   #copyright

Money

2007 Schools Wikipedia Selection. Related subjects: Currency

   Money is any good or token that functions as a medium of exchange that
   is socially and legally accepted in payment for goods and services and
   in settlement of debts. Money also serves as a standard of value for
   measuring the relative worth of different goods and services. Some
   authors explicitly require money to be a standard of deferred payment.
   Money is one of the most central topics studied in economics and forms
   its most cogent link to finance.

   In common usage, money refers more specifically to currency,
   particularly the many circulating currencies with legal tender status
   conferred by a national state; deposit accounts denominated in such
   currencies are also considered part of the money supply, although these
   characteristics are historically comparatively recent. Money may also
   serve as a means of rationing access to scarce resources and as a
   quantitative measure that provides a common standard for the comparison
   and valuation of quality as well as quantity, such as in the valuation
   of real estate or artistic works.

   The use of money provides an easier alternative to barter, which is
   considered in a modern, complex economy to be inefficient because it
   requires a coincidence of wants between traders, and an agreement that
   these needs are of equal value, before a transaction can occur. The
   efficiency gains through the use of money are thought to encourage
   trade and the division of labour, in turn increasing productivity and
   wealth.

History

Early commodity systems

   A number of commodity money systems were amongst the earliest forms of
   money to emerge. For example
     * the shekel referred to a specific volume of barley in ancient
       Babylon
     * iron sticks were used in Argos, before Pheidon's reforms.
     * cowries were used as a money in Africa (up until 19th Century),
       ancient China and throughout the South Pacific.
     * salt was used as a currency in pre-coinage societies in Europe.
     * ox-shaped ingots of copper seem to have functioned as a currency in
       the Bronze Age eastern Mediterranean.
     * state certified weights of gold and silver functioned as currency
       and gave rise to the development of coinage
     * rum-currency operated in the early European settlement of Sydney
       cove in Australia.
     * cash crops such as tobacco, rice, wheat, indigo, and maize were
       used as money in colonial Virginia.

   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 because of gold's useful physical
   properties besides its value due to monetary usage, 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. It quickly
   begins functioning as a store of value, since holders of perishable
   goods can easily convert them into durable money.

Coinage

   Coins are commonly used for the smaller denominations of a country's
   currency system. In the United States for example, coins come in 1, 5,
   10, 25, and 50 cents, and also 1 dollar. In Europe, coins come in 1, 2,
   5, 10, 20, and 50 euro cents, and also 1 euro and 2 euros. The larger
   denominations of currency in both regions consist of paper money. The
   same general phenomenon can be observed in the Philippines, Mexico,
   Singapore, China, Canada, South Africa, and many other societies
   throughout the world.

   The use of coins made of valuable material such as gold, silver of
   copper is commonly attributed to Croesus of Lydia in the 6th century
   BCE. However, some authorities claim a significantly earlier origin for
   coinage in China

The rise of fiat currencies

   The bulkiness and limited transportability of some forms of commodity
   money. This led to the invention of symbolic substitutes for commodity
   money. Goldsmiths' receipts became an accepted money-substitute for
   gold in 17th Century England. The goldsmiths were the precursors of
   leading banks in England and the receipts they issued were the
   precursors of the banknote. During the 19th Century commercial banks in
   Europe and North America issued their own banknotes based on the same
   principle of partial backing. In the US, the Free Banking Era lasted
   between 1837 and 1866.

   By the end of the 19th century, however, most countries prohibited
   private issues of banknotes or brought private issuers under the
   control of central banks.
   Banknotes from all around the world donated by visitors to the British
   Museum, London
   Banknotes from all around the world donated by visitors to the British
   Museum, London

   Banknotes (also known as paper money) and coins are the most liquid
   forms of symbolic money and are commonly used for small
   person-to-person transactions. There are also less tangible forms of
   money, which nevertheless serve the same functions as money. Cheques,
   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.

