Money

Money

Overview
Money is any object
Object
Object may refer to:* Object , a thing, being or concept** Entity, something that is tangible and within the grasp of the senses* As used in object relations theories of psychoanalysis, that to which a subject relates....

 or record that is generally accepted as payment
Payment
A payment is the transfer of wealth from one party to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfill a legal obligation....

 for goods and services
Goods and services
In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility. It is often used when referring to a Goods and Services Tax....

 and repayment of debts in a given country
Country
A country is a region legally identified as a distinct entity in political geography. A country may be an independent sovereign state or one that is occupied by another state, as a non-sovereign or formerly sovereign political division, or a geographic region associated with a previously...

 or socio-economic context. The main functions of money are distinguished as: a medium of exchange
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...

; a unit of account
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....

; a store of value
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

; and, occasionally in the past, a standard of deferred payment
Standard of deferred payment
A standard of deferred payment is the accepted way, in a given market, to settle a debt – a unit in which debts are denominated. It is one of the defining functions of money; for example, while the gold standard reigned, gold or any currency convertible to gold at a fixed rate constituted such a...

. Any kind of object or secure verifiable record that fulfills these functions can serve as money.

Money originated as commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....

, but nearly all contemporary money systems are based on fiat money
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...

.
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Unanswered Questions
Quotations

Ploratur lacrimis amissa pecunia veris.

Lost money is wept for with real tears.

Juvenal, Satires 13, v. 134

Crescit amor nummi quantum ipsa pecunia crescit,Et minus hanc optat, qu non habet.

Translation: Increase of wealth increases our desiresAnd hew, who least possesses, least requires.

Alt. Translation: The love of money grows as the money itself grows.

Juvenal, Satires 14, v. 139

Quid faciant leges, ubi sola pecunia regnat?

What power has law where only money rules?

Petronius, Satyricon, Cap. XIV

That's just a lie we tell poor people to keep them from rioting in the streets.

Eva Longoria Parker|Eva Longoria Parker, Desperate Housewives In response to the claim that money can't buy happiness.

Money, now this has to be some good shit.

Martin Amis, Money, a Suicide Note (1984)
Encyclopedia
Money is any object
Object
Object may refer to:* Object , a thing, being or concept** Entity, something that is tangible and within the grasp of the senses* As used in object relations theories of psychoanalysis, that to which a subject relates....

 or record that is generally accepted as payment
Payment
A payment is the transfer of wealth from one party to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfill a legal obligation....

 for goods and services
Goods and services
In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility. It is often used when referring to a Goods and Services Tax....

 and repayment of debts in a given country
Country
A country is a region legally identified as a distinct entity in political geography. A country may be an independent sovereign state or one that is occupied by another state, as a non-sovereign or formerly sovereign political division, or a geographic region associated with a previously...

 or socio-economic context. The main functions of money are distinguished as: a medium of exchange
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...

; a unit of account
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....

; a store of value
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

; and, occasionally in the past, a standard of deferred payment
Standard of deferred payment
A standard of deferred payment is the accepted way, in a given market, to settle a debt – a unit in which debts are denominated. It is one of the defining functions of money; for example, while the gold standard reigned, gold or any currency convertible to gold at a fixed rate constituted such a...

. Any kind of object or secure verifiable record that fulfills these functions can serve as money.

Money originated as commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....

, but nearly all contemporary money systems are based on fiat money
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...

. Fiat money is without intrinsic use value
Use value
Use value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...

 as a physical commodity, and derives its value by being declared by a government to be legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....

; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private".

The money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 of a country consists of currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...

 (banknotes and coins) and bank money (the balance held in checking accounts and savings account
Savings account
Savings accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money . These accounts let customers set aside a portion of their liquid assets while earning a monetary return...

s). Bank money usually forms by far the largest part of the money supply.

History




The use of barter
Barter
Barter is a method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is usually bilateral, but may be multilateral, and usually exists parallel to monetary systems in most developed countries, though to a...

-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. Instead, non-monetary societies operated largely along the principles of gift economics. When barter did occur, it was usually between either complete strangers or potential enemies.

Many cultures around the world eventually developed the use of commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....

. The shekel
Shekel
Shekel , is any of several ancient units of weight or of currency. The first usage is from Mesopotamia around 3000 BC. Initially, it may have referred to a weight of barley...

 was originally a unit of weight, and referred to a specific weight of barley
Barley
Barley is a major cereal grain, a member of the grass family. It serves as a major animal fodder, as a base malt for beer and certain distilled beverages, and as a component of various health foods...

