MONEY is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange ; a unit of account ; a store of value ; and, sometimes, a standard of deferred payment . Any item or verifiable record that fulfills these functions can be considered as money.
The money supply of a country consists of currency (banknotes and
coins) and, depending on the particular definition used, one or more
types of bank money (the balances held in checking accounts , savings
accounts , and other types of bank accounts ).
* 1 Etymology * 2 History
* 3 Functions
* 4 Properties
* 5.1 Market liquidity
* 6 Types
* 7 Monetary policy * 8 Counterfeit * 9 Laundering * 10 See also * 11 References * 12 Additional reading * 13 External links
The word "money" is believed to originate from a temple of Juno , on
In the Western world, a prevalent term for coin-money has been specie, stemming from Latin in specie, meaning 'in kind'.
A 640 BC one-third stater electrum coin from Lydia Main article: History of money
The use of barter -like methods may date back to at least 100,000 years ago, though there is no evidence of a society or economy that relied primarily on barter. Instead, non-monetary societies operated largely along the principles of gift economy and 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 . The Mesopotamian shekel was a unit of weight, and
relied on the mass of something like 160 grains of barley . The first
usage of the term came from
The system of commodity money eventually evolved into a system of
representative money . This occurred because gold and silver merchants
or banks would issue receipts to their depositors – redeemable for
the commodity money deposited. Eventually, these receipts became
generally accepted as a means of payment and were used as money. Paper
money or banknotes were first used in
World War II
A supply and demand diagram, illustrating the effects of an increase in demand .
* History * Types * Classification
* History of economics * Economic history (academic study) * Schools of economics
* Concepts * Theory * Techniques
* Economists * Publications (journals )
* v * t * e
This couplet would later become widely popular in macroeconomics textbooks. Most modern textbooks now list only three functions, that of medium of exchange , unit of account , and store of value , not considering a standard of deferred payment as it is a distinguished function, but rather subsuming it in the others.
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 is in conflict with its role as a store of value : its role as a store of value requires holding it without spending, whereas its role as a medium of exchange requires it to circulate. 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
Main article: 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 "coincidence of wants " problem. Money's most important usage is as a method for comparing the values of dissimilar objects.
MEASURE OF VALUE
Main article: Unit of account
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.
STANDARD OF DEFERRED PAYMENT
Main article: 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 – a unit in which debts are denominated, and the status of money as legal tender , in those jurisdictions which have this concept, states that it may function for the discharge of debts. When debts are denominated in money, the real value of debts may change due to inflation and deflation , and for sovereign and international debts via debasement and devaluation .
STORE OF VALUE
Main article: Store of value
To act as a store of value, a 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.
To fulfill its various functions, money must have certain properties:
* Fungibility : its individual units must be capable of mutual substitution (i.e., interchangeability). * Durability : able to withstand repeated use. * Portability: easily carried and transported. * Cognizability: its value must be easily identified. * Stability of value: its value should not fluctuate.
In economics, money is a broad term that refers to any financial instrument that can fulfill the functions of money (detailed above). These financial instruments together are collectively referred to as the money supply of an economy. In other words, the money supply is the number of financial instruments within a specific economy available for purchasing goods or services. Since the money supply consists of various financial instruments (usually currency, demand deposits and various other types of deposits), the amount of money in an economy is measured by adding together these financial instruments creating a monetary aggregate.
Modern monetary theory distinguishes among different ways to measure the money supply, reflected in different types of monetary aggregates, using a categorization system that focuses on the liquidity of the financial instrument used as money. The most commonly used monetary aggregates (or types of money) are conventionally designated M1, M2 and M3. These are successively larger aggregate categories: M1 is currency (coins and bills) plus demand deposits (such as checking accounts); M2 is M1 plus savings accounts and time deposits under $100,000; and 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 by firms and households in the economy. M0 is base money , or the amount of money actually issued by the central bank of a country. It is measured as currency plus deposits of banks and other institutions at the central bank. M0 is also the only money that can satisfy the reserve requirements of commercial banks .
Main article: Market liquidity
"Market liquidity" describes how easily an item can be traded for
another item, or into the common currency within an economy.
Liquid financial instruments are easily tradable and have low transaction costs . There should be no (or minimal) spread between the prices to buy and sell the instrument being used as money.
Currently, most modern monetary systems are based on fiat money. However, for most of history, almost all money was commodity money, such as gold and silver coins. As economies developed, commodity money was eventually replaced by representative money , such as the gold standard , as traders found the physical transportation of gold and silver burdensome. Fiat currencies gradually took over in the last hundred years, especially since the breakup of the Bretton Woods system in the early 1970s.
Main article: Commodity money A 1914 British gold sovereign
Many items have been used as commodity money such as naturally scarce
precious metals , conch shells , barley , beads etc., as well as many
other things that are thought of as having value .
Main article: Representative money
In 1875, the British economist William Stanley Jevons described the money used at the time as "representative money ". Representative money is money that consists of token coins , paper money or other physical tokens such as certificates, that can be reliably exchanged for a fixed quantity of a commodity such as gold or silver . The value of representative money stands in direct and fixed relation to the commodity that backs it, while not itself being composed of that commodity.
Fiat money or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order (fiat). Usually, the government declares the fiat currency (typically notes and coins from a central bank, such as the Federal Reserve System in the U.S.) to be legal tender , making it unlawful not to accept the fiat currency as a means of repayment for all debts, public and private.
Some bullion coins such as the Australian
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
These factors led to the shift of the store of value being the metal itself: at first silver, then both silver and gold, and at one point there was bronze as well. Now we have copper coins and other non-precious metals as coins. Metals were mined, weighed, and stamped into coins. This was to assure the individual taking the coin that he was getting a certain known weight of precious metal. Coins could be counterfeited, but they also created a new unit of account , which helped lead to banking . Archimedes\' principle provided the next link: coins could now be easily tested for their fine weight of metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with (see Numismatics ).