   The invention of symbolic substitutes for money further loosened the
   association between money and barter and opened the way for fiat money.
   Fiat money is currency that has negligible inherent value and is not
   backed by any commodity. A central authority (government) creates a new
   money object by issuing paper currency or creating new bank deposits.
   The widespread acceptance of fiat money is most frequently enhanced by
   the central authority mandating the money's acceptance as legal tender
   and demanding this money in payment of taxes or tribute.

   By the early 1970s almost all countries had abandoned the gold standard
   and converted their national currencies to pure fiat money. 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.

   Today's national currencies are backed by the governments that issue
   them, not by gold or silver, and the governments are backed by the
   productive capacity of the societies they represent.

Currency unions

   During the 20th century, it was normal for all independent states to
   have their own national currency, managed by a central bank. In 1999,
   however, a number of countries in the European Union adopted a common
   currency, the euro. From 1999 to 2002, the euro was a common unit of
   account co-existing with national currencies which continued to
   circulate. In 2002, euro-denominated notes and coins were issued, and
   rapidly displaced the previous national currencies, including the
   French franc, German mark and Italian lira.

   In addition, a number of countries including Ecuador and El Salvador
   have adopted the policy of dollarization, abandoning the national
   currency in favour of that of another country, most commonly the United
   States dollar.

   Economic analysis of currency unions focuses on two issues. The theory
   of optimum currency areas deals with the extent to which countries or
   regions experience common economic shocks and can therefore benefit
   from a common monetary policy. Countries with high levels of trade and
   similar economic structures may benefit from a currency union. The
   literature on central bank credibility deals with the conditions under
   which central banks can make a credible commitment to avoid inflation.
   When these conditions are not met, dollarization may be an appropriate
   policy response.

Major world currencies

   Bloomberg L.P. lists the following major currencies used in trading.
     * Australia - Australian Dollar (AUD)
     * Canada - Canadian Dollar (CAD)
     * European Monetary Union (EUR-13) - 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 globally on the
   currency markets:
     * Gold (XAU) quoted in 1 ounce increments
     * Silver (XAG) quoted in 1000 ounce increments

   In addition, the Chinese Renminbi is an important currency in
   international trade, but trade in financial markets is subject to
   central bank restrictions.

Social and political impact of money

   The evolution of money illustrates how each new social institution
   creates linkages with other existing social institutions as it develops
   and those linkages gradually expand into complex networks of
   relationships until they become inseparable elements of a single social
   web. The evolution of money began as a medium of exchange and measure
   of value money, thus serving as a stimulant for the exchange of goods
   and services. It has ended as a force for restructuring political and
   social relationships.

   Over time, money has helped breakdown the rigid class structure which
   allocated privileges according to one’s birth. In a money economy
   access to goods and services is based on the capacity to pay rather
   than one’s social origins. Thus it helps eliminate social
   discrimination based on caste and class.

   As a medium for storage of value, it gave rise to banking. Banks pooled
   economic resources, and provided a legal structure for transporting
   money over great distances. This in turn allowed the development of
   capital intensive trade routes around the globe. At a later date,
   pooled capital permitted large scale investments in productive capacity
   and infrastructure, thus facilitating the industrial revolution.

   Money has also changed political and social structure. The ever
   increasing need of that government for more funds created the need for
   taxation and made governments increasingly dependent and subject to
   those sections of society that possessed or controlled large sums of
   money. The right to collect taxes initially helped monarchy centralize
   power and influence in a national government. The English Parliament
   eventually wrested power from the king by first acquiring the sole
   right to raise taxes, paving the way for democracy.

   Money has also played an important role in population migrations and
   the shifting balance of power between individuals, the state and
   religious institutions. The desire to add Jewish wealth to Catholic and
   Spanish treasuries helped trigger the Spanish inquisition. Many
   Catholics fled England after Henry the 8th dissolved the catholic
   monasteries and confiscated their treasuries.

   The need for large sums of money helped limit the power of absolute
   monarchs and caused the realignment of social roles. Despite their
   philosophical and religious claims, to absolute power the monarchs of
   the middle ages were frequently dependent on wealthy bankers and
   traders for the funds to wage war. This forced a limited form of power
   sharing and rule by consensus. In some cases, particularly in Italy,
   oligarchies of rich merchants, rather than hereditary rulers governed.

