credit money certainly acts as a substitute for money when it is used in other functions of money (medium of exchange and store of value).
Indo-European and Semitic etymology
The origin of the word "money" comes from the Latin word "moneta", which comes from the temple of Juno (Hera) the Moneta where the Roman money came from, in the early days of Rome.
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 human's mone (money).
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. The first golden coins in history were coined by Lydian king Croesus, around 560 B.C.E. The first Greek coins were made initially of copper, then of iron because copper and iron were powerful materials used to make weapons. Pheidon king of Argos, around 700 B.C.E., changed the coins from iron to a rather useless and ornamental metal, silver, and, according to Aristotle, dedicated some of the remaining iron coins (which were actually iron sticks) to the temple of Hera[4]. King Pheidon coined the silver coins at Aegina, at the temple of the goddess of wisdom and war Athena the Aphaia (the vanisher), and engraved the coins with a Chelone, which is to this day as a symbol of capitalism. Chelone coins[5] were the first medium of exchange that was not backed by a real value good. They were widely accepted and used as the international medium of exchange until the days of Peloponnesian War, when the Athenian Drachma replace them. According other fables, inventors of money were Demodike(or Hermodike) of Kymi (the wife of Midas), Lykos (son of Pandion II and ancestor of the Lycians) and Erichthonius, the Lydians or the Naxians.
The word money in Greek language is not μόνη (money), it is νόμισμα (nomisma or numisma) which derives from the word νομίζω (nomizo=putative,I think so,I suppose so) and from the word νόμος (nomos=law). So numisma gives the exact meaning and definition of mone(y). It is something we think has value, or something which someone has convinced us has, but in reality has not. In case we are unconvinced that mone(y) has value and we do not recognize the mone(y) maker authority, mone(y) is also something that we are enforced by law to use it as the unique medium of exchange in trades. In case an individual or a community refuses to accept mone(y) as the unique medium of exchange, then the powerful mone(y) maker authority, using violence and the taxes procedure, steals the real value goods (home,food,transport,energy) that the individual or the community owns. That is why many individuals or communities hide their goods from mone(y)-maker authorities. The crime of hiding goods from a mone(y)-maker authority is called tax evasion.
" He who has an ear, let him hear what the Spirit says to the churches. To the winner, I will give some of the hidden manna and I will also give him a white vote with a new name written on it which no one knows except the one who receives it."(Book of Revelation 2:17).
One of the words for money in the Hebrew language is mammon. Mammon does have more than one meaning depending on its linguistic and etymological contexts. The Hebrew and Christian Bible gives the word mammon a broader context in its socioeconomic, cultural, and theological usages. Mammon, a word of Aramaic origin, means "riches", but has an unclear etymology; scholars have suggested connections with a word meaning "entrusted", or with the Hebrew word "matmon", meaning "treasure". [citation needed] It is also used in Hebrew as a word for "money" - ממון.
The Greek word for "Mammon", mamonas, occurs in the Sermon on the Mount (Matthew vi 24) and in the parable of the Unjust Steward (Luke xvi 9-13). The Authorised Version keeps the Syriac word. Wycliffe uses "richessis". Other scholars derive Mammon from Phoenician "mommon", benefit. It is interesting to note that if mammon(as) (μαμωνᾶς) is considered as a Greek word and as a composite one (the majority of Greek words are composites), the two parts "mam-mon(as)" could be explained (in Greek doric) as "lonely mother", which recalls Hera's myth mentioned above. Other explanations could be mamm(means "mother" or "food")-onas(means "a place where you can find mamm"), also mam(means "mother" or "food")-m(means "with")-on(means "being")-as(with Circumflex, means "owner or seller").
Another word for money in hebrew is the word Kessef-כסף, that translates to silver. Also the french word for money, Argent, derives from the greek άργυρος, and translates also to silver.
According to the Book of Revelation, the mark of the beast seems to be a form of money: "And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads: And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name. Here is wisdom. Let him that hath understanding vote the number of the beast: for it is the number of a man; and his(its) number is ΧΞς." (Book of Revelation 13:16-13:18).
Essential characteristics
Money is generally considered to have the following three characteristics:
1. It is a medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.
2. It is a unit of account
A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions.
3. It is a store of value
To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved.
