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Money is any item or verifiable record that is generally accepted as
payment A payment is the voluntary tender of money or its equivalent or of things of value Value or values may refer to: * Value (ethics) it may be described as treating actions themselves as abstract objects, putting value to them ** Values (Western p ...

payment
for
goods and services Goods are items that are usually (but not always) tangible According to the philosopher Piyush Mathur (2017), "''Tangibility is the property that a phenomenon exhibits if it has and/or transports mass and/or energy and/or momentum". Mathur, P ...
and repayment of
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
s, such as
taxes A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...

taxes
, in a particular country or socio-economic context. The main functions of money are distinguished as: a
medium of exchange In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavio ...
, a
unit of account In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
, a
store of value A store of value is the function of an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce pos ...
and sometimes, a
standard of deferred payment In economics, standard of deferred payment is a function of money. It is the function of being a widely accepted way to value a debt, thereby allowing goods and services to be acquired now and paid for in the future.http://www.amosweb.com/cgi-bin/ ...
. T.H. Greco. ''Money: Understanding and Creating Alternatives to Legal Tender'', White River Junction, Vt: Chelsea Green Publishing (2001). Any item or verifiable record that fulfils these functions can be considered as money. Money is historically an
emergent market phenomenon
emergent market phenomenon
establishing a
commodity money Commodity money is money 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. The main functions of m ...
, but nearly all contemporary money systems are based on
fiat money Fiat money (from la, fiat, ) is a type of money that is not backed by any commodity such as gold or silver, and typically declared by a decree from the government to be legal tender. Throughout history, fiat money was sometimes issued by local ...
. Fiat money, like any check or note of debt, is without
use value Use value (german: Gebrauchswert) or value in use is a concept in classical political economy and Marxian economics. It refers to the tangible features of a commodity (a tradeable object) which can satisfy some human requirement, want or need, or w ...
as a physical
commodity In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...
. It derives its value by being declared by a
government A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Departmen ...

government
to be
legal tender Legal tender is a form of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner, 1 ...
; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private".
Counterfeit money Counterfeit money is currency produced without the legal sanction of the State or government, usually in a deliberate attempt to imitate that currency and so as to deceive its recipient. Producing or using counterfeit To counterfeit means to ...
can cause
good money In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavio ...
to lose its value. The
money supply In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is a social science Social science is the Branches of science, branch of science dev ...
of a country consists of
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Money is any item or verifiable record that is generally accepted as payment for goods and services ...

currency
(
banknote A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a ...
s and
coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hell ...

coin
s) and, depending on the particular definition used, one or more types of
bank money Demand deposits or non-confidential money are funds held in demand accounts in commercial banks. These account balances are usually considered money and form the greater part of the narrowly defined money supply of a country.Paul Krugman, Krugman ...
(the balances held in
checking accounts Check or cheque, may refer to: Places * Check, Virginia Check is an unincorporated community in Floyd County, Virginia, Floyd County, Virginia, United States. Check is located on U.S. Route 221 northeast of Floyd, Virginia, Floyd. Check has a pos ...
,
savings account A savings account is a bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transaction A financial transaction is an Contract, agreement, or communication, carried ...
s, and other types of
bank accounts A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded. Each financial institution sets the terms and conditions for each type of a ...
). Bank money, which consists only of records (mostly computerized in modern banking), forms by far the largest part of
broad money In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods an ...
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 Juno commonly refers to: *Juno (mythology), the Roman goddess of marriage and queen of the gods *Juno (film), ''Juno'' (film), 2007 Juno may also refer to: Arts, entertainment and media Fictional characters *Juno, in the film ''Jenny, Juno'' *Jun ...
, on
Capitoline and the Servian Wall The Capitolium or Capitoline Hill ( ; it, Campidoglio ; la, Mons Capitolinus ), between the Roman Forum, Forum and the Campus Martius, is one of the seven hills of Rome, Seven Hills of Rome. The hill was earlier known ...
, one of Rome's seven hills. In the ancient world, Juno was often associated with money. The temple of
Juno Moneta In Roman mythology, Moneta (Latin Monēta) was a title given to two separate goddesses: It was the name of the goddess of memory (identified with the Greek mythology, Greek goddess Mnemosyne), and it was an epithet of Juno (mythology), Juno, cal ...
at Rome was the place where the mint of Ancient Rome was located. 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 Specie may refer to: * Coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Ancient Greek, Greek μέταλλον ''métallon'', "mine, quarry, metal") is a material that, when fresh ...
'', stemming from Latin ''in specie'', meaning 'in kind'.