, which was used as currency. The first usage of the term came from Mesopotamia
Mesopotamia
Mesopotamia is a toponym for the area of the Tigris–Euphrates river system, largely corresponding to modern-day Iraq, northeastern Syria, southeastern Turkey and southwestern Iran.Widely considered to be the cradle of civilization, Bronze Age Mesopotamia included Sumer and the...

 circa 3000 BC. Societies in the Americas, Asia, Africa and Australia used shell money – often, the shells of the money cowry
Cowry
Cowry, also sometimes spelled cowrie, plural cowries, is the common name for a group of small to large sea snails, marine gastropod molluscs in the family Cypraeidae, the cowries...

 (Cypraea moneta L. or C. annulus L.). According to Herodotus
Herodotus
Herodotus was an ancient Greek historian who was born in Halicarnassus, Caria and lived in the 5th century BC . He has been called the "Father of History", and was the first historian known to collect his materials systematically, test their accuracy to a certain extent and arrange them in a...

, the Lydians
Lydians
The Lydians were the inhabitants of Lydia, a region in western Anatolia, who spoke the distinctive Lydian language, an Indo-European language of the Anatolian group....

 were the first people to introduce the use of gold and silver coin
Silver coin
Silver coins are possibly the oldest mass produced form of coinage. Silver has been used as a coinage metal since the times of the Greeks. Their silver drachmas were popular trade coins....

s. It is thought by modern scholars that these first stamped coins
COinS
ContextObjects in Spans, commonly abbreviated COinS, is a method to embed bibliographic metadata in the HTML code of web pages. This allows bibliographic software to publish machine-readable bibliographic items and client reference management software to retrieve bibliographic metadata. The...

 were minted around 650–600 BC.

The system of commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....

 eventually evolved into a system of representative money
Representative money
The term representative money has been used variously to mean:*a claim on a commodity, for example gold certificates or silver certificates. In this sense it may be called 'commodity-backed money'....

. This occurred because gold and silver merchants or banks would issue receipts to their depositors – redeemable for the commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as 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
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...

 during the Song Dynasty
Song Dynasty
The Song Dynasty was a ruling dynasty in China between 960 and 1279; it succeeded the Five Dynasties and Ten Kingdoms Period, and was followed by the Yuan Dynasty. It was the first government in world history to issue banknotes or paper money, and the first Chinese government to establish a...

. These banknotes, known as "jiaozi
Jiaozi (currency)
Jiaozi is a form of banknote which appeared around 10th century in the Sichuan capital of Chengdu, China. Most numismatists generally regard it as the first paper money in history, a development of the Chinese Song Dynasty ....

", evolved from promissory notes that had been used since the 7th century. However, they did not displace commodity money, and were used alongside coins. Banknotes were first issued in Europe by Stockholms Banco
Stockholms Banco
Stockholms Banco in Sweden was the first European bank to print banknotes. The bank was founded in 1657 by Johan Palmstruch and began printing banknotes in 1661...

 in 1661, and were again also used alongside coins.
The gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...

, a monetary system
Monetary system
A monetary system is anything that is accepted as a standard of value and measure of wealth in a particular region.However, the current trend is to use international trade and investment to alter the policy and legislation of individual governments. The best recent example of this policy is the...

 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
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....

, 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
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

, 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.

Etymology


The word "money" is believed to originate from a temple of Hera
Hera
Hera was the wife and one of three sisters of Zeus in the Olympian pantheon of Greek mythology and religion. Her chief function was as the goddess of women and marriage. Her counterpart in the religion of ancient Rome was Juno. The cow and the peacock were sacred to her...

, 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. The name "Juno" may derive from the Etruscan goddess Uni
Uni (mythology)
Uni was the supreme goddess of the Etruscan pantheon and the patron goddess of Perugia. Uni was identified by the Etruscans as their equivalent of Juno in Roman mythology and Hera in Greek mythology....

 (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'.

Functions



In the past, money was generally considered to have the following four main functions, which are summed up in a rhyme
Rhyme
A rhyme is a repetition of similar sounds in two or more words and is most often used in poetry and songs. The word "rhyme" may also refer to a short poem, such as a rhyming couplet or other brief rhyming poem such as nursery rhymes.-Etymology:...

 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
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...

, a unit of account
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....

, a standard of deferred payment
Standard of deferred payment
A standard of deferred payment is the accepted way, in a given market, to settle a debt – a unit in which debts are denominated. It is one of the defining functions of money; for example, while the gold standard reigned, gold or any currency convertible to gold at a fixed rate constituted such a...

, and a store of value
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

. However, modern textbooks now list only three functions, that of medium of exchange
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...

, unit of account
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....