Desirable features
To function as money, the monetary item should possess a number of features:
To be a medium of exchange:
- It should have liquidity, and be easily tradable, with a low spread between the prices to buy and sell, in other words, a low transaction cost.
- It should be easily transportable; precious metals have a high value to weight ratio. This is why oil, coal, vermiculite, or water are not suitable as money even though they are valuable. Paper notes have proved highly convenient in this regard.
- It should be durable. Money is often left in pockets through the wash. Australian bank notes are made of plastic for durability. Gold coins are often mixed with copper to improve durability.
- It should minimize contamination and contagion. Since money is frequently handled it becomes a pathway for infectious disease transmission. Recent studies have shown that the area in business offices that show the highest contamination by disease causing organisms is the accounting office where money must be counted and handled. Unlike paper, silver, as well as platinum and titanium, is used as a anti-bacterial and anti-viral agent. This property of silver has been recognised for millennia and used for eating utensils.
To be a unit of account:
- It should be divisible into small units without destroying its value; precious metals can be coined from bars, or melted down into bars again. This is why leather, or live animals are not suitable as money.
- It should be fungible: that is, one unit or piece must be exactly equivalent to another, which is why diamonds, works of art or real estate are not suitable as money.
- It must be a specific weight, or measure, or size to be verifiably countable. For instance, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
To be a store of value:
- It should be long lasting, durable, it must not be perishable or subject to decay. This is why food items, expensive spices, or even fine silks or oriental rugs, are not generally suitable as money.
- It should have a stable value.
- It should be difficult to counterfeit, and the genuine must be easily recognizable.
To be anonymous:
- Money should not be subject to government tracking.
- It should be useable for purchases in a black market.
- It should not require equipment, tools or electricity to use.
Money also is typically that which has the least declining marginal utility, meaning that as you accumulate more units of it, each unit is worth about the same as the prior units, and not substantially less.
For these reasons, gold and silver have been chosen again and again throughout history as money in more societies and in more cultures and over longer time periods than any other items. Platinum and palladium have not been identified and refined until the last two hundred years, and do not therefore have a long history of use as money, but that may change in the future[citation needed].
One key benefit of these features of money is that it facilitates and encourages trade, as barter is far less efficient.
Problems with gold as money
There is no perfect money, although silver or gold may come closest to this standard. Gold is not always the most liquid asset due to its higher valuation than silver. Not many people want to carry a few ounces of gold around. It's just too valuable, and so there are not as many people to exchange it with. When gold is demonetized and forced to compete with paper currencies it does have a spread of about 4% to buy and sell in terms of the paper currency, whereas paper money can be exchanged without the 4 to 5 percent preminum imposed by the market preference for paper. The exchange premium comes from the relative scarcity of people to exhange paper for gold or silver. The scarcity has resulted in having to pay coin dealers a small profit for the service. If silver and gold were remonetized, then there would be no shortage of sources for exchange. Accordingly the premium's charged would drop to nothing in an economy that recognized silver or gold as lawful money. Gold today is a relatively small market (in terms of paper currency), and the price of gold can move substantially higher if a few billion dollars tries to buy gold. Although gold itself does not decay, gold coins are easily scratched or damaged, and this can reduce their value, and fungibility or of gold coins (athough no where near as fast as inflation reduces the value of paper). Gold coins are often made with 10% copper for added durability, such as the Krugerrand and the U.S. Eagle, but then the gold is no longer 99.9% pure, or .999 fine. The copper alloy, however, reduces the value by very little. From 1980 to 2001, gold was a poor store of value as its own value was unstable due to the manipulations of the worlds central banks conspiring to manipulate the market by selling their reserves to keep the price down.; gold prices dropped from a high of $850/oz. to a low of $255/oz., and that is also being measured in terms of dollars that were also losing value, so the 1980 high might be more like $1600/oz., but a precisely accurate amount is nearly impossible to measure. The advantage of gold and silver, however, lies in the fact that the supply cannot be increased by dishonest bankers. In 2006 they were running low on gold and silver with which to manipulate the market, and the debt overhanging the fiat money fractional reserve system will soon deflate. This will cause the buying power of silver and gold to rise to extreme levels at first, and then to be used as money until the next system of fiat money, or fiat electronic credit is imposed on the world.
