See
also: List of Economic Topics 
Money
Money
in theory is an agreement within a community, to use something as a medium of
exchange. This agreement to use whatever material as money can either be explicit
or implicit, freely chosen, or coerced.
(Bills
and coins of several countries and values)
The
emergence of monetary goods is not dependent on central authority or government.
It is a quite natural market phenomenon. But in practice, a minority which holds
military and/or information power take advantage of this money need, in order
to become the one and only money maker authority. History proves that most of
the times money is actually a coerced agreement. A small minority having power,
enforces (using violence or censorship) the vast majority of the community to
reconcile and to accept this small minority as the ultimate money maker authority.
Money material, produced by this small minority, is used within an economy as
the exclusive medium of exchange and acts as intermediary market good. Only this
"legitimate" money is allowed to take part in trades and exchanges of
other goods while any other medium of exchange is severely prohibited by law.(see
Money#Private_currencies).
Thus
in practice, money is the fruit of power and can be used for wielding or gaining
more power. Money is not an agreement anymore, it is a power share. Everyone who
uses the money produced by a money maker authority as a medium of exchange, recognizes
authority's power and wants to become a power shareholder. However, it is important
for power shareholders to understand that a money maker authority holds both the
power to share its own power to power shareholders and the power to take it back.
As
discussed below, money also has other characteristics.
Overview
Money
itself must be a scarce good. Many items have been used as money, from naturally
scarce precious metals and conch shells through cigarettes to entirely artificial
money such as banknotes.
Modern
money (and most ancient money too) is essentially a token -- an abstraction. Paper
currency is perhaps the most common type of physical money today. However, goods
such as gold or silver retain many of the essential properties of money.
The
origin of the word "money" comes from the Latin word "moneta",
which comes from the temple of Hera the Moneta where the Roman money came from,
in the early days of Rome.
In
Greek language, "Hera Mone tas" means the lonely Hera ("Mone tas"
is in Doric dialect, it is "Mone tes" in Ionic dialect). Zeus, once
upon times, punished Hera and tied her with a golden chain between earth and sky.
Hera , due to the fact that she was alone between sky and earth tied with gold,
was called moneres or mone (µ???) which means lonely, and this is where
the word money comes from. Hera, with the help of Hephaestus, broke the golden
chain and released herself. It is said that all gold found on earth (which forms
approximately a single cube 20 m a side, so you can imagine how Hera looked inside
it) originates from the fragments of this golden chain, which fall from the sky
and became human's mone(y). Maybe due to this fable, gold was used in ancien greece
only in temples, graves and jewels and there is not any ancien greek golden coin,
until the day Philip II of Macedon coined golden coins.
Essential
characteristics of money
Money
has the following three characteristics.
1.
It must be a medium of exchange
When
an object is in demand primarily for its use in exchange -- for its ability to
be used in trade to exchange for other things -- then it has this property.
This
characteristic allows money to be a standard of deferred payment, i.e., a tool
for the payment of debt.
2.
It must be a unit of account
When
the value of a 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.
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 must be a store of value
When
an object 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.
Many
goods or tokens have some of the characteristics outlined above. However no good
or token is money unless it can 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 criteria 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 credit and money are frequently used interchangeably. Even
in economics credit is often referred to as money. 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 in a modern economy a good or token should possess a number
of features:
It
must have a stable value.
It must be difficult to counterfeit.
It must
be easily divisible and transportable.
It must be fungible. That is, one artifact
of the token or good must be equivalent to another.
Modern
forms of money
When
using money anonymously, the most common methods are cash (either coin or banknotes)
and stored-value cards.
When
using money substitutes in such a way as to leave a financial record of the transaction,
the most common methods are checks, debit cards, credit cards, and digital cash.
Money
and economics
Money
is one of the most central topics studied in economics and forms its most cogent
link to finance.
The
amount of money in an economy directly affects inflation and interest rates and
hence has profound effects. 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) during the
1990s.
Modern
economics also faces a difficulty in deciding what exactly 'is' money. See money
supply
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. These arguments are covered in financial capital which
is a more general and inclusive term for all liquid instruments, whether or not
they are a uniformly recognized tender.
History
of money
Before money
Prior
to the introduction of money, barter was the only way to exchange goods. Bartering
has several problems, most notably timing constraints. If you wish to trade pigs
for wheat, you can only do this when the pigs and wheat are both available at
the same time and place - and without proper storage that may be a very brief
time. With a trade standard like gold, you can sell your pigs at the "best
time" and take the gold coins. You can then use that gold to buy wheat when
the harvest comes in. Thus the use of money makes all commodities become more
liquid.