, and store of value
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

, not considering a standard of deferred payment as a distinguished function, but rather subsuming it in the others.

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
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...

 is in conflict with its role as a store of value
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

: its role as a store of value requires holding it without spending, whereas its role as a medium of exchange requires it to circulate. 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. The term '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


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.

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
    Fungibility
    Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, wheat, precious metals or currencies...

    : that is, one unit or piece must be perceived as equivalent to any other, which is why diamond
    Diamond
    In mineralogy, diamond is an allotrope of carbon, where the carbon atoms are arranged in a variation of the face-centered cubic crystal structure called a diamond lattice. Diamond is less stable than graphite, but the conversion rate from diamond to graphite is negligible at ambient conditions...

    s, works of art
    Art
    Art is the product or process of deliberately arranging items in a way that influences and affects one or more of the senses, emotions, and intellect....

     or real estate
    Real estate
    In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...

     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
    Milled coinage
    In numismatics, the term milled coinage is used to describe coins which are produced by some form of machine, rather than by manually hammering coin blanks between two dies or casting coins from dies.-History:The earliest machine known for producing coins is the screw press, invented by Leonardo...

    , 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 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
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

, by reducing the value of money, diminishes the ability of the money to function as a store of value.

Standard of deferred payment



While standard of deferred payment is distinguished by some texts, particularly older ones, other texts subsume this under other functions. A "standard of deferred payment" is an accepted way to settle a debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

 – a unit in which debts are denominated, and the status of money as legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....

, 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
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

 and deflation, and for sovereign and international debts via debasement
Debasement
Debasement is the practice of lowering the value of currency. It is particularly used in connection with commodity money such as gold or silver coins...

 and devaluation
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....

.

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
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 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
Market liquidity
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...

 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
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...

 by firms and households in the economy. M0 is base money, or the amount of money actually issued by the central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

 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.

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
Liberty
Liberty is a moral and political principle, or Right, that identifies the condition in which human beings are able to govern themselves, to behave according to their own free will, and take responsibility for their actions...

 to trade goods and services easily without having to barter.

Liquid financial instruments are easily tradable
Tradable
Tradability is the property of a good or service that can be sold in another location distant from where it was produced. A good that is not tradable is called non-tradable. Different goods have differing levels of tradability: the higher the cost of transportation and the shorter the shelf life,...

 and have low transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...

s. 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
Representative money
The term representative money has been used variously to mean:*a claim on a commodity, for example gold certificates or silver certificates. In this sense it may be called 'commodity-backed money'....

, such as the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of 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
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...

 in the early 1970s.

Commodity money




Many items have been used as commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....

 such as naturally scarce precious metal
Precious metal
A precious metal is a rare, naturally occurring metallic chemical element of high economic value.Chemically, the precious metals are less reactive than most elements, have high lustre, are softer or more ductile, and have higher melting points than other metals...

s, conch shells, barley
Barley
Barley is a major cereal grain, a member of the grass family. It serves as a major animal fodder, as a base malt for beer and certain distilled beverages, and as a component of various health foods...

, beads etc., as well as many other things that are thought of as having value
Intrinsic theory of value
An intrinsic theory of value is any theory of value in economics which holds that the value of an object, good or service, is intrinsic or contained in the item itself...

. 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. Examples of commodities that have been used as mediums of exchange include gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...

, silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...

, copper
Copper
Copper is a chemical element with the symbol Cu and atomic number 29. It is a ductile metal with very high thermal and electrical conductivity. Pure copper is soft and malleable; an exposed surface has a reddish-orange tarnish...

, rice
Rice
Rice is the seed of the monocot plants Oryza sativa or Oryza glaberrima . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East Asia, Southeast Asia, South Asia, the Middle East, and the West Indies...

, 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
Price system
In economics, a price system is any economic system that affects its distribution of goods and services with prices and employing any form of money. Except for possible remote and primitive communities, all modern societies use price systems to allocate resources...

 economies. Use of commodity money is similar to barter, but a commodity money provides a simple and automatic unit of account
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....

 for the commodity which is being used as money. Although some gold coins such as the Krugerrand
Krugerrand
The Krugerrand is a South African gold coin, first minted in 1967 to help market South African gold. The coin, produced by the South African Mint, proved popular and by 1980 the Krugerrand accounted for 90% of the gold coin market. The name itself is a compound of Kruger and rand, the South...

 are considered legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....

