Money

An example of Money. More specifically, Brazilian Real bills and coins.

In economics, there are various definitions for money, though it is now commonly considered to be any good or token that fulfills the money functions: to be a medium of exchange, store of value, and unit of account. Some authors explicitly require money to be a standard of deferred payment, too [1]. In common usage, money refers more specifically to currency, particularly the many circulating currencies with legal tender status; deposit accounts denominated in such currencies are also considered part of the money supply.

The use of money provides an alternative to bartering, which is often inefficient because it requires a coincidence of wants between traders. The emergence of some form of money is a natural market phenomenon observed repeatedly across civilizations and is not dependent on any central authority or government. Indeed, the division of labour in any but the most basic of forms cannot occur without it.

Commodity money was amongst the earliest forms of money to emerge. Under a commodity money system, the object used as money is actually useful in everyday life (has intrinsic value). It is usually adopted to simplify transactions in a barter economy; thus it functions first as a medium of exchange. It quickly begins functioning as a store of value, since holders of perishable goods can easily convert them into durable money.

Fiat money is a relatively modern invention. A central authority (government) creates a new money object that has negligible inherent value. The widespread acceptance of fiat money is most frequently enhanced by the central authority mandating the money's acceptance under penalty of law and demanding this money in payment of taxes or tribute. At various times in history, government-issued promissory notes have later become fiat currencies (e.g. US Dollar) and fiat currencies have gone on to become a form of commodity currency (e.g. Swiss Dinar).

History of money

Money has developed over the years from the likes of conch shells to being managed by complex international banking systems.

The history of money has generally seen commodity money replaced by more formal systems, as money has been progressively brought under the control of governments.

Essential characteristics of money

Money is generally considered to have the following three characteristics:

1. It is a medium of exchange

When something is consistently used as an intermediate object of trade, as opposed to direct barter, then it is regarded as a medium of exchange. Such a thing simplifies the process of trade by allowing trade to take place without the need for double coincidences.

2. It is a unit of account

When the value of a market good is frequently used to measure or compare the value of other goods or where its value is used to denominate debts then it is functioning as a unit of account.

A debt or an IOU can not serve as a unit of account because its value is specified by comparison to some external reference value, some actual unit of account that may be used for settlement. Unless, of course, the debt or IOU is also an accepted medium of exchange, in which case we have money.

For example, if in some culture people are inclined to measure the worth of things with reference to goats then we would regard goats as the dominant unit of account in that culture. For instance we may say that today a horse is worth 10 goats and a good hut is worth 45 goats. We would also say that an IOU denominated in goats would change value at much the same rate as real goats.

3. It is a store of value

When something is purchased primarily to store value for future trade then it is being used as a store of value. For example, a sawmill might maintain an inventory of lumber that has market value. Likewise it might keep a cash box that has some currency that holds market value. Both would represent a store of value because through trade they can be reliably converted to other goods at some future date. Most non-perishable goods have this quality.

Most goods are capable of possesing all of the characteristics outlined above to a greater or lesser degree. However, the more successful a money is, the greater the degree in which it will typically satisfy all three criteria.

Credit as money

Credit is often loosely referred to as money. However credit only satisfies items one and three of the above "Essential Characteristics of Money" criteria. Credit completely fails criterion number two. Hence to be strictly accurate credit is a money substitute and not money proper.

This distinction between money and credit causes much confusion in discussions of monetary theory. In lay terms, and when convenient in academic discussion, credit and money are frequently used interchangeably. For example bank deposits are generally included in summations of the national broad money supply. However any detailed study of monetary theory needs to recognize the proper distinction between money and credit.

The rest of this article frequently uses the term money in the looser sense of the word.

Desirable features of money

To function as money, the monetary item should possess a number of features:

To be a medium of exchange:
* It should have liquidity, easily tradable, with a low spread between the prices to buy and sell, in other words, a low transaction cost
* It should be easily transportable; precious metals have a high value to weight ratio. This is why oil, coal, vermiculite, or water are not suitable as money even though they are valuable. Paper notes have proved highly convenient in this regard.
* It should be durable. Money is often left in pockets through the wash. The Mexican 20 peso note is made of plastic for durability. Gold coins are often mixed with copper to improve durability, and coins are made with ridges around the rim to prevent coin shaving or debasement.