History

The use of
barter In trade Trade involves the transfer of goods from one person or entity to another, often in exchange for money. Economists refer to a system A system is a group of Interaction, interacting or interrelated elements that act according ...

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. Instead, non-monetary societies operated largely along the principles of
gift economy A gift economy or gift culture is a mode of exchange where Anthropological theories of value, valuables are not sold, but rather given without an explicit agreement for immediate or future rewards. Social norms and customs govern giving a gift i ...
and
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
. When barter did in fact occur, it was usually between either complete strangers or potential enemies. Many cultures around the world eventually developed the use of
commodity money Commodity money is money 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. The main functions of m ...
. The Mesopotamian
shekel Shekel or sheqel ( akk, 𒅆𒅗𒇻 ''šiqlu'' or ''siqlu,'' he, שקל, plural or shekels, Phoenician: ) is an ancient Near Eastern coin, usually of silver Silver is a chemical element In chemistry, an element is a pure Ch ...
was a unit of weight, and relied on the mass of something like 160
grains A grain is a small, hard, dry seed A seed is an embryonic ''Embryonic'' is the twelfth studio album by experimental rock band the Flaming Lips released on October 13, 2009, on Warner Bros. Records, Warner Bros. The band's first double albu ...
of
barley Barley (''Hordeum vulgare''), a member of the grass family Poaceae () or Gramineae () is a large and nearly ubiquitous family In human society, family (from la, familia) is a group of people related either by consanguinity (by recogn ...

barley
. The first usage of the term came from
Mesopotamia Mesopotamia ( grc, Μεσοποταμία ''Mesopotamíā''; ar, بِلَاد ٱلرَّافِدَيْن ; syc, ܐܪܡ ܢܗܪ̈ܝܢ, or , ) is a historical region of Western Asia situated within the Tigris–Euphrates river system, in th ...

Mesopotamia
circa 3000 BC. Societies in the Americas, Asia, Africa and Australia used
shell money Shell money is a medium of exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green Township, Morgan County, Indiana, ...
– often, the shells of the
cowry Cowrie or cowry () is the common name for a group of small to large sea snails, ocean, marine Gastropoda, gastropod Mollusca, mollusks in the family Cypraeidae, the cowries. The term ''porcelain'' derives from the old Italian language, Italian ...

cowry
(''Cypraea moneta L.'' or ''C. annulus L.''). According to
Herodotus Herodotus ( ; grc, Ἡρόδοτος, Hēródotos, ; BC) was an Classical Greece, ancient Greek writer, geographer, and historian born in the Greek city of Halicarnassus, part of the Achaemenid Empire, Persian Empire (now Bodrum, Turkey). He ...
, the
Lydians The Lydians (known as ''Sparda'' to the Achaemenids The Achaemenid Empire (; peo, 𐎧𐏁𐏂, translit=Xšāça, translation=The Empire), also called the First Persian Empire, was an ancient Iranian Iranian may refer to: * Iran ...
were the first people to introduce the use of
gold Gold is a chemical element In chemistry, an element is a pure Chemical substance, substance consisting only of atoms that all have the same numbers of protons in their atomic nucleus, nuclei. Unlike chemical compounds, chemical elemen ...
and
silver coin Silver coins are possibly the oldest mass-produced form of coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Ancient Greek, Greek μέταλλον ''métallon'', "mine, quarry, ...
s. It is thought by modern scholars that these first stamped
coins A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hell ...