, 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
Millesimal fineness
Millesimal fineness is a system of denoting the purity of platinum, gold and silver alloys by parts per thousand of pure metal by mass in the alloy. For example, an alloy containing 75% gold is denoted as "750". Many European countries use decimal hallmark stamps Millesimal fineness is a system of...

 content.
American Eagles
American Gold Eagle
The American Gold Eagle is an official gold bullion coin of the United States. Authorized under the Gold Bullion Coin Act of 1985, it was first released by the United States Mint in 1986.- Details :...

 are imprinted with their gold content and legal tender face value
Face value
The Face value is the value of a coin, stamp or paper money, as printed on the coin, stamp or bill itself by the minting authority. While the face value usually refers to the true value of the coin, stamp or bill in question it can sometimes be largely symbolic, as is often the case with bullion...

.

Representative money


In 1875 economist William Stanley Jevons
William Stanley Jevons
William Stanley Jevons was a British economist and logician.Irving Fisher described his book The Theory of Political Economy as beginning the mathematical method in economics. It made the case that economics as a science concerned with quantities is necessarily mathematical...

 described what he called "representative money
Representative money
The term representative money has been used variously to mean:*a claim on a commodity, for example gold certificates or silver certificates. In this sense it may be called 'commodity-backed money'....

," i.e., money that consists of token coin
Token coin
In the study of numismatics, tokens are coin-like objects used instead of coins. The field of tokens is part of exonumia. Tokens are used in place of coins and either have a denomination shown or implied by size, color or shape...

s, or other physical tokens such as certificates, that can be reliably exchanged for a fixed quantity of a commodity such as gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...

 or silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...

. 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.

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
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...

 in the U.S.) to be legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....

, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private.

Some bullion coins such as the Australian Gold Nugget
Australian Gold Nugget
The Australian Gold Nugget is a gold bullion coin minted by the Perth Mint. The coins have been minted in denominations of 1/20 oz, 1/10 oz, 1/4 oz, 1/2 oz, 1 oz, 2 oz, 10 oz, and 1 kg of 24 carat gold...

 and American Eagle
American Gold Eagle
The American Gold Eagle is an official gold bullion coin of the United States. Authorized under the Gold Bullion Coin Act of 1985, it was first released by the United States Mint in 1986.- Details :...

 are legal tender, however, they trade based on the market price
Market price
In economics, market price is the economic price for which a good or service is offered in the marketplace. It is of interest mainly in the study of microeconomics...

 of the metal content as a commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....

, rather than their legal tender face value
Face value
The Face value is the value of a coin, stamp or paper money, as printed on the coin, stamp or bill itself by the minting authority. While the face value usually refers to the true value of the coin, stamp or bill in question it can sometimes be largely symbolic, as is often the case with bullion...

 (which is usually only a small fraction of their bullion value).

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
Federal Reserve Note
A Federal Reserve Note is a type of banknote used in the United States of America. Federal Reserve Notes are printed by the United States Bureau of Engraving and Printing on paper made by Crane & Co. of Dalton, Massachusetts. They are the only type of U.S...

 (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. By contrast, commodity money which has been lost or destroyed cannot be recovered.

Currency



Currency refers to physical objects generally accepted as a medium of exchange
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...

. These are usually the coins
COinS
ContextObjects in Spans, commonly abbreviated COinS, is a method to embed bibliographic metadata in the HTML code of web pages. This allows bibliographic software to publish machine-readable bibliographic items and client reference management software to retrieve bibliographic metadata. The...

 and banknotes of a particular government, which comprise the physical aspects of a nation's money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

. The other part of a nation's money supply consists of bank deposits (sometimes called deposit money), ownership of which can be transferred by means of cheque
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...

s, debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...

s, or other forms of money transfer. Deposit money and currency are money in the sense that both are acceptable as a means of payment.

Money in the form of currency has predominated throughout most of history. Usually (gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...

 or silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...

) coins of intrinsic value (commodity money
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....

) have been the norm. However, nearly all contemporary money systems are based on fiat money
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...

 – modern currency has value only by government order (fiat). Usually, the government declares the fiat currency (typically notes and coins issued by the central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

) to be legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....

, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private.

Commercial bank money


Commercial bank money or demand deposit
Demand deposit
Demand deposits, bank money or scriptural money are funds held in demand deposit accounts in commercial banks. These account balances are usually considered money and form the greater part of the money supply of a country.-History:...

s are claims against financial institutions that can be used for the purchase of goods and services. A demand deposit account is an account from which funds can be withdrawn at any time by check or cash withdrawal without giving the bank or financial institution any prior notice. Banks have the legal obligation to return funds held in demand deposits immediately upon demand (or 'at call'). Demand deposit withdrawals can be performed in person, via checks or bank drafts, using automatic teller machines (ATMs), or through online banking
Online banking
Online banking allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.-Features:...

