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.
Money is historically an emergent market phenomenon establishing a
commodity money, but nearly all contemporary money systems are based
on fiat money. Fiat money, like any check or note of debt, is
without use value as a physical commodity. It derives its value by
being declared by a government to be legal tender; that is, it must be
accepted as a form of payment within the boundaries of the country,
for "all debts, public and private".
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). Bank money, which
consists only of records (mostly computerized in modern banking),
forms by far the largest part of broad money in developed
3.1 Medium of exchange
3.2 Measure of value
3.3 Standard of deferred payment
3.4 Store of value
5.1 Creation of money
5.2 Market liquidity
6.6 Commercial bank
6.7 Electronic or digital
7 Monetary policy
10 See also
12 Further reading
13 External links
The word "money" is believed to originate from a temple of Juno, on
Capitoline, one of Rome's seven hills. In the ancient world Juno was
often associated with money. The temple of
Juno Moneta at Rome was the
place where the mint of Ancient Rome was located. The name "Juno"
may derive from the Etruscan goddess Uni (which means "the one",
"unique", "unit", "union", "united") and "Moneta" either from the
Latin word "monere" (remind, warn, or instruct) or the Greek word
"moneres" (alone, unique).
In the Western world, a prevalent term for coin-money has been specie,
stemming from Latin in specie, meaning 'in kind'.
Main article: History of money
A 640 BC one-third stater electrum coin from Lydia
The use of barter-like methods may date back to at least 100,000 years
ago, though there is no evidence of a society or economy that relied
primarily on barter. 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
Mesopotamia circa 3000 BC. Societies
in the Americas, Asia, Africa and Australia used shell money –
often, the shells of the cowry (Cypraea moneta L. or C. annulus L.).
According to Herodotus, the
Lydians were the first people to introduce
the use of gold and silver coins. It is thought by modern scholars
that these first stamped coins were minted around 650–600 BC.
Song Dynasty Jiaozi, the world's earliest paper money
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
Paper money or banknotes were first used in China during the
Song dynasty. These banknotes, known as "jiaozi", evolved from
promissory notes that had been used since the 7th century. However,
they did not displace commodity money, and were used alongside coins.
In the 13th century, paper money became known in Europe through the
accounts of travelers, such as
Marco Polo and William of Rubruck.
Marco Polo's account of paper money during the
Yuan dynasty is the
subject of a chapter of his book, The Travels of Marco Polo, titled
"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 in 1661, and were
again also used alongside coins. The gold standard, a monetary system
where the medium of exchange are paper notes that are convertible into
pre-set, fixed quantities of gold, replaced the use of gold coins as
currency in the 17th–19th centuries in Europe. These gold standard
notes were made legal tender, and redemption into gold coins was
discouraged. By the beginning of the 20th century almost all countries
had adopted the gold standard, backing their legal tender notes with
fixed amounts of gold.
World War II
World War II and the Bretton Woods Conference, most countries
adopted fiat currencies that were fixed to the U.S. dollar. The U.S.
dollar was in turn fixed to gold. In 1971 the U.S. government
suspended the convertibility of the 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, fiat money is also backed by taxes. By imposing taxes, states
create demand for the currency they issue.
A supply and demand diagram, illustrating
the effects of an increase in demand
History of economics
Economic history (academic study)
Schools of economics
JEL classification codes
Monetary / Financial
Glossary of economics
Business and economics portal
Money and the Mechanism of Exchange (1875), William Stanley Jevons
famously analyzed money in terms of four functions: a medium of
exchange, a common measure of value (or unit of account), a standard
of value (or standard of deferred payment), and a store of value. By
1919, Jevons's four functions of money were summarized in the couplet:
Money's a matter of functions four,
A Medium, a Measure, a Standard, a Store.
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
Money acts as a standard measure and 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
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
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.
Money Base, M1 and M2 in the U.S. from 1981 to 2012
Printing paper money at a printing press in Perm
In economics, money is a broad term that refers to any financial
instrument that can fulfil 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.