To be a unit of account:
* It should be divisible into small units without destroying its value; precious metals can be coined from bars, or melted down into bars again. This is why leather, or live animals are not suitable as money.
* It should be fungible: that is, one unit or piece must be exactly equivalent to another, which is why diamonds, works of art or real estate are not suitable as money.
* It must be a specific weight, or measure, or size to be verifiably countable.

To be a store of value:
* It should be long lasting, durable, it must not be perishable or subject to decay. This is why food items, expensive spices, or even fine silks or oriental rugs, are not generally suitable as money.
* It should have a stable value.
* It should be difficult to counterfeit, and the genuine must be easily recognizable.

For these reasons, gold and silver have been chosen again and again throughout history as money in more societies and in more cultures and over longer time periods than any other items. Platinum and Palladium have not been meltable until recently, are not as widely recognized by the general public and are not as suitable for use as money.

One key benefit of these features of money is that it facilitates and encourages trade; because barter is inefficient.

Modern forms of money

Banknotes (also known as paper money) and coins are the most liquid forms of tangible money and are commonly used for small person-to-person transactions. Today, gold is commonly used as a store of value, but is not directly used as a medium of exchange and thus is no longer a form of money.

There are also less tangible forms of money, which nevertheless serve the same functions as money. Checks, debit cards and wire transfers are used as means to more easily transfer larger amounts of money between bank accounts. Electronic money is an entirely non-physical currency that is traded and used over the internet.

Economics of money

Money is one of the most central topics studied in economics and forms its most cogent link to finance. Monetarism is an economic theory which predominantly deals with the supply and demand for money.

Monetary policy aims to manage the money supply, inflation and interest to affect output and employment. Inflation is the decrease in the value of a specific currency over time and can be caused by dramatic increases in the money supply. The interest rate, the cost of borrowing money, is an important tool used to control inflation and economic growth in monetary economics. Central banks are often made responsible for monitoring and controlling the money supply, interest rates and banking.

A monetary crisis can have very significant economic effects, particularly if it leads to monetary failure and the adoption of a much less efficient barter economy. This happened in Russia, for instance, after the fall of the Soviet Union.

There have been many historical arguments regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. Financial capital is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender.

Private currencies

In many countries, the issue of private paper currencies has been severely restricted by law.

A private 1 dollar note, issued by the "Delaware Bridge Company" of New Jersey 1836-1841.

In the United States, the Free Banking Era lasted between 1837 and 1866. States, municipalities, private banks, railroad and construction companies, stores, restaurants, churches and individuals printed an estimated 8,000 different monies by 1860. If the issuer went bankrupt, closed, left town, or otherwise went out of business the note would be worthless. Such organizations earned the nickname of "wildcat banks" for a reputation of unreliability and that they were often situated in far-off, unpopulated locales that were said to be more apt to wildcats than people. On the other hand, according to Lawrence H. White's article inThe Freeman: Ideas on Liberty - October 1993 "it turns out that "wildcat" banking is largely a myth. Although stories about crooked banking practices are entertaining—and for that reason have been repeated endlessly by textbooks—modern economic historians have found that there were in fact very few banks that fit any reasonable definition of wildcat bank." The National Bank Act of 1863 ended the "wildcat bank" period.

In Australia, the Bank Notes Tax Act of 1910 basically shut down the circulation of private currencies by imposing a prohibitive tax on the practice. Many other nations have similar such policies that eliminate private sector competition.

In Scotland and Northern Ireland private sector banks are licensed to print their own paper money by the government. These are known as currency notes and are only accepted as currency in the jurisdiction where they were issued.

Today privately issued electronic money is in circulation. Some of these private currencies are backed by historic forms of money such as gold, as in the case of digital gold currency. Transactions in these currencies represent an annual turnover value in billions of US dollars.