coins
were minted around 650 to 600 BC. The system of
commodity money Commodity money is money 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. The main functions of m ...
eventually evolved into a system of
representative money Representative money is any medium of exchange Medium of exchange is a term in economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution ...
. This occurred because gold and silver merchants or banks would issue receipts to their depositors – redeemable for the
commodity money Commodity money is money 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. The main functions of m ...
deposited. Eventually, these receipts became generally accepted as a means of payment and were used as money. Paper money or
banknotes A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable instrument, negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes w ...
were first used in China during the
Song dynasty The Song dynasty (; ; 960–1279) was an imperial dynasty of China that began in 960 and lasted until 1279. The dynasty was founded by Emperor Taizu of Song Emperor Taizu of Song (21 March 927 – 14 November 976), personal name Zhao Kua ...
. These banknotes, known as "
jiaozi ''Jiaozi'' ( zh, 餃子; ) are Chinese dumpling Dumpling is a broad class of dishes that consist of pieces of dough (made from a variety of starch sources) wrapped around a filling, or of dough with no filling. The dough can be based ...
", evolved from
promissory notes A promissory note, sometimes referred to as a note payable, is a legal instrument (more particularly, a financing instrument and a debt instrument), in which one party (the ''maker'' or ''issuer'') promises in writing to pay a determinate sum of mo ...
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 Marco Polo (, , ; September 15, 1254January 8, 1324) was a merchant, explorer, and writer who travelled through Asia along the between 1271 and 1295. His travels are recorded in ' (also known as ''Book of the Marvels of the World '' and '' ...

Marco Polo
and
William of Rubruck 250px, Voyage of William of Rubruck in 1253–1255 William of Rubruck ( nl, Willem van Rubroeck; la, Gulielmus de Rubruquis;  12481255), also known as Willem van Ruysbroeck, Guillaume de Rubrouck, or Willielmus de Rubruquis, was a Flemish peo ...
. Marco Polo's account of paper money during the
Yuan dynasty The Yuan dynasty (), officially the Great Yuan (; xng, , , literally "Great Yuan State"), was a successor state Successor is someone who, or something which succeeds or comes after (see success and succession) Film and TV * ''The Succ ...
is the subject of a chapter of his book, ''
The Travels of Marco Polo ''Book of the Marvels of the World'' (Italian language, Italian: ''Il Milione'', lit. "The Million", deriving from Polo's nickname "Emilione"), in English commonly called ''The Travels of Marco Polo'', is a 13th-century travelogue written down by ...
'', titled " How the Great Kaan Causeth the Bark of Trees, Made Into Something Like Paper, to Pass for Money All Over his Country." Banknotes were first issued in Europe by
Stockholms Banco Stockholms Banco (also known as the Palmstruch's Bank, sv, Palmstruchska banken) was the first European bank A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A ...
in 1661 and were again also used alongside coins. The
gold standard A gold standard is a monetary system A monetary system is a system by which a government provides money in a country's economy. Modern monetary systems usually consist of the national treasury, the mint (facility), mint, central bank, the cen ...
, a
monetary system A monetary system is a system by which a government provides money in a country's economy. Modern monetary systems usually consist of the national treasury, the mint (facility), mint, central bank, the central banks and commercial banks. Commodity ...
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 Legal tender is a form of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner, 1 ...
, 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 World War II or the Second World War, often abbreviated as WWII or WW2, was a global war A world war is "a war War is an intense armed conflict between states State may refer to: Arts, entertainment, and media Literatur ...
and the
Bretton Woods Conference The Bretton Woods Conference, formally known as the United Nations Monetary and Financial Conference, was the gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel The Mount Washington Hotel is a hotel in Bretton ...
, most countries adopted fiat currencies that were fixed to the
U.S. dollar The United States dollar (symbol A symbol is a mark, sign, or word that indicates, signifies, or is understood as representing an idea, Object (philosophy), object, or wikt:relationship, relationship. Symbols allow people to go beyond wha ...
. The U.S. dollar was in turn fixed to gold. In 1971 the U.S. government suspended the convertibility of the U.S. 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 Monetary Theory or Modern Money Theory (MMT) is a heterodox In religion, heterodoxy (from Ancient Greek Ancient Greek includes the forms of the Greek language used in ancient Greece and the classical antiquity, ancient world f ...
, fiat money is also backed by taxes. By imposing taxes, states create demand for the currency they issue.


Functions

In ''Money and the Mechanism of Exchange (1875)'',
William Stanley Jevons William Stanley Jevons FRS (; 1 September 183513 August 1882) was an English economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories ...