Where
trade is common, barter systems usually lead quite rapidly to the emergence of
several key goods with monetary properties. In the early British colony of New
South Wales in Australia, rum emerged quite soon after settlement as the most
monetary of goods. When a nation is without a fiat currency system it is quite
common for the fiat currency of a neighbouring nation to emerge as the dominant
monetary good. In some prisons where conventional money is prohibited it is quite
common for goods such as cigarettes to take on a monetary quality. Gold has emerged
naturally from the world of barter again and again to take on a monetary function.
It should be noted that the emergence of monetary goods is not dependent on central
authority or government. It is a quite natural market phenomenon.
Commodity
money
Precious metals have been a common form of money, such as this
gold from Sveriges Riksbank.The first instances of money were objects which were
useful for their intrinsic value. This was known as commodity money and included
any commonly-available commodity that has intrinsic value; historical examples
include pigs, rare seashells, whale's teeth, and (often) cattle. In medieval Iraq,
bread was used as an early form of currency.
Spices
have been used as commodity money for long. Definite indications are available
that both black and white pepper have been used as commodity money for hundreds
of years before the Christ, as also several centuries thereafter. Being a valuable
commodity, pepper has naturally been used as payment. Attila the Hun reportedly
demanded 3,000 pounds in weight of pepper in 408 AD as part of a ransom for the
city of Rome. In the Middle Ages, there was a French saying, 'As dear as pepper'.
In England, rent could be paid in pounds of pepper.
Even
in the industrialised world, in the absence of other types of money, people have
occasionally used commodities such as tobacco as money. This last happened on
a wide scale after World War II when cigarettes became used unofficially in Europe,
in parallel with other currencies, for a short time.
Another
example of "commodity money" is shell money in the Solomon Islands.
Shells are painstakingly chipped into rough circles, filed down, and threaded
onto large necklaces, which are then used during marriage proposals; for instance,
a father may charge twenty shell money necklaces for his daughter's hand in marriage.
One
interesting example of commodity money is the huge limestone coins from the Micronesian
island of Yap, quarried at great peril from a source several hundred miles away.
The value of the coin was determined by its size — the largest of which could
range from nine to twelve feet in diameter and weigh several tons. Displaying
a large coin, often outside one's home, was a considerable status symbol and source
of prestige in that society. (Due to the great inconvenience, islanders would
often trade only promises of ownership of an individual coin instead of actually
moving it. In some cases, coins which had been lost at sea were still used for
exchange in this way. These agreements could be thought of as a kind of representative
money, described below.)
An
8-foot "coin" from the village of Gachpar, on Yap.Once a commodity becomes
used as money, it takes on a value that is often a bit different from what the
commodity is intrinsically worth or useful for. Being able to use something as
money in a society adds an extra use to it, and so adds value to it. This extra
use is a convention of society, and how extensive the use of money is within the
society will affect the value of the monetary commodity. So although commodity
money is real, it should not be seen as having a fixed value in absolute terms.
Its value is still socially determined to a large extent. A prime example is gold,
which has been valued differently by many different societies, but perhaps none
valued it more than those who used it as money. Fluctuations in the value of commodity
money can be strongly influenced by supply and demand whether current or predicted
(if a local gold mine is about to run out of ore, the relative market value of
gold may go up in anticipation of a shortage).
Money
can be anything that the parties agree is tradable, but the usability of a particular
sort of money varies widely. Desirable features of a good basis for money include
being able to be stored for long periods of time, dense so it can be carried around
easily, and difficult to find on its own so that it is actually worth something.
Again, supply and demand play a key role in determining value.
Metals
like gold and silver have been used as commodity money for thousands of years,
being in the form of metal dust, nuggets, rings, bracelets and assorted pieces.
Eventually the Lydians began coining gold and silver around 650BC.
Gold
and silver are both quite soft metals, and coins minted from the pure metals suffer
from wear or deformation in daily use. Fortunately these metals are also easily
alloyed with a less expensive metal, frequently copper, in order to improve the
durability of the resulting coins. Typically alloys of coinage metals, such as
sterling silver or 22 carat gold, are used to make coins more durable. These are
alloys of 90% or more precious metal as alloys of less than 90% do not improve
hardness or durability very much, and so are typically considered to be on the
slippery slope into monetary debasement.
Standardized
coinage
A Roman denarius, a standardized silver coin.It was the discovery
of the touchstone that paved the way for metal-based commodity money and coinage.
Any soft metal can be tested for purity on a touchstone, allowing one to quickly
calculate the total content of a particular metal in a lump. Gold is a soft metal,
which is also hard to come by, dense, and storable. For these reasons gold as
a money spread very quickly from Asia Minor where it first gained wide use, to
the entire world.
Using
such a system still required several steps and some math. The touchstone allowed
you to estimate the amount of gold in an alloy, which was then multiplied by the
weight to find the amount of gold alone in a lump.
