- Money
is any object or record that is generally accepted as payment for goods
and services and repayment of debts in a given socio-economic context
or country.[1][2][3] The main functions of money
are distinguished as: a medium of exchange; a unit of account; a store
of value; and, occasionally in the past, a standard of deferred
payment.[4][5] Any kind of object or secure verifiable record that
fulfills these functions can be considered money.
Money is historically an emergent market phenomenon establishing a commodity money, but nearly all contemporary
money
systems are based on fiat money.[4] Fiat money, like any check or note
of debt, is without intrinsic 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"[
citation needed]. Such laws in practice cause fiat
money to acquire the value of any of the goods and services that it may be traded for within the nation that issues it.
The
money supply of a country consists of currency (banknotes and coins) and bank
money
(the balance held in checking accounts and savings accounts). Bank
money, which consists only of records (mostly computerized in modern
banking), forms by far the largest part of the
money supply in developed nations.[6][7][8]
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.[9] Instead, non-monetary societies operated largely
along the principles of gift economics and debt.[10][11] When barter
did in fact occur, it was usually between either complete strangers or
potential enemies.[12]
Many cultures around
the world eventually developed the use of commodity money. The shekel
was originally a unit of weight, and referred to a specific weight of
barley, which was used as currency.[13] 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
money 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.[14] It is thought by modern scholars
that these first stamped coins were minted around 650–600 BC.[15]
Song Dynasty
Jiaozi, the world's earliest paper money
The system of commodity
money eventually evolved into a system of representative money.[
citation needed]
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 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.[16] 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."[17] 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.
After
World War II, at the Bretton Woods Conference, most countries adopted
fiat currencies that were fixed to the US dollar. The US dollar was in
turn fixed to gold. In 1971 the US government suspended the
convertibility of the US dollar to gold. After this many countries
de-pegged their currencies from the US 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.
The word "money" is believed to originate from a
temple of Hera, located on Capitoline, one of Rome's seven hills. In the
ancient world Hera was often associated with money. The temple of Juno
Moneta at Rome was the place where the mint of Ancient Rome was
located.[18] 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'.[19]
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Business and economics portal
In the past,
money
was generally considered to have the following four main functions,
which are summed up in a rhyme found in older economics textbooks:
"Money is a matter of functions four, a medium, a measure, a standard, a
store." That is,
money
functions as a medium of exchange, a unit of account, a standard of
deferred payment, and a store of value.[5] However, 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 a
distinguished function, but rather subsuming it in the
others.[4][20][21]
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.[5] 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.[22] The term 'financial capital' is a more general and inclusive
term for all liquid instruments, whether or not they are a uniformly
recognized tender.
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 'double coincidence of wants' problem.
Main article: Unit of account
A
unit of account
is a standard numerical 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. To function as a 'unit of account', whatever is
being used as
money must be:
- Divisible into smaller units without loss of value; precious metals can be coined from bars, or melted down into bars again.
- Fungible: that is, one unit or piece must be perceived as equivalent
to any other, which is why diamonds, works of art or real estate are
not suitable as money.
- A specific weight, or measure, or size to be verifiably countable.
For instance, coins are often milled with a reeded edge, so that any
removal of material from the coin (lowering its commodity value) will be
easy to detect.
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.[4]
Main article: Standard of deferred payment
While
standard of deferred payment
is distinguished by some texts,[5] particularly older ones, other texts
subsume this under other functions.[4][20][21] 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.
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.
But its most important usage is as a method for comparing the values of
dissimilar objects.
money supply
money Base, M1 and M2 in the US from 1981 to 2012
Main article:
money supply
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 amount 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.
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.
money is 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 barter.
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.
Types of 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.
Commodity
money value comes from the commodity out of which it is made. The commodity itself constitutes the money, and the
money
is the commodity.[23] Examples of commodities that have been used as
mediums of exchange include gold, silver, copper, rice, 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.[24] American Eagles are imprinted with their gold
content and legal tender face value.[25]
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.[26]
Main article: Fiat money
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 to not accept the fiat currency as a means of
repayment for all debts, public and private.[27][28]
Some
bullion coins such as the 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 value).[25][29]
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.[30] 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, 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 equivalent.
Paper money
Main article: Banknote
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 China.
Song Dynasty
Jiaozi, the world's earliest paper money
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,[31] cheques, promissory notes,[32] savings accounts,
transactional accounts, loaning, trusts, exchange rates, the transfer of
credit and debt,[33] and banking institutions for loans and
deposits.[33]
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 stock.
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