William Stanley Jevons
famously analyzed money in terms of four functions: a ''
medium of exchange In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavio ...
'', a ''common measure of value'' (or
unit of account In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
), a ''standard of value'' (or
standard of deferred payment In economics, standard of deferred payment is a function of money. It is the function of being a widely accepted way to value a debt, thereby allowing goods and services to be acquired now and paid for in the future.http://www.amosweb.com/cgi-bin/ ...
), and a ''
store of value A store of value is the function of an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce pos ...
''. By 1919, Jevons's four functions of money were summarized in the
couplet A couplet is a pair of successive lines Long interspersed nuclear elements (LINEs) (also known as long interspersed nucleotide elements or long interspersed elements) are a group of non-LTR (long terminal repeat A long terminal repeat (LTR) is ...

couplet
: :Money's a matter of functions four, :A Medium, a Measure, a Standard, a Store. This couplet would later become widely popular in macroeconomics textbooks. Most modern textbooks now list only three functions, that of
medium of exchange In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavio ...
,
unit of account In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
, and
store of value A store of value is the function of an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce pos ...
, not considering a standard of deferred payment as a distinguished function, but rather subsuming it in the others.Krugman, Paul & Wells, Robin, ''Economics'', Worth Publishers, New York (2006) 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 In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavio ...
conflicts with its role as a
store of value A store of value is the function of an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce pos ...
: its role as a store of value requires holding it without spending, whereas its role as a medium of exchange requires it to circulate. 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 The coincidence of wants (often known as double coincidence of wants) is an economic phenomenon where two parties each hold an item the other wants, so they exchange these items directly without any monetary medium. This type of exchange is the f ...
". 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) 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.


Standard of deferred payment

While ''standard of deferred payment'' is distinguished by some texts, particularly older ones, other texts subsume this under other functions. A "standard of deferred payment" is an accepted way to settle a
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
– a unit in which debts are denominated, and the status of money as
legal tender Legal tender is a form of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner, 1 ...
, 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 In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behav ...

deflation
, and for sovereign and international debts via
debasement A debasement of coinage is the practice of lowering the intrinsic value of coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Ancient Greek, Greek μέταλλον ''métallon ...
and
devaluation In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Production ( ...
.


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.


Properties

To fulfill its various functions, money must have certain properties: *
Fungibility In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of good ...
: its individual units must be capable of mutual substitution (i.e., interchangeability). *
Durability Durability is the ability of a physical product to remain functional, without requiring excessive maintenance or repair, when faced with the challenges of normal operation over its design lifetime. There are several measures of durability in use ...
: able to withstand repeated use. * Divisibility: divisible to small units. * Portability: easily carried and transported. * Cognizability: its value must be easily identified. * Scarcity: its supply in circulation must be limited.


Money supply

In economics, money is any
financial instrument Financial instruments are monetary contracts A contract is a legally binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement. A contract is legally enforceable because it me ...
that can fulfill the functions of money (detailed above). These financial instruments together are collectively referred to as the
money supply In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is a social science Social science is the Branches of science, branch of science dev ...
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''. Modern
monetary theory Monetary economics is the branch of economics that studies the different competing theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value and unit of account), and it c ...
distinguishes among 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 Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can qui ...
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 Demand deposits or non-confidential money are funds held in demand account A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a deposit ...
s (such as checking accounts); M2 is M1 plus
savings account A savings account is a bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transaction A financial transaction is an Contract, agreement, or communication, carried ...
s and
time deposit A time deposit or term deposit (in the United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It consists o ...
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. Another measure of money, M0, is also used; unlike the other measures, it does not represent actual
purchasing power Purchasing power is the amount of goods and services that can be purchased with a unit of currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Im ...
by firms and households in the economy. M0 is
base money In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
, or the amount of money actually issued by the
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money ...

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 Reserve or reserves may refer to: Places * Reserve, Kansas Reserve is a city in Brown County, Kansas, Brown County, Kansas, United States. As of the 2010 United States Census, 2010 census, the city population was 84. It is located approximate ...
of
commercial banks A commercial bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), s ...
.


Creation of money

In current economic systems, money is created by two procedures: 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. 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.


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 Freedom, generally, is having the ability to act or change without constraint. Something is "free" if it can change easily and is not constrained in its present state. In philosophy and religion, it is associated with having free will and bein ...

freedom
to trade goods and services easily without having to barter. Liquid financial instruments are easily
tradable Tradability is the property of a good 125px, In many Western religions, angels are considered to be good beings and are contrasted with devils who are considered evil In most contexts, the concept of good denotes the conduct that should be ...
and have low
transaction cost In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a Market (economics), market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companie ...
s. There should be no (or minimal) spread between the prices to buy and sell the instrument being used as money.