To
make this process easier, the concept of standard coinage was introduced. Coins
were pre-weighed and pre-alloyed, so as long as you were aware of the origin of
the coin, no use of the touchstone was required. Coins were typically minted by
governments in a carefully protected process, and then stamped with an emblem
that guaranteed the weight and value of the metal. It was however extremely common
for governments to assert that the value of such money lay in its emblem and to
subsequently debase the currency by lowering the content of valuable metal.
Although
gold and silver were commonly used to mint coins, other metals could be used.
Ancient Sparta minted coins from iron to discourage its citizens from engaging
in foreign trade. In the early seventeenth century Sweden lacked more precious
metal and so produced "plate money," which were large slabs of copper
approximately 50cm or more in length and width, appropriately stamped with indications
of their value.
Metal
based coins had the advantage of carrying their value within the coins themselves
— they induced on the other hand manipulations: the clipping of coins in
attempts to get and recycle the precious metal. The bigger problem was the simple
co-existence of gold, silver and copper coins in Europe's nations. English and
Spanish traders valued gold coins at a higher rate of silver coins than their
neighbours would do, with the effect that the English gold-based guinea coin began
to rise against the English silver based crown in the 1670s and 1680s and with
the consequence that silver was ultimately pulled out of England for dubious amounts
of gold coming into the country at a rate no other European nation would share.
The effect was worsened with Asian traders not sharing the European appreciation
of gold altogether — gold left Asia and silver left Europe in quantities
European observers like Isaac Newton, Master of the Royal Mint observed with uneasiness
(http://www.pierre-marteau.com/currency/ed/newton-1717-09-25.html;).
Stability
came into the system with national Banks guaranteeing to change money into gold
at a promised rate, it did, however, not come easily. The Bank of England risked
a national financial catastrophe in the 1730s when customers demanded their money
to be changed into gold in a moment of crisis. Eventually London's merchants saved
the bank and the nation with financial guarantees.
See
also: Roman currency, coinage metal, for conversions of the European coins before
the introduction of paper money: The Marteau Early 18th-Century Currency Converter
(http://www.pierre-marteau.com/currency/converter.html).
Representative
money
An example of representative money, this 1896 note could be
exchanged for five US Dollars worth of silver.The system of commodity money in
many instances evolved into a system of representative money. In this system,
the material that constitutes the money itself had very little intrinsic value,
but none the less such money achieves significant market value through being scarce
as an artefact.
Paper
currency and non-precious coinage was backed by a government or bank's promise
to redeem it for a given weight of precious metal, such as silver. This is the
origin of the term "British Pound" for instance; it was a unit of money
backed by a Tower pound of sterling silver - hence the currency Pound Sterling.
For
much of the nineteenth and twentieth centuries, many currencies were based on
representative money through the use of the gold standard.
Fiat
money
An example of fiat money is the new, international currency,
the Euro. Its introduction changed the face of money, superseding many of the
world's oldest currencies.Fiat money refers to money that is not backed by reserves
of another commodity. The money itself is given value by government fiat (Latin
for "let it be done") or decree, enforcing legal tender laws, previously
known as "forced tender", whereby debtors are legally relieved of the
debt if they (offer to) pay it off in the government's money. By law the refusal
of "legal tender" money in favor of some other form of payment is illegal,
and has at times in history (Rome under Diocletian, and post-revolutionary France
during the collapse of the assignats) invoked the death penalty.
Governments
through history have often switched to forms of fiat money in times of need such
as war, sometimes by suspending the service they provided of exchanging their
money for gold, and other times by simply printing the money that they needed.
When governments produce money more rapidly than economic growth, the money supply
overtakes economic value. Therefore, the excess money eventually dilutes the market
value of all money issued. This is called inflation. See open market operations.
In
1971 the US finally switched to fiat money indefinitely. At this point in time
many of the economically developed countries' currencies were fixed to the US
dollar (see Bretton Woods Conference), and so this single step meant that much
of the western world's currencies became fiat money based.
Following
the first Gulf War the president of Iraq, Saddam Hussein, repealed the existing
Iraqi fiat currency and replaced it with a new currency. However, the old currency
continued to be used in the politically isolated Kurdish regions of Iraq. Despite
having no backing by a commodity and with no central authority mandating its use
or defending its value it continued to circulate within this Kurdish region. It
became known as the Swiss Dinar. This currency remained relatively strong and
stable for over a decade. It was formally replaced following the second Gulf War.
Credit
money
Credit
money often exists in parallel with other money such as fiat money or commodity
money, and from the user's point of view is indistinguishable from it. Most of
the western world's money is credit money derived from national fiat money currencies.