In most major economies using coinage, copper, silver and gold formed
three tiers of coins.
At around the same time in the medieval Islamic world , a vigorous monetary economy was created during the 7th–12th centuries on the basis of the expanding levels of circulation of a stable high-value currency (the dinar ). Innovations introduced by Muslim economists, traders and merchants include the earliest uses of credit , cheques , promissory notes , savings accounts , transactional accounts , loaning , trusts , exchange rates , the transfer of credit and debt , and banking institutions for loans and deposits .
In Europe, paper money was first introduced in
However, these advantages held within them 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
At this time both silver and gold were considered legal tender , and accepted by governments for taxes. However, the instability in the ratio between the two grew over the course of the 19th century, with the increase both in supply of these metals, particularly silver, and of trade. This is called bimetallism and the attempt to create a bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of inflationists . Governments at this point could use currency as an instrument of policy, printing paper currency such as the United States Greenback , to pay for military expenditures. They could also set the terms at which they would redeem notes for specie, by limiting the amount of purchase, or the minimum amount that could be redeemed. Banknotes with a face value of 5000 of different currencies
By 1900, most of the industrializing nations were on some form of gold standard, with paper notes and silver coins constituting the circulating medium. Private banks and governments across the world followed Gresham\'s Law : keeping gold and silver paid, but paying out in notes. This did not happen all around the world at the same time, but occurred sporadically, generally in times of war or financial crisis, beginning in the early part of the 20th century and continuing across the world until the late 20th century, when the regime of floating fiat currencies came into force. One of the last countries to break away from the gold standard was the United States in 1971.
No country anywhere in the world today has an enforceable gold standard or silver standard currency system.
Main article: Demand deposit A check, used as a means of converting funds in a demand deposit to cash
Commercial bank money or demand deposits are claims against financial institutions that can be used for the purchase of goods and services. A demand deposit account is an account from which funds can be withdrawn at any time by check or cash withdrawal without giving the bank or financial institution any prior notice. Banks have the legal obligation to return funds held in demand deposits immediately upon demand (or 'at call'). Demand deposit withdrawals can be performed in person, via checks or bank drafts, using automatic teller machines (ATMs), or through online banking .
Commercial bank money is created through fractional-reserve banking , the banking practice where banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand. Commercial bank money differs from commodity and fiat money in two ways: firstly it is non-physical, as its existence is only reflected in the account ledgers of banks and other financial institutions, and secondly, there is some element of risk that the claim will not be fulfilled if the financial institution becomes insolvent. The process of fractional-reserve banking has a cumulative effect of money creation by commercial banks, as it expands money supply (cash and demand deposits) beyond what it would otherwise be. Because of the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank . That multiple (called the money multiplier ) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators.
The money supply of a country is usually held to be the total amount of currency in circulation plus the total value of checking and savings deposits in the commercial banks in the country. In modern economies, relatively little of the money supply is in physical currency. For example, in December 2010 in the U.S., of the $8853.4 billion in broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money.
ELECTRONIC OR DIGITAL
Main article: Electronic money
Many digital currencies, in particular
Beenz , had gained
momentum before the
Dot-com bubble of the early 2000s. Not much
innovation occurred until the conception of
Main article: Monetary policy US dollar banknotes
When gold and silver are used as money, the money supply can grow
only if the supply of these metals is increased by mining. This rate
of increase will accelerate during periods of gold rushes and
discoveries, such as when Columbus discovered the
Modern day monetary systems are based on fiat money and are no longer
tied to the value of gold. The control of the amount of money in the
economy is known as monetary policy.
Monetary policy is the process by
which a government , central bank, or monetary authority manages the
money supply to achieve specific goals. Usually the goal of monetary
policy is to accommodate economic growth in an environment of stable
prices. For example, it is clearly stated in the
A failed monetary policy can have significant detrimental effects on an economy and the society that depends on it. These include hyperinflation , stagflation , recession , high unemployment , shortages of imported goods, inability to export goods, and even total monetary collapse and the adoption of a much less efficient barter economy. This happened in Russia, for instance, after the fall of the Soviet Union .
Governments and central banks have taken both regulatory and free market approaches to monetary policy. Some of the tools used to control the money supply include:
* changing the interest rate at which the central bank loans money to (or borrows money from) the commercial banks * currency purchases or sales * increasing or lowering government borrowing * increasing or lowering government spending * manipulation of exchange rates * raising or lowering bank reserve requirements * regulation or prohibition of private currencies * taxation or tax breaks on imports or exports of capital into a country
In the US, the
For many years much of monetary policy was influenced by an economic
theory known as monetarism.
Monetarism is an economic theory which
argues that management of the money supply should be the primary means
of regulating economic activity. The stability of the demand for money
prior to the 1980s was a key finding of
Main article: Counterfeit money
Counterfeit money is imitation currency produced without the legal
sanction of the state or government. Producing or using counterfeit
money is a form of fraud or forgery . Counterfeiting is almost as old
as money itself. Plated copies (known as Fourrées ) have been found
of Lydian coins which are thought to be among the first western coins.
Before the introduction of paper money , the most prevalent method of
counterfeiting involved mixing base metals with pure gold or silver .
A form of counterfeiting is the production of documents by legitimate
printers in response to fraudulent instructions. During
World War II
Calculation in kind
* ^ Mishkin, Frederic S. (2007). The
* ^ Bernstein, Peter, A Primer on
* Keen, Steve (February 2015). What Is
* Media related to Money