Types


Commodity

Many items have been used as
commodity money Commodity money is money 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. The main functions of m ...
such as naturally scarce
precious metal Precious metals are rare, naturally occurring metal A metal (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located ...
s,
conch shell Conch () is a common name of a number of different medium- to large-sized sea snail or shells, generally those of large snails whose shell has a high spire and a noticeable siphonal canal (in other words, the shell comes to a noticeable po ...

conch shell
s,
barley Barley (''Hordeum vulgare''), a member of the grass family Poaceae () or Gramineae () is a large and nearly ubiquitous family In human society, family (from la, familia) is a group of people related either by consanguinity (by recogn ...

barley
, beads, etc., as well as many other things that are thought of as having
value Value or values may refer to: * Value (ethics) In ethics Ethics or moral philosophy is a branch of philosophy Philosophy (from , ) is the study of general and fundamental questions, such as those about Metaphysics, existence, reason, E ...
. 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.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. Examples of commodities that have been used as mediums of exchange include gold, silver, copper, rice,
Wampum Wampum is a traditional shell bead of the Eastern Woodlands tribes of Native Americans. It includes white shell beads hand fashioned from the North Atlantic channeled whelk shell and white and purple beads made from the quahog or Western Nort ...

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 In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods an ...
economies. The use of commodity money is similar to barter, but a commodity money provides a simple and automatic
unit of account In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
for the commodity which is being used as money. Although some
gold coins A gold coin is a coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδ ...
such as the
Krugerrand The Krugerrand (; ) is a South African coin, first minted on 3 July 1967 to help market South African gold and produced by Rand Refinery Rand Refinery (Pty) Limited is the largest integrated single-site precious metals refining and smelting c ...
are considered
legal tender Legal tender is a form of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner, 1 ...
, 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 The fineness of a precious metal Precious metals are rare, naturally occurring metallic chemical elements of high Value (economics), economic value. Chemically, the precious metals tend to be less reactivity (chemistry), reactive than most e ...
content.
American Eagles The American Eagles are the athletics teams that represent the American University in National Collegiate Athletic Association (NCAA) NCAA Division I, Division I competition. American is a member of the Patriot League in all sports except wrestlin ...
are imprinted with their gold content and legal tender
face value The face value, sometimes called nominal value, is the value of a coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Ancient Greek, Greek μέταλλον ''métallon'', "mine ...
.


Representative

In 1875, the British economist
William Stanley Jevons William Stanley Jevons FRS (; 1 September 183513 August 1882) was an English economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories ...

William Stanley Jevons
described the money used at the time as "
representative money Representative money is any medium of exchange Medium of exchange is a term in economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution ...
". Representative money is money that consists of
token coin In numismatics Numismatics is the study or collection of currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Image:National-Debt-Gillray. ...
s,
paper money A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a ...
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.


Fiat

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 The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central bank A central bank, reserve bank, or monetary authority is an institution that manages the and of a or formal monetary union, and ove ...
in the U.S.) to be
legal tender Legal tender is a form of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner, 1 ...
, making it unlawful not to accept the fiat currency as a means of repayment for all debts, public and private.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 ''Black's Law Dictionary'' is the most widely used law dictionary in the United States. Henry Campbell Black (1860–1927) was the author of the first two editions of the dictionary. However, it remains an abridged dictionary with pronunciation gui ...
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"
Some
bullion coins Bullion is non-ferrous metal In metallurgy Metallurgy is a domain of Materials science, materials science and engineering that studies the physical and chemical behavior of metallic Chemical element, elements, their Inter-metallic alloy, in ...
such as the Australian Gold Nugget and
American EagleAmerican Eagle may refer to: *Bald eagle, sometimes called the American eagle, the national bird and national animal of the United States Aviation *American Eagle (airline brand), a brand name under which several regional airlines operate flights f ...
are legal tender, however, they trade based on the
market price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or b ...
of the metal content as a
commodity In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...
, rather than their legal tender
face value The face value, sometimes called nominal value, is the value of a coin A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Ancient Greek, Greek μέταλλον ''métallon'', "mine ...
(which is usually only a small fraction of their bullion value).usmiNT.gov
Retrieved July-18-09.
Fiat money, if physically represented in the form of currency (paper or coins), can be accidentally damaged or destroyed. However, fiat money has an advantage over representative or commodity money, in that the same laws that created the money can also define rules for its replacement in case of damage or destruction. For example, the U.S. government will replace mutilated
Federal Reserve Note Federal Reserve Notes, also United States banknotes, are the currently issued banknotes of the United States dollar. The United States Bureau of Engraving and Printing produces the notes under the authority of the Federal Reserve Act of 1913 ...
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. By contrast, commodity money that has been lost or destroyed cannot be recovered.