Strictly
speaking a debt is not money, primarily because debt can not act as a unit of
account. All debts are denominated in units of something external to the debt.
Hence credit money is not strictly money at all. However, credit money certainly
acts as a money substitute when it comes to the other functions of money (medium
of exchange and store of value). As such the existence of credit money may dampen
demand for the real money and in so doing alter the dynamics of money's market
value...
When
paper money is merely an IOU for something such as gold, then the paper itself
is not a unit of account but merely a convenient medium of exchange. Under a rigid
gold-standard with convertibility, paper currency is merely a debt instrument.
However, when paper money floats, its value is not defined by reference to an
external unit of account. It is no longer a debt instrument but rather it becomes
purely monetary and its value is a product of the dynamics of supply and demand.
Typically a central bank forces supply and the private sector forces demand. See
open market operations.
Credit
money tends to arise as a byproduct of lending and borrowing money. The following
example illustrates this.
Imagine
you have deposited some gold coins in a bank vault. The bank might lend the coins
to a second person based on a promise to pay equivalent coins back with a few
extra at a time in the future. The second person can in the meantime use the coins
normally as money. But you still own the coins, and you also could still use them
- you could transfer their ownership to another person to pay for something you
have bought by telling the bank to transfer them from your account to the other
person's account. You might do this by writing a check. So in this simple example
there are two people using the same coins as money at the same time. It's as if
new money has been created by the act of lending. Taking it another step, if the
second person spends the coins at a shop, and they end up being deposited back
into the bank by the shopkeeper, the bank can lend them again. Now you and the
shopkeeper can use the coins in the same way, by writing checks or the equivalent
in this example, and whoever borrows the coins a second time can use the coins
directly as money. So there are three people with financial use of the coins.
This can go on with many people ending up simultaneously using the same coins
financially, but for each extra user there is a promise to pay equivalent coins
back. These arrangements where many people use the same money simultaneously are
in many respects the same as if there was extra money. The extra money that there
appears to be is known as credit money. It is in regulating the amount of money
a bank can lend that the controlling authority can set the money supply and change
monetary policy. The credible promises to repay in a reasonable time give the
extra money its value. It tends to exist in parallel with another form of money
such as fiat money or commodity money, wherever banking-style loans are used,
and occurs as a by-product of lending. It could occur without banks, but banks
provide a degree of stability to the whole process by taking and evaluating the
risk involved in each loan.
During
the Crusades in Europe, precious goods would be entrusted to the Catholic Church's
Knights Templar, who effectively created a system of modern credit accounts. Over
time this system grew into the credit money that we know today, where banks create
money by approving loans - although the risk and reserve policies of each national
central bank sets a limit on this, requiring banks to keep reserves of fiat money
to back their deposits. Sometimes, as in the U.S.A. during the Great Depression
or the Savings and Loan crisis, trust in bank policies drops very low and government
must intervene to keep the industry of credit in operation.
Private
currencies
In
many countries, the issue of private paper currencies has been severely restricted
by law.
A
private $1 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,
during which almost anyone could issue their own paper money. 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. In
the other hand, according to Lawrence H. White's article in FEE (http://www.fee.org/vnews.php?nid=2794)
"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 Notes 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.
Today
there are several privately issued digital currencies in circulation that function
as money. Transactions in these currencies represent an annual turnover value
in billions of US dollars. Many of these private currencies are backed by older
forms of money such as gold (digital gold currencies). Of course, because money
is the fruit of power and can be used for wielding or gaining more power, the
one who accepts gold as legitimate money gives power to the people who own gold's
stocks. In the other hand gold is stable over thousands of years and has survived
the test of time. All the other materials have become less important as gold has
proved itself the superior unit of account. Basically, price fluctuations of gold
are not because the value of gold has changed, but because the value of the currency
has changed. The same happens with some other materials, like food or energy or
transport or accommodation. A plate of food has always the same value, whatever
its price is.
It
is possible for privately issued money to be backed by any other material, although
some people argue about perishables 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 watts) or by transport
(measured in kilogramme*kilometre/hour) or by food [1] (http://www.economist.com/markets/bigmac/displayStory.cfm?story_id=3503641)
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, its up to the community (or to the minority which holds
the power) to decide whether money should be backed by whatever material or should
be totally virtual.
Money
supply
Main
article: Money supply The money supply is the amount of money available within
a specific economy available for purchasing goods or sevrices. The supply is usually
considered as four escalating categories M0, M1, M2 and M3. The categories grow
in size with M3 representing all forms money and M0 being just physical money
(coins and bills). In the United States, the Federal Reserve is responsible for
controlling the money supply (monetary policy).
Growing
the money supply
Historically
money was a metal (gold, silver, 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:
Economics,
Banking & Finance