It is possible for privately issued money to be backed by any other material, although some people argue about perishable materials. After all, gold, or platinum, or silver, have in some regards less utility than previously (their electrical properties notwithstanding), while currency backed by energy (measured in joules) or by transport (measured in kilogramme*kilometre/hour) or by food [2] is also possible and may be accepted by the people, if legalised. It is important to understand though that, as long as money is above all an agreement to use something as a medium of exchange, it is up to a community (or to whoever holds the power within a community) to decide whether money should be backed by whatever material or should be totally virtual.

Money supply

U.S. Money Supply from 1959-2006

The money supply is the amount of money available within a specific economy available for purchasing goods or services. The supply is usually considered as four escalating categories M0, M1, M2 and M3. The categories grow in size with M3 representing all forms of money (including credit) and M0 being just base money (coins, bills, and central bank deposits). M0 is also money that can satisfy private banks' reserve requirements. In the United States, the Federal Reserve is responsible for controlling the money supply, while in the Euro area the respective institution is the ECB. Other central banks with greater impact on global finances are the Bank of Japan, People's Bank of China and the Bank of England.

When gold is used as money, the money supply can grow in either of two ways. First, the money supply can increase as the amount of gold increases by new gold mining at 2% per year, but it can also increase more during periods of gold rushes and discoveries, such as when Columbus discovered the new world and brought gold back to Spain, or when gold was discovered in California in 1849. This kind of increase helps debtors, and causes inflation, as the value of gold goes down. Second, the money supply can increase when the value of gold goes up, as this makes existing stocks of gold more valuable. This king of increase helps savers and creditors and is called deflation, where items for sale are increasingly less expensive in terms of gold. Deflation was the more typical situation for over a 100 years when gold was used as money in the U.S. from 1792 to 1913.

Expanding the paper money supply

Historically money was a metal (gold, silver, copper, etc,) or other object that was difficult to duplicate, but easy to transport and divide. Later it consisted of paper notes, now issued by all modern governments. With the rise of modern industrial capitalism it has gone through several phases including but not limited to:

#Bank notes - paper issued by banks as an interest-bearing loan. (These were common in the 19th century but not seen anymore.)#Paper notes, coins with varying amounts of precious metal (usually called legal tender) issued by various governments. There is also a near-money in the form of interest bearing bonds issued by governments with solid credit ratings.#Bank credit through the creation of chequable deposits in the granting of various loans to business, government and individuals. (It is critical that we understand that when a bank makes a loan, that is new money and when a loan is paid off that money is destroyed. Only the interest paid on it remains.)

Thus, all debt denominated in dollars is money. However, the creation of dollar-denominated debt (or any generic obligation) only creates money when a bank (as opposed to a credit cardcompany) is granting the debt. "High powered" money (M0) is created when the elected government spends moneyinto the economy. The money created in the bank loan process is bank money and thesetwo forms of money trade at par one with the other. Banks are limited in the amountof loans they can grant and thus in the amount of bank money (credit) they cancreate by both the net assets of the bank and by reserve requirements (M0).For most intents and purposes the aggregate of M0 multiplied by the reserve requirementwill be an indicator of (but this is somewhat greater than) the aggregate of loans. If additional money is needed in thebanking system to allow more loans the Federal Reserve will create money by purchasing Bonds orT-bills with money created from the other. No matter who sells the bonds themoney will end up in the banking system as M0. The Fed could purchase lolly popsif that would accomplish the purpose of expansion better than a purchase ofBonds.

Shrinking the paper money supply

Perhaps the most obvious way money can be destroyed is if paper bills are burned or taken out of circulation by the central bank. But, it should be remembered that legal tender usually constitutes less than 4% of the broad money supply.