Coinage

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 In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
, which helped lead to banking.
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provided the next link: coins could now be easily tested for their
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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 Numismatics is the study or collection of currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money Image:National-Debt-Gillray.jpeg, In a 1786 James ...

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 India, officially the Republic of India (Hindi Hindi (Devanagari: , हिंदी, ISO 15919, ISO: ), or more precisely Modern Standard Hindi (Devanagari: , ISO 15919, ISO: ), is an Indo-Aryan language spoken chiefly in Hindi Belt, ...
since the time of the
Mahajanapadas The Mahājanapadas ( sa, great realm, from ''maha'', "great", and ''janapada'' "foothold of a people") were sixteen Realm, kingdoms or oligarchy, oligarchic republics that existed in Northern History of India, ancient India from the sixth to ...
. In Europe, this system worked through the
medieval In the history of Europe The history of Europe concerns itself with the discovery and collection, the study, organization and presentation and the interpretation of past events and affairs of the people of Europe since the beginning of ...

medieval
period because there was virtually no new gold, silver, or copper introduced through mining or conquest. Thus the overall ratios of the three coinages remained roughly equivalent.


Paper

In , the need for credit and for circulating a medium that was less of a burden than exchanging thousands of
copper coins A coin is a small, flat, (usually, depending on the country or value) round piece of metal A metal (from Ancient Greek, Greek μέταλλον ''métallon'', "mine, quarry, metal") is a material that, when freshly prepared, polished, or fr ...

copper coins
led to the introduction of
paper money A banknote (often known as a bill (in the US and Canada), paper money, or simply a note) is a type of negotiable promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a ...
, commonly known today as "banknote"s. This economic phenomenon was a slow and gradual process that took place from the late
Tang dynasty The Tang dynasty (, ; ), or Tang Empire, was an imperial dynasty of China that ruled from 618 to 907, with an interregnum An interregnum (plural interregna or interregnums) is a period of discontinuity or "gap" in a government, organiza ...
(618–907) into the
Song dynasty The Song dynasty (; ; 960–1279) was an imperial dynasty of China that began in 960 and lasted until 1279. The dynasty was founded by Emperor Taizu of Song Emperor Taizu of Song (21 March 927 – 14 November 976), personal name Zhao Kua ...
(960–1279). It began as a means for merchants to exchange heavy coinage for
receipt A receipt (also known as a packing list, packing slip, packaging slip, (delivery) docket, shipping list, delivery list, bill of parcel, Manifest (transportation), manifest or customer receipt) is a document acknowledging that a person has rece ...

receipt
s of deposit issued as
promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a legal Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of ...
s from shops of wholesalers, notes that were valid for temporary use in a small regional territory. In the 10th century, the
Song dynasty The Song dynasty (; ; 960–1279) was an imperial dynasty of China that began in 960 and lasted until 1279. The dynasty was founded by Emperor Taizu of Song Emperor Taizu of Song (21 March 927 – 14 November 976), personal name Zhao Kua ...
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 Woodblock printing or block printing is a technique for printing text, images or patterns used widely throughout East Asia and originating in China in antiquity as a method of textile printing, printing on textiles and later paper. As a Woodbl ...
and then Pi Sheng's
movable type Movable type (US English; moveable type in British English) is the system and technology Technology ("science of craft", from Ancient Greek, Greek , ''techne'', "art, skill, cunning of hand"; and , ''wikt:-logia, -logia'') is the sum of a ...
printing by the 11th century was the impetus for the massive production of paper money in premodern China. At around the same time in the medieval Islamic world, a vigorous
monetary economy Monetary economics is the branch of economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (e ...
was created during the 7th–12th centuries on the basis of the expanding levels of circulation of a stable high-value currency (the
dinar The dinar () is the principal currency unit in several countries near the Mediterranean Sea, and its historical use is even more widespread. The modern dinar's historical antecedents are the gold dinar, the main coin of the medieval Islamic e ...