   Money also played a limiting role in religious discrimination. Despite
   the Catholic church's many attempts to isolate Jews from the
   surrounding Christian society, Jews were periodically invited to move
   into a country as a way of stimulating trade across Europe and the far
   east. Because Jews were found all along the trade routes and their use
   of Hebrew provided a common language for trade from Europe to China.
   Their historic role in banking was as much stimulated by their unique
   position on trade routes as by the oft cited Catholic edicts against
   usury

Economic characteristics

   Money is generally considered to have the following characteristics,
   which are summed up in a rhyme found older economics textbooks and a
   primer: "Money is a matter of functions four, a medium, a measure, a
   standard, a store."

   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.

Medium of exchange

   A medium of exchange is an intermediary used in trade. An effective
   medium of exchange should have the following characteristics:
     * It should also be recognizable as something of value. Person A
       should recognize the value of the item so that Person B can give it
       to A in exchange for goods or services.
     * 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. Some countries (such as Australia, New Zealand, Mexico and
       Singapore) are making their bank notes out of plastic for increased
       durability. Gold coins are often mixed with copper to improve
       durability.
     * It should minimize contamination and contagion. Since money is
       frequently handled it becomes a pathway for infectious disease
       transmission. Recent studies have shown that the area in business
       offices that show the highest contamination by disease causing
       organisms is the accounting office where money must be counted and
       handled.

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 pre-requisite for the formulation of
   commercial agreements that involve debt.

   An effective unit of account 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 and live animals are not suitable as money.
     * 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.
     * A specific weight, or measure, or size to be verifiably countable.
       For instance, coins are often made with ridges around the edges, so
       that any removal of material from the coin (lowering its commodity
       value) will be easy to detect.

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. Fiat currency like paper
   or electronic currency no longer backed by gold in most countries is
   not considered by some economists to be a storage of value.

   An effective store of value should have the following characteristics:
     * It should be long lasting and 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.

Market liquidity

   The fourth and final function of money, as a means of liquidity. It is
   important for any economy to move beyond a simple system of bartering.
   Liquidity describes how easy it is an item can be traded for something
   that you want, 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 a 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

   In economics, money is a broad term that refers to any instrument that
   can be used in the resolution of debt. However, not all money is
   created equal.

   One early theoretician, Ludwig von Mises, argued for the importance of
   distinguishing between three types of money: commodity money, fiat
   money, and credit money. Each carries different economic strengths and
   liabilities - a point driven home in his book The Theory of Money and
   Credit.

   Modern monetary theory also distinguishes between different types of
   money, using a categorization system that focuses on the liquidity of
   money.

Commodity money

   Commodity money is any money that is both used as a general purpose
   medium of exchange and as a tradable commodity in its own right.

   Commodity based currencies are often viewed as more stable, but this is
   not always the case. The value of a commodity based currency as a
   medium of exchange depends on its supply relative to other goods and
   services available in the economy.

   Historically, gold, silver and other metals commonly used in commodity
   based monetary systems have been subject to regular and sometimes
   extraordinary fluctuations in purchasing power. This not only damages
   its stability as a medium of exchange; it also reduces its
   effectiveness as a store of value. In the 1500 and 1600's huge
   quantities of gold and even larger amounts of silver were discovered in
   the New World and brought back to Europe for conversion into coin, the
   purchasing power of those coins fell by 60% to 80%, i.e. prices of
   commodities rose, because the supply of goods for sale did not keep
   pace with the increased supply of money. In addition, the relative
   value of silver to gold shifted dramatically downward. More recently,
   from 1980 to 2001, gold was a particularly poor store of value, as gold
   prices dropped from a high of $850/oz. to a low of $255/oz. The
   advantage of gold and silver, however, lies in the fact that, unlike
   fiat paper currency, the supply cannot be increased arbitrarily by a
   central bank.