Current banking systems are based on fractional reserves so money can be destroyed if depositers withdraw funds from a bank. When money is withdrawn it can no longer be used for lending and just as the fractional reserve system gives leverage to the creation of money, it also gives leverage to the destruction of money. Bank savings are actually a kind of loans — savers loan their money to a bank at a low interest rate or merely in exchange for the benefit of convenience or its security (accepting that they lose a small amount of value to inflation). The bank may use this loan to manage its liabilities (its deposit liabilities created by loans). It must be recalled that the federal reserve banking system is mostly a closed system. A check written on bank A gets deposited in Bank B and a check written on bank B gets deposited in Bank C and a check on bank C gets deposited in bank A. At the end of the day the bankers go have a beer and see who needs to borrow from whom:) On a good day very little borrowing needs to be done because a bank gets as much in new deposits as it does in paid out funds. Even if a bank is short of reserves it can borrow the reserves from another bank at the discount rate.

Another way money can be destroyed is when any bank loan is paid off or any government bond or T-Bill is purchased by the private sector. The money value of the contract or bond is destroyed — taken out of circulation. If a bank loan is defaulted upon then the "interest" paid by other borrowers will be employed to cover the default. A very large part of the "interest" paid on bank loans is actually a finance charge employed to cover bad loans. The group of good borrowers pay the loan instead of the original borrower. In cases where the default is huge such as loans to foreign governments Fed intervention has, in the past, rescued the banks. In this instance it would seem that the taxpayers and/or money holders (savers) will pay the debt. The effects on the money supply will be controlled, again, by the level of bond purchase or redemption or the level of T-Bill sales or purchases by the Treasury.

In extreme forms, a bank run or panic may drive a bank into insolvency and, if uninsured, the savings of all its depositors are lost. Such bank failures were a major cause of the tremendous contraction in the money supply that occurred during the Great Depression, particularly in the United States. In that country many banking reforms were subsequently enacted during the New Deal, including the creation of the Federal Deposit Insurance Corporation to guarantee private bank deposits.

Slang words and synonyms associated with money

In English language

Some money
* Beer Tokens
* Bling (when referring to coins)
* Bread
* Bucks
* Cake
* Cheese
* Chips
* Clams
* Coinage
* Coppers
* Dead Presidents (US)
* Deniro
* Dime
* Dosh
* Dough
* Duckets
* Folding Green (US)
* Frogskins (US)
* Green (US)
* Greenbacks (US)
* Grip (large quantity of money)
* Jingle
* Moola
* Nickels
* Paper
* Shrapnel (when referring to coins)
* Silver
* Skrill, Skrilla (US West Coast and also East Coast Canada, primarily Halifax)
* (The Old) Spondulix
* Yay

My money
*Slice of my pie
*My stack
*My wedge

Amounts of money
* Archer = £2000
* Bar = 1,000,000 currency units
* Bob = 1 shilling
* Buck = $1
* C note, Benjamin (US) = $100 bill
* Fiver, Five Spot, Finsky = 5 currency units
* Foonie = $5 (Canada) - a non-existent $5 coin, allegedly under discussion by the Canadian mint
* Grand, G, Bag, Big One, Large or K = 1,000 currency units
* Loonie = $1 (Canada)
* Monkey = £500
* Nicker = £1
* Pony = £25
* Quid = £1
* Nugget = £1
* Score = £20
* Single = $1 bill (but not coin) or £1 (coin or note)
* Sov = £1 (short for sovereign)
* Stack of High Society = 10,000 currency units
* Tanner = sixpence
* Tenner = 10 currency units
* Ton = £100
* Toonie = $2 (Canada)

Benchmark World Currencies

These are the major currencies used in tradingbenchmark World Currencies at Bloomberg.
*Australia - Australian Dollar (AUD)
*Canada - Canadian Dollar (CAD)
*European Monetary Union (EUR-12) - Euro (EUR)
*Hong Kong - Hong Kong Dollar (HKD)
*Japan - Japanese Yen (JPY)
*Switzerland - Swiss Franc (CHF)
*United Kingdom - Pound Sterling (GBP)
*United States - US Dollar (USD)

Besides these currencies gold and silver are traded globaly on the currency markets:Gold (XAU) quoted in 1 ounce incrementsSilver (XAG) quoted in 1000 ounce increments

References

External links

*Philosophy of Money by Alla Sheptun
*The Heraion Standard.

zh-yue:錢

Money: Encyclopedia BETA

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