dinar
). Innovations introduced by economists, traders and merchants of the Muslim world include the earliest uses of
credit Credit (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the R ...
,
cheque A cheque, or check (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of variety (linguistics), varieties of the English language native to the Unit ...
s,
savings account A savings account is a bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transaction A financial transaction is an Contract, agreement, or communication, carried ...
s,
transactional account A transaction account, also called a checking account, chequing account, current account, demand deposit Demand deposits or non-confidential money are funds held in demand account A transaction account, also called a checking account, chequ ...
s, loaning,
trusts A trust is a legal relationship in which the holder of a right (eg. title to a chattel) gives it to another person or entity who must keep and use it solely for another's benefit. In common law, English common law, the party who entrusts the ri ...
,
exchange rate In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, ...
s, the transfer of credit and
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
, and
banking institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entit ...
s for loans and
deposits A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, Transaction account#Current accounts, current accounts or any of several other ...
. In Europe, paper money was first introduced in
Sweden Sweden ( sv, Sverige ), officially the Kingdom of Sweden ( sv, links=no, Konungariket Sverige ), is a Nordic country The Nordic countries, or the Nordics, are a geographical and cultural region In geography, regions are areas that ...

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; it allowed for a division of currency into credit and specie backed forms. It enabled the sale of
stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities i ...

stock
in joint stock companies, and the redemption of those
shares In financial markets A financial market is a market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertain ...
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
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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 A standing army is a permanent, often professional, army. It is composed of full-time soldiers who may be either career soldiers or conscripts. It differs from Military reserve force, army reserves, who are enrolled for the long term, but activate ...
. 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 Legal tender is a form of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner, 1 ...
, 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 Bimetallism is a monetary standard in which the value of the monetary unit is defined as equivalent to certain quantities of two metals, typically gold and silver, creating a fixed rate of exchange between them. For scholarly purposes, "proper" bim ...
and the attempt to create a bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of inflationists. Governments at this point could use currency as an instrument of policy, printing paper currency such as the United States greenback, to pay for military expenditures. They could also set the terms at which they would redeem notes for specie, by limiting the amount of purchase, or the minimum amount that could be redeemed. By 1900, most of the industrializing nations were on some form of a gold standard, with paper notes and silver coins constituting the circulating medium. Private banks and governments across the world followed
Gresham's law In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
: 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 A gold standard is a monetary system A monetary system is a system by which a government provides money in a country's economy. Modern monetary systems usually consist of the national treasury, the mint (facility), mint, central bank, the cen ...
was the United States in 1971. No country anywhere in the world today has an enforceable gold standard or
silver standard The silver standard is a monetary system A monetary system is a system by which a government provides money in a country's economy. Modern monetary systems usually consist of the national treasury, the mint (facility), mint, central bank, the cen ...
currency system.


Commercial bank

Commercial bank money or
demand deposit Demand deposits or non-confidential money are funds held in demand account A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a 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 In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societie ...
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 An automated teller machine (ATM) or cash machine (in British English British English (BrE) is the standard dialect A standard language (also standard variety, standard dialect, and standard) is a language variety that has undergo ...
s (ATMs), or through
online banking Online banking, also known as internet banking, web banking or home banking, is an electronic payment system An e-commerce payment system (or an electronic payment system) facilitates the acceptance of electronic payment for e-commerce, online ...
. Commercial bank money is created through
fractional-reserve banking Fractional-reserve banking is the system of banking A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of peo ...
, the banking practise where banks keep only a fraction of their
deposits A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, Transaction account#Current accounts, current accounts or any of several other ...
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. 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 Money creation, or money issuance, is the process by which the money supply In macroeconomics, the money supply (or money stock) refers to the total volume of money held by the public at a particular point in time in an economy. There are ...
by commercial banks, as it expands the
money supply In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is a social science Social science is the Branches of science, branch of science dev ...
(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 In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
created by the country's
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" in the most specific sense is money ...

central bank
. That multiple (called the
money multiplierIn monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money (also called the monetary base) under a fractional-reserve banking Fractional-reserve banking, the most common for ...
) is determined by the
reserve requirement A reserve requirement is a central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a State (polity), state or formal monetary union, and oversees their commercia ...
or other
financial ratio A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statement Financial statements (or financial reports) are formal records of the financial activities and positi ...
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.


