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^{[citation needed]} observed repeatedly across civilizations and is not dependent on any central authority or government^{[citation needed]}. The use of money in society thus encourages trade which increases the division of labour, which increases productivity and overall wealth.

Commodity money such as gold or silver was amongst the earliest forms of money to emerge. Under a commodity money system, the objects used as money have intrinsic value, i.e., they have value beyond their use as money. For example, gold coins retain value as gold even if inflation damages their value as currency, whereas paper notes are only worth as much as the monetary value assigned to them. Commodity money is usually adopted to simplify transactions in a barter economy, and so it functions first as a medium of exchange^{[citation needed]}. It quickly begins functioning as a store of value^{[citation needed]}, since holders of perishable goods can easily convert them into durable money.

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

Etymology

Money may be from the Latin, moneta, meaning mint or coinage. See also the Indo-European and Semitic etymology at History of money.

In many languages, the word for money is the same as or similar to the word for silver or gold. The French use 'argent' for 'money' which means 'silver' 1. In Hebrew, the word kesepph means both silver and money 2.

History of money

Money has developed over the years from gold, silver, copper, brass, iron, stones, or shells to paper, or electronic entries being managed by complex international banking systems.

Essential characteristics of money

Money is generally considered to have the following three characteristics:

1. It is a medium of exchange

A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.

2. It is a unit of account

A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions.

3. It is a store of value

To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved.

Desirable features 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.

Money also is typically that which has the least declining marginal utility, meaning that as you accumulate more units of it, each unit is worth about the same as the prior units, and not substantially less.

For these reasons, gold and silver have been chosen again and again throughout history as money in more societies and in more cultures and over longer time periods than any other items. Platinum and Palladium have not been identified and refined until the last two hundred years, and do not therefore have a long history of use as money, but that may change in the future.

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

Problems with gold as money

There is no perfect money, although gold may be the closest that there is. Gold is not always the most liquid asset, as it does have a spread of about 4% to buy and sell, whereas paper money can be exchanged for much less. Furthermore, gold today is a relatively small market, and the price of gold can move substantially higher if a few billion dollars tries to buy gold. Although gold itself does not decay, gold coins are easily scratched or damaged, and this can reduce their value, and reduce the fungibility or exchangability of gold coins. Gold coins are often made with 10% copper for added durability, such as the Kruggerrand, and U.S. Eagle, but then the gold is no longer 99.9% pure, or .999 fine. From 1980 to 2001, gold was a poor store of value, and did not have a stable value, as gold prices dropped from a high of $850/oz. to a low of $255/oz., and that is also being measured in terms of dollars that were also losing value, so the 1980 high might be more like $1600/oz., but a precisely accurate amount such is nearly impossible to measure. Money is supposed to be an honest weight and measure, but you cannot easily measure the changing value of gold by dollars that are changing in value themsleves.

Problems with paper as money

Paper money is not truly money, although it is called money and thought of as money. Paper money bills or notes are fundamentally a promise to pay money. Paper money's greatest failure is as a store of value. U.S. Dollars, or more accurately, Federal Reserve Notes, have lost about 95% of their value since 1913. Paper money constantly loses value through inflation, as more paper money is continually issued. Paper money also loses value through defaults, wherein the issures of paper money cannot make good on the promise to pay in silver or gold. The first Federal Reserve Note default was in 1933, when U.S. citizens could no longer redeem, or exchange dollars for gold at $20 per ounce. The second default was in 1971, when persons foreign to the U.S. could no longer redeem the notes for gold at the rate of $35 per ounce. In 2006, dollars have fallen in value all the way to about $700 per ounce.

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 often used as a medium of exchange or a unit of account. But central banks do use gold as a unit of account.

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

Credit as money

or

Credit is often loosely referred to as money. Credit is debt, it is not money. A debt is a promise to repay money, and is not money. Credit is a promise. Money is not a promise to pay. Money is what is used to make payment in full.

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

Bank notes are a form of credit. Gold backed bills are likewise also a debt of the bank, a promise to pay in gold.

Federal Reserve Notes, which are used as money in the United States, are difficult to describe in terms of credit or debt or money. Federal Reserve Notes are not a promise to pay in gold, and the notes are irredeemable by the issuer. The Federal Reserve's Notes are perhaps viewed best as a political promise to devalue (inflate) at a certain targeted rate.

Since Federal Reserve Notes are used in the United States as the most common medium of exchange, unit of account, and store of value, they are considered money by the majority of the population. To measure this kind of credit money, various forms of credit are counted together and listed as M1 or M2. M3 was the most common measure of money, but the publication of M3 was discontinued in May, 2006.

Economics 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. The stability of the demand for money prior to the 1980s was a key finding of the work of Milton Friedman, Anna Schwartz, David Laidler, and many others. Technical, institutional, and legal changes changed the nature of the demand for money during the 1980s.

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

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

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

Private currencies

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

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

Future of Money

Paper money's greatest failure is as a stable store of value. All paper money is plagued by inflation, the devaluation of money over time. Although inflation may be good for debtors, it is not good for savers.

Investors seek to preserve or grow their wealth, and some seek to buy currencies that will stay strong and keep their value. In 2006, the currency markets trade over $1 trillion each day. In 2006, all the gold in all the world is valued at about $3.5 trillion.

Today, gold can be traded electronically via online systems.

Will the world return to using gold as money again? Is there enough remaining silver to be used as money? These are questions that investors still struggle with today.

Money supply

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

When gold is used as money, the money supply can grow in either of two ways. First, the money supply can increase as the amount of gold increases by new gold mining at about 2% per year, but it can also increase more during periods of gold rushes and discoveries, such as when Columbus discovered the new world and brought gold back to Spain, or when gold was discovered in California in 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 kind of increase helps savers and creditors and is called deflation, where items for sale are increasingly less expensive in terms of gold. Deflation was the more typical situation for over a 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 -- mortgages, money markets, credit card debt, travelers cheques -- is money. However, the creation of dollar-denominated debt (or any generic obligation) only creates money when a bank (as opposed to a credit card company) is granting the debt. "High powered" money (M0) is created when the elected government spends money into the economy. The money created in the bank loan process is bank money and these two forms of money trade at par one with the other. Banks are limited in the amount of loans they can grant and thus in the amount of bank money (credit) they can create 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 requirement will be an indicator of (but this is somewhat greater than) the aggregate of loans. If additional money is needed in the banking system to allow more loans the Federal Reserve will create money by purchasing Bonds or T-bills with money created from the other. No matter who sells the bonds the money will end up in the banking system as M0. The Fed could purchase lolly pops if that would accomplish the purpose of expansion better than a purchase of Bonds.

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. 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
Mothers Milk of Politics
Nickels
Paper
Shrapnel (when referring to coins)
Silver
Simolians
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 trading^[1].

Australia - Australian Dollar (AUD)
Canada - Canadian Dollar (CAD)
European Monetary Union (EUR-12) - Euro (EUR)
Hong Kong - Hong Kong Dollar (HKD)
Japan - Japanese Yen (JPY)
Switzerland - Swiss Franc (CHF)
United Kingdom - Pound Sterling (GBP)
United States - US Dollar (USD)

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

References

^ benchmark World Currencies at Bloomberg

External links

Philosophy of Money by Alla Sheptun
The Heraion Standard.
History of Money from Ancient Times to the Present Day by Glyn Davies

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[1] rk World Currencies at Bloomberg

[1]

Money

Contents

Etymology

History of money

Essential characteristics of money