Creation of money
In current economic systems, money is created by two procedures:
Legal tender, or narrow money (M0) is the cash money 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.
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.
the most liquid asset because it is universally recognised and
accepted as the common currency. In this way, money gives consumers
the freedom to trade goods and services easily without having to
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.
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.
value comes from the commodity out of which it is made. The commodity
itself constitutes the money, and the money is the commodity.
Examples of commodities that have been used as mediums of exchange
include gold, silver, copper, rice, Wampum, salt, peppercorns, large
stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy,
etc. These items were sometimes used in a metric of perceived value in
conjunction to one another, in various commodity valuation or price
system economies. Use of commodity money is similar to barter, but a
commodity money provides a simple and automatic unit of account for
the commodity which is being used as money. Although some gold coins
such as the
Krugerrand are considered legal tender, there is no record
of their face value on either side of the coin. The rationale for this
is that emphasis is laid on their direct link to the prevailing value
of their fine gold content. American Eagles are imprinted with
their gold content and legal tender face value.
Main article: Representative money
In 1875, the British economist
William Stanley Jevons
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
Main article: Fiat money
Gold coins are an example of legal tender that are traded for their
intrinsic value, rather than their face value.
Fiat money or fiat currency is money whose value is not derived from
any intrinsic value or guarantee that it can be converted into a
valuable commodity (such as gold). Instead, it has value only by
government order (fiat). Usually, the government declares the fiat
currency (typically notes and coins from a central bank, such as the
Federal Reserve System
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 Gold Nugget
Australian Gold Nugget and American
Eagle are legal tender, however, they trade based on the market price
of the metal content as a commodity, rather than their legal tender
face value (which is usually only a small fraction of their bullion
Fiat money, if physically represented in the form of currency (paper
or coins) can be accidentally damaged or destroyed. However, fiat
money has an advantage over representative or commodity money, in that
the same laws that created the money can also define rules for its
replacement in case of damage or destruction. For example, the U.S.
government will replace mutilated
Federal Reserve Notes (U.S. fiat
money) if at least half of the physical note can be reconstructed, or
if it can be otherwise proven to have been destroyed. By contrast,
commodity money which has been lost or destroyed cannot be recovered.
Main article: Coin
These factors led to the shift of the store of value being the metal
itself: at first silver, then both silver and gold, and at one point
there was bronze as well. Now we have copper coins and other
non-precious metals as coins. Metals were mined, weighed, and stamped
into coins. This was to assure the individual taking the coin that he
was getting a certain known weight of precious metal.
Coins could be
counterfeited, but they also created a new unit of account, which
helped lead to banking.
Archimedes' principle provided the next link:
coins could now be easily tested for their fine weight of metal, and
thus the value of a coin could be determined, even if it had been
shaved, debased or otherwise tampered with (see Numismatics).
In most major economies using coinage, copper, silver and gold formed
three tiers of coins.