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 Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet The Inte ...
in bank databases. In 2012, by number of transaction, 20 to 58 percent of transactions were electronic (dependent on country). Non-national digital currencies were developed in the early 2000s. In particular,
Flooz Flooz.com was a dot-com venture, now defunct, based in New York City New York City (NYC), often simply called New York, is the List of United States cities by population, most populous city in the United States. With an estimated 2019 popu ...
and
Beenz Beenz.com was a website A website (also written as web site) is a collection of web pages and related content that is identified by a common domain name and published on at least one web server. Notable examples are wikipedia.org, google ...
had gained momentum before the
Dot-com bubble The dot-com bubble, also known as the dot-com boom, the tech bubble, and the Internet bubble, was a stock market bubble Stock (also capital stock) is all of the Share (finance), shares into which ownership of a corporation is divided.Long ...
. Not much innovation occurred until the conception of
Bitcoin Bitcoin (₿) is a cryptocurrency A cryptocurrency, crypto-currency, or crypto is a collection of binary data which is designed to work as a medium of exchange. Individual coin ownership records are stored in a ledger, which is a comp ...

Bitcoin
in 2008, which introduced the concept of a
cryptocurrency A cryptocurrency, crypto-currency, or crypto is a collection of binary data which is designed to work as a medium of exchange In economics Economics () is a social science Social science is the Branches of science, branch of s ...
– a decentralised trustless currency.


Monetary policy

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 A gold rush or gold fever is a discovery of gold Gold is a chemical element In chemistry, an element is a pure Chemical substance, substance consisting only of atoms that all have the same numbers of protons in their atomic nucleus, ...

gold rush
es and discoveries, such as when Columbus traveled to the
New World The "New World" is a term for the majority of Earth's Western Hemisphere, specifically the Americas."America." ''The Oxford Companion to the English Language'' (). McArthur, Tom, ed., 1992. New York: Oxford University Press, p. 33: " 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 In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is a social science Social science is the Branches of science, branch of science dev ...
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." 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. 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 debt, government borrowing * increasing or lowering government spending * manipulation of
exchange rate In finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, ...
s * raising or lowering bank reserve requirements * regulation or prohibition of Private currency, private currencies * taxation or tax breaks on imports or exports of capital into a country In the US, 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 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 supported by the work of David Laidler, and many others. The nature of the demand for money changed during the 1980s owing to technical, institutional, and legal factors and the influence of monetarism has since decreased.


Locality

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 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 an 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 (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). 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 In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
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.


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 Lydia#First coinage, Lydian coins which are thought to be among the first western coins. Historically, objects that were difficult to counterfeit (e.g. shells, rare stones, precious metals) were often chosen as money. 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 World War II or the Second World War, often abbreviated as WWII or WW2, was a global war A world war is "a war War is an intense armed conflict between states State may refer to: Arts, entertainment, and media Literatur ...
, 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.


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.


See also

* Calculation in kind * Coin of account * Commons-based peer production * Digital currency * Finance * Foreign exchange market * Gift economy * Intelligent banknote neutralisation system * Labour voucher * Leprosy colony money * Local exchange trading system * Money bag * Money management * Orders of magnitude (currency) * Seigniorage * Slang terms for money * Social capital * Velocity of Money * World currency *
Counterfeit money Counterfeit money is currency produced without the legal sanction of the State or government, usually in a deliberate attempt to imitate that currency and so as to deceive its recipient. Producing or using counterfeit To counterfeit means to ...


References


Further reading

* Steve Keen, Keen, Steve (February 2015)
"What Is Money and How Is It Created?"
Uses arguments from Augusto Graziani, Graziani, Augusto (1989), ''The Theory of the Monetary Circuit'', Thames Papers in Political Economy, Spring: pp. 1–26. "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'' * * 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. 28–31.


External links

* * * *
"Money"
BBC Radio 4 discussion with Niall Ferguson, Richard J. Evans and Jane Humphries (''In Our Time'', Mar. 1, 2001) {{Authority control Money, Monetary economics, Currency Economic anthropology Emergence Trade