In the history of the Several States of America such attitudes as "gold is the money of monarchs"* helped to maintain a bi-metallic money system that rejected credit and debt as currency. (*Senator John J. Ingalls, a republican Senator from Kansas, in a speech delivered on the 14th of February, 1877 also Ingalls, "Globe," vol. cxxxvii, p. 1052.)
Problems with paper as money
Due to the ease of production paper money may lose value through inflation and can be easily damaged or destroyed. Despite the ease of production there have been notable instances paper money experiencing deflation. For example the British Pound after the 1925 revision of the gold standard and the Japanese Yen during the 1990s. Perhaps the biggest criticism of paper money relates to the fact that its stability is generally subject the whim of government regulation rather than the disciplines of market phenoma.
Modern forms
Banknotes (also known as paper money) and coins are the most liquid forms of tangible money and are commonly used for small person-to-person transactions. Today, gold is commonly used as a store of value, but is not often used as a medium of exchange or a unit of account. But central banks do use gold as a unit of account.
There are also less tangible forms of money, which nevertheless serve the same functions as money. Checks, debit cards and wire transfers are used as means to more easily transfer larger amounts of money between bank accounts. Electronic money is an entirely non-physical currency that is traded and used over the internet.
Credit
or
Credit is often loosely referred to as money. Credit is debt or a promise to settle a debt, not money. Money is what is used to make a payment in full.
This distinction between money and credit causes much confusion in discussions of monetary theory. In lay terms, and when convenient in academic discussion, credit and money are frequently used interchangeably. For example, bank deposits are generally included in summations of the national broad money supply. However, any detailed study of monetary theory needs to recognize the proper distinction between money and credit.
Bank notes are a form of credit. Gold-backed bills are likewise also a debt of the bank, a promise to pay in gold.
Federal Reserve notes, which are used as money in the United States, are difficult to describe in terms of credit or debt or money. Federal Reserve notes are not a promise to pay in gold, and the notes are irredeemable by the issuer. The Federal Reserve's notes are perhaps viewed best as a political promise to devalue (inflate) at a certain targeted rate.
Since Federal Reserve notes are used in the United States as the most common medium of exchange, unit of account, and store of value, they are considered money by the majority of the population. To measure this kind of credit money, various forms of credit are counted together and listed as M1 or M2. M3 was the most common measure of money, but the publication of M3 was discontinued in May, 2006.
Economics
Money is one of the most central topics studied in economics and forms its most cogent link to finance. Monetarism is an economic theory which predominantly deals with the supply and demand for money. The stability of the demand for money prior to the 1980s was a key finding of the work of Milton Friedman, Anna Schwartz, David Laidler, and many others. Technical, institutional, and legal changes changed the nature of the demand for money during the 1980s.
Monetary policy aims to manage the money supply, inflation and interest to affect output and employment. Inflation is the decrease in the value of a specific currency over time and can be caused by dramatic increases in the money supply. The interest rate, the cost of borrowing money, is an important tool used to control inflation and economic growth in monetary economics. Central banks are often made responsible for monitoring and controlling the money supply, interest rates and banking.
A monetary crisis can have very significant economic effects, particularly if it leads to monetary failure and the adoption of a much less efficient barter economy. This happened in Russia, for instance, after the fall of the Soviet Union.
There have been many historical arguments 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. Financial capital is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender.
Private currencies
In many countries, the issue of private paper currencies has been severely restricted by law.
In the United States, the Free Banking Era lasted between 1837 and 1866. States, municipalities, private banks, railroad and construction companies, stores, restaurants, churches and individuals printed an estimated 8,000 different monies by 1860. If the issuer went bankrupt, closed, left town, or otherwise went out of business the note would be worthless. Such organizations earned the nickname of "wildcat banks" for a reputation of unreliability and that they were often situated in far-off, unpopulated locales that were said to be more apt to wildcats than people. On the other hand, according to Lawrence H. White's article in The Freeman: Ideas on Liberty - October 1993 "it turns out that “wildcat” banking is largely a myth. Although stories about crooked banking practices are entertaining—and for that reason have been repeated endlessly by textbooks—modern economic historians have found that there were in fact very few banks that fit any reasonable definition of wildcat bank." In Australia, the Bank Notes Tax Act of 1910 basically shut down the circulation of private currencies by imposing a prohibitive tax on the practice. Many other nations have similar such policies that eliminate private sector competition.