   It is also possible for the trading value of a commodity money to be
   greater than its value as a medium of exchange. When this happens
   people will often start melting down coins and reselling the metal used
   to make them. This has happened periodically in the United States,
   eventually causing it to move away from pure silver nickels and pure
   copper pennies. Shipping coins from one jurisdiction to another so that
   they could be reminted was sometimes a lucrative trade before the
   advent of trusted paper money.

   Commodity money's ability to function as a store of value is also
   limited by its very nature. Copper and tin risk rust and corrosion.
   Gold and silver are soft metals that can lose weight through scratches
   and abrasions.

   Stability aside, commodity based currencies are limiting in a rapidly
   growing or very active economy. The supply of money in an economy must
   be equal or greater than the volume of trade. If commodities are used
   as money, then the money supply must equal the total amount of goods
   and services sold. In a large economy, the volume of trade can easily
   outstrip the supply of any one commodity.

   This problem is compounded by the fact that money also serves as a
   store of value. This encourages hoarding and takes the commodity money
   out circulation, reducing the supply. The supply of circulating
   commodity currency is further reduced by the fact that commodity moneys
   also have competing non-monetary uses. For example, gold and silver is
   used in jewelery and nickel and copper have important industrial uses.

   Commodity based currencies also limit the geographic extent of the
   trading market. To make large purchases either a large volume or a high
   weight or both of the commodity must be transported to the seller. The
   cost of transportation of the currency raises the transaction cost and
   makes long distance sales less attractive.

Fiat money

   Fiat money is any money whose value is determined by legal means rather
   than the relative availability of goods and services. Fiat money may be
   symbolic of a commodity or government promises.

   Fiat money provides solutions to several limitations of commodity
   money. Depending on the laws, there may be little or no need to
   physically transport the money - an electronic exchange may be
   sufficient. Its sole use is as a medium of exchange so its supply is
   not limited by competing alternate uses. It can be printed without
   limit, so there is no limit on trade volumes.

   Fiat money, especially in the form of paper or coins, can be easily
   damaged or destroyed. However, it has has an advantage over 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 US government will replace mutilated paper money if at
   least half of the bill can be reconstructed.. By contrast commodity
   money is gone for good.

   Paper money is especially vulnerable to everyday hazards: from fire,
   water, termites, and simple wear and tear. Money in the form of minted
   coins is sometimes destroyed by children placing it on railroad tracks
   or in amusement park machines that restamp it. In order to reduce
   replacement costs, many countries are converting to plastic bills. For
   example, Mexico has changed its twenty and fifty pesos notes, Singapore
   its $2 and $10 bills, Malaysia with $1,$5,$10,$50 and $100, and
   Australia and New Zealand their $5, $10, $20, $50 and $100 to plastic
   for the increased durability.

   Some of the benefits of fiat money can be a double-edged sword. For
   example, if the amount of money in active circulation outstrips the
   available goods and services for sale, the effect can be inflationary.
   This can easily happen if governments print money without attention to
   the level of economic activity or counterfeiters are allowed to
   flourish.

   Perhaps the biggest criticism of paper money relates to the fact that
   its stability is highly dependent on the stability of the legal system
   backing the currency. Should the legal system fail, so would the
   currency that depends on it.

Credit money

   Credit money is any claim against a physical or legal person that can
   be used for the purchase of goods and services. Credit money differs
   from commodity and fiat money in two important ways: It is not payable
   on demand and there is some element of risk that the real value upon
   fulfillment of the claim will not be equal to real value expected at
   the time of purchase.

   This risk comes about in two ways and affects both buyer and seller.

   First it is a claim and the claimant may default (not pay). High levels
   of default have destructive supply side effects. If manufacturers and
   service providers do not recieve payment for the goods they produce,
   they will not have the resources to buy the labor and materials needed
   to produce new goods and services. This reduces supply, increases
   prices and raises unemployment, possibly triggering a period of
   stagflation. In extreme cases, widespread defaults can cause a lack of
   confidence in lending institutions and lead to economic depression. For
   example, abuse of credit arrangements is considered one of the
   significant causes of the Great Depression of the 1930s.