Gold coins were used for large purchases,
payment of the military and backing of state activities. Silver coins
were used for midsized transactions, and as a unit of account for
taxes, dues, contracts and fealty, while copper coins represented the
coinage of common transaction. This system had been used in ancient
India since the time of the Mahajanapadas. In Europe, this system
worked through the medieval period because there was virtually no new
gold, silver or copper introduced through mining or conquest.[citation
needed] Thus the overall ratios of the three coinages remained roughly
Main article: Banknote
Huizi currency, issued in 1160
In premodern China, the need for credit and for circulating a medium
that was less of a burden than exchanging thousands of copper coins
led to the introduction of paper money, commonly known today as
banknotes. This economic phenomenon was a slow and gradual process
that took place from the late
Tang dynasty (618–907) into the Song
dynasty (960–1279). It began as a means for merchants to exchange
heavy coinage for receipts of deposit issued as promissory notes from
shops of wholesalers, notes that were valid for temporary use in a
small regional territory. In the 10th century, the Song dynasty
government began circulating these notes amongst the traders in their
monopolized salt industry. The Song government granted several shops
the sole right to issue banknotes, and in the early 12th century the
government finally took over these shops to produce state-issued
currency. Yet the banknotes issued were still regionally valid and
temporary; it was not until the mid 13th century that a standard and
uniform government issue of paper money was made into an acceptable
nationwide currency. The already widespread methods of woodblock
printing and then Pi Sheng's movable type printing by the 11th century
was the impetus for the massive production of paper money in premodern
Paper money from different countries
At around the same time in the medieval Islamic world, a vigorous
monetary economy was created during the 7th–12th centuries on the
basis of the expanding levels of circulation of a stable high-value
currency (the dinar). Innovations introduced by 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
Sweden in 1661. Sweden
was rich in copper, thus, because of copper's low value,
extraordinarily big coins (often weighing several kilograms) had to be
made. The advantages of paper currency were numerous: it reduced
transport of gold and silver, and thus lowered the risks; it made
loaning gold or silver at interest easier, since the specie (gold or
silver) never left the possession of the lender until someone else
redeemed the note; and it allowed for a division of currency into
credit and specie backed forms. It enabled the sale of stock in joint
stock companies, and the redemption of those shares in paper.
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
David Hume in the 18th
century. The result is that paper money would often lead to an
inflationary bubble, which could collapse if people began demanding
hard money, causing the demand for paper notes to fall to zero. The
printing of paper money was also associated with wars, and financing
of wars, and therefore regarded as part of maintaining a standing
army. For these reasons, paper currency was held in suspicion and
hostility in Europe and America. It was also addictive, since the
speculative profits of trade and capital creation were quite large.
Major nations established mints to print money and mint coins, and
branches of their treasury to collect taxes and hold gold and silver
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.
A check, used as a means of converting funds in a demand deposit to
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.[page needed]
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
Flooz and Beenz, had gained
momentum before the
Dot-com bubble of the early 2000s. Not much
innovation occurred until the conception of
Bitcoin in 2009, which
introduced the concept of a cryptocurrency.
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
New World and
brought back gold and silver to Spain, or when gold was discovered in
California in 1848. This causes inflation, as the value of gold goes
down. However, if the rate of gold mining cannot keep up with the
growth of the economy, gold becomes relatively more valuable, and
prices (denominated in gold) will drop, causing deflation. Deflation
was the more typical situation for over a century when gold and paper
money backed by gold were used as money in the 18th and 19th
Modern day monetary systems are based on fiat money and are no longer
tied to the value of gold. The control of the amount of money in the
economy is known as monetary policy.
Monetary policy is the process by
which a government, central bank, or monetary authority manages the
money supply to achieve specific goals. Usually the goal of monetary
policy is to accommodate economic growth in an environment of stable
prices. For example, it is clearly stated in the
Federal Reserve Act
Board of Governors
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 fall of the Soviet
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
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 significant impact on
global finances are the Bank of Japan,
People's Bank of China
People's Bank of China and the
Bank of England.
For many years much of monetary policy was influenced by an economic
theory known as monetarism.
Monetarism is an economic theory which
argues that management of the money supply should be the primary means
of regulating economic activity. The stability of the demand for money
prior to the 1980s was a key finding of
Milton Friedman and Anna
Schwartz 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[clarification
needed] and the influence of monetarism has since decreased.
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, 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 is the process in which the proceeds of crime are
transformed into ostensibly legitimate money or other assets.
However, in a number of legal and regulatory systems the term money
laundering has become conflated with other forms of financial crime,
and sometimes used more generally to include misuse of the financial
system (involving things such as securities, digital currencies,
credit cards, and traditional currency), including terrorism
financing, tax evasion, and evading of international sanctions.
Calculation in kind
Coin of account
Commons-based peer production
Foreign exchange market
Intelligent banknote neutralisation system
Leprosy colony money
Local exchange trading system
Orders of magnitude (currency)
Slang terms for money
Social reputation in fiction (category)
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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
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Media related to
Money (category) at Wikimedia Commons
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