In Scotland and Northern Ireland private sector banks are licensed to print their own paper money by the government. Today privately issued electronic money is in circulation. Some of these private currencies are backed by historic forms of money such as gold, as in the case of digital gold currency. Transactions in these currencies represent an annual turnover value in billions of US dollars.
It is possible for privately issued money to be backed by any other material, although some people argue about perishable materials. After all, gold, or platinum, or silver, have in some regards less utility than previously (their electrical properties notwithstanding), while currency backed by energy (measured in joules) or by transport (measured in kilogramme*kilometre/hour) or by food [6] is also possible and may be accepted by the people, if legalised. It is important to understand though that, as long as money is above all an agreement to use something as a medium of exchange, it is up to a community (or to whoever holds the power within a community) to decide whether money should be backed by whatever material or should be totally virtual.
Future
Paper money's greatest failure is as a stable store of value. All paper money is plagued by inflation, the devaluation of money over time. Although inflation may be good for debtors, it is not good for savers.
Investors seek to preserve or grow their wealth, and some seek to buy currencies that will stay strong and keep their value. In 2006, the currency markets trade over $1 trillion each day. In 2006, all the gold in all the world is valued at about $3.5 trillion.
Today, gold and paper money can be traded electronically via online systems.
Supply
The money supply is the amount of money available within a specific economy available for purchasing goods or services. The supply is usually considered as four escalating categories M0, M1, M2 and M3. The categories grow in size with M3 representing all forms of money (including credit) and M0 being just base money (coins, bills, and central bank deposits). M0 is also money that can satisfy private banks' reserve requirements. In the United States, the Federal Reserve is responsible for controlling the money supply, while in the Euro area the respective institution is the ECB. Other central banks with greater impact on global finances are the Bank of Japan, People's Bank of China and the Bank of England.
When gold is used as money, the money supply can grow in either of two ways. First, the money supply can increase as the amount of gold increases by new gold mining at about 2% per year, but it can also increase more during periods of gold rushes and discoveries, such as when Columbus discovered the new world and brought gold back to Spain, or when gold was discovered in California in 1848. This kind of increase helps debtors, and causes inflation, as the value of gold goes down. Second, the money supply can increase when the value of gold goes up, as this makes existing stocks of gold more valuable. This kind of increase helps savers and creditors and is called deflation, where items for sale are increasingly less expensive in terms of gold. Deflation was the more typical situation for over a century when gold was used as money in the U.S. from 1792 to 1913.
Benchmark World Currencies
These are the major currencies used in trading[1].
- Australia - Australian Dollar (AUD)
- Canada - Canadian Dollar (CAD)
- European Monetary Union (EUR-12) - Euro (EUR)
- Hong Kong - Hong Kong Dollar (HKD)
- Japan - Japanese Yen (JPY)
- Switzerland - Swiss Franc (CHF)
- United Kingdom - Pound Sterling (GBP)
- United States - US Dollar (USD)
Besides these currencies gold and silver are traded globally on the currency markets: Gold (XAU) quoted in 1 ounce increments Silver (XAG) quoted in 1000 ounce increments
Notes
ReferencesISBN links support NWE through referral fees
- Davies, Glyn, History of Money from Ancient Times to the Present Day
- Jevons, W. S. (1875), Money and the Mechanism of Exchange, London: Macmillan.
- Menger, Carl, "On the Origin of Money"
- Szabo, Nick, Shelling Out — The Origins of Money
- United States Mint
- Royal Mint
- American Numismatic Association
- World Bank
- Ingham, Geoffrey. 2004. The Nature of Money. Polity Press. ISBN 074560997X ISBN 978-0745609973
- Mzumara, Macleans. 2006. The Theory of Money and Banking in Modern Times. Tate Publishing & Enterprises. ISBN 1933290021 ISBN 978-1933290027
- Schwartz, Anna J. 1989. Money in Historical Perspective. Chicago, IL: University Of Chicago Press. ISBN 0226742288 ISBN 978-0226742281
External links
- Philosophy of Money by Alla Sheptun
- The Heraion Standard.
- History of Money from Ancient Times to the Present Day by Glyn Davies
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