   The second source of risk is time. Credit money is a promise of future
   payment. If the interest rate on the claim fails to compensate for the
   combined impact of the inflation (or deflation) rate and the time value
   of money, the seller will receive less real value than anticipated. If
   the interest rate on the claim overcompensates, the buyer will pay more
   than expected.

Money supply

   Components of US money supply (M1, M2, and M3) since 1959
   Components of US money supply (M1, M2, and M3) since 1959

   The money supply is the amount of money available within a specific
   economy available for purchasing goods or services. The supply in the
   US 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 US, 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
   significant 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 1848. 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 century when gold
   was used as money in the US from 1792 to 1913.

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 that the 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 on
   imported goods, inability to export goods, and even total monetary
   collapse and the adoption of a much less efficient barter economy. This
   happened in Russia, for instance, after the fall of the Soviet Union.

   Governments and central banks have taken both regulatory and free
   market approaches to monetary policy. Some of the various tools used to
   control the money supply include:
     * currency purchases or sales
     * increasing or lowering government spending
     * increasing or lowering government borrowing
     * changing the rate at which the government loans or borrows money
     * manipulation of exchange rates
     * taxation or tax breaks on imports or exports of capital into a
       country
     * raising or lowering bank reserve requirements
     * regulation or prohibition of private currencies

   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.

   Technical, institutional, and legal changes changed the nature of the
   demand for money during the 1980s and the influence of monetarism has
   since decreased.

Social and psychological value of money

   Money is universally valued; Money today is valued for the products and
   services for which it can be exchanged, the security it provides
   against unexpected needs, the economic power it generates, the
   political influence it exerts, the social status it offers to those who
   possess it, and also the self-confidence and sense of accomplishment it
   fosters in those who earn it.

   Theories abound to explain the economic value of money in terms of
   purchasing power. But in order to fully understand the value of money,
   economic theory is not sufficient. Money has acquired the all-pervasive
   value that it possesses today by a slow evolutionary process that can
   be most easily understood by tracing its social and psychological
   origins from ancient times. Money has to be viewed in a wider context
   as a social institution based on the consent of the population and as a
   psychological symbol based on the consent of the individual.

Quotations on money

     * "No one can serve two masters, for either he will hate the one and
       love the other; or else he will be devoted to one and despise the
       other. You can't serve both God and Mammon." Gospel of Matthew 6:24
     * "For the love of money is a root of all kinds of evil: which while
       some coveted after, they have erred from the faith, and pierced
       themselves through with many sorrows." First Epistle to Timothy
       6:10
     * "When it's a question of money, everybody is of the same religion."
       Voltaire
     * "Only when the last tree has died and the last river been poisoned
       and the last fish been caught will we realise we cannot eat money."
       Cree proverb
     * "When I have money, I get rid of it quickly, lest it find a way
       into my heart." John Wesley
     * "Money. It's a gas." Pink Floyd
     * "Everybody loves money. That's why it's called 'money'." Danny
       DeVito
     * "Money doesn't talk, it swears." Bob Dylan
     * "I spend money with reckless abandon. Last month I blew five
       thousand dollars at a reincarnation seminar. I got to thinking,
       what the hell, you only live once." Ronnie Shakes
     * "So you think that money is the root of all evil? Have you ever
       asked what is the root of money? Money is a tool of exchange, which
       can't exist unless there are goods produced and men able to produce
       them. Money is the material shape of the principle that men who
       wish to deal with one another must deal by trade and give value for
       value. Money is not the tool of the moochers, who claim your
       product by tears or of the looters, who take it from you by force.
       Money is made possible only by the men who produce. Is this what
       you consider evil?" Ayn Rand
     * "The study of money, above all other fields in economics, is one in
       which complexity is used to disguise truth or to evade truth, not
       to reveal it. The process by which banks creates money is so simple
       that mind is repelled." John Kenneth Galbraith
     * "If you want to know what a man is really like, take notice of how
       he acts when he loses money." New England Proverb
     * "Money is worthless unless some people have it and others do not"

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