.

Commercial bank money is created through fractional-reserve banking
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...

, the banking practice where bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

s keep only a fraction of their deposits
Demand deposit
Demand deposits, bank money or scriptural money are funds held in demand deposit accounts in commercial banks. These account balances are usually considered money and form the greater part of the money supply of a country.-History:...

 in reserve
Bank reserves
Bank reserves are banks' holdings of deposits in accounts with their central bank , plus currency that is physically held in the bank's vault . The central banks of some nations set minimum reserve requirements...

 (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand. Commercial bank money differs from commodity and fiat money in two ways, firstly it is non-physical, as its existence is only reflected in the account ledgers of banks and other financial institutions, and secondly, there is some element of risk that the claim will not be fulfilled if the financial institution becomes insolvent. The process of fractional-reserve banking has a cumulative effect of money creation
Money creation
In economics, money creation is the process by which the money supply of a country or a monetary region is increased due to some reason. There are two principal stages of money creation. First, the central bank introduces new money into the economy by purchasing financial assets or lending money...

 by commercial banks, as it expands money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 (cash and demand deposits) beyond what it would otherwise be. Because of the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money
Monetary base
In economics, the monetary base is a term relating to the money supply , the amount of money in the economy...

 created by the country's central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

. That multiple (called the money multiplier
Money multiplier
In monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money under a fractional-reserve banking system. Most often, it measures the maximum amount of commercial bank money that can be created by a given unit of central bank money...

) is determined by the reserve requirement
Reserve requirement
The reserve requirement is a central bank regulation that sets the minimum reserves each commercial bank must hold of customer deposits and notes...

 or other financial ratio
Financial ratio
A financial ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization...

 requirements imposed by financial regulators.

The money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 of a country is usually held to be the total amount of currency in circulation plus the total amount of checking and savings deposits in the commercial banks in the country. In modern economies, relatively little of the money supply is in physical currency. For example, in December 2010 in the U.S., of the $8853.4 billion in broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money.

Monetary policy


When gold and silver are used as money, the money supply can grow only if the supply of these metals is increased by mining. This rate of increase will accelerate during periods of gold rush
Gold rush
A gold rush is a period of feverish migration of workers to an area that has had a dramatic discovery of gold. Major gold rushes took place in the 19th century in Australia, Brazil, Canada, South Africa, and the United States, while smaller gold rushes took place elsewhere.In the 19th and early...

es and discoveries, such as when Columbus discovered the new world and brought back gold and silver to Spain, or when gold was discovered in California in 1848
California Gold Rush
The California Gold Rush began on January 24, 1848, when gold was found by James W. Marshall at Sutter's Mill in Coloma, California. The first to hear confirmed information of the gold rush were the people in Oregon, the Sandwich Islands , and Latin America, who were the first to start flocking to...

. This causes inflation, as the value of gold goes down. However, if the rate of gold mining
Gold mining
Gold mining is the removal of gold from the ground. There are several techniques and processes by which gold may be extracted from the earth.-History:...

 cannot keep up with the growth of the economy, gold becomes relatively more valuable, and prices (denominated in gold) will drop, causing deflation. Deflation was the more typical situation for over a century
Century
A century is one hundred consecutive years. Centuries are numbered ordinally in English and many other languages .-Start and end in the Gregorian Calendar:...

 when gold and paper money backed by gold were used as money in the 18th and 19th centuries.

Modern day monetary systems are based on fiat money and are no longer tied to the value of gold. The control of the amount of money in the economy is known as monetary policy. Monetary policy is the process by which a government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

, central bank, or monetary authority
Monetary authority
Monetary authority is a generic term in finance and economics for the entity which controls the money supply of a given currency, and has the right to set interest rates, and other parameters which control the cost and availability of money...

 manages the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 to achieve specific goals. Usually the goal of monetary policy is to accommodate economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...

 in an environment of stable prices. For example, it is clearly stated in the Federal Reserve Act
Federal Reserve Act
The Federal Reserve Act is an Act of Congress that created and set up the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes and Federal Reserve Bank Notes as legal tender...

 that the Board of Governors
Board of governors
Board of governors is a term sometimes applied to the board of directors of a public entity or non-profit organization.Many public institutions, such as public universities, are government-owned corporations. The British Broadcasting Corporation was managed by a board of governors, though this role...

 and the Federal Open Market Committee
Federal Open Market Committee
The Federal Open Market Committee , a committee within the Federal Reserve System, is charged under United States law with overseeing the nation's open market operations . It is the Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money...

 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
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...

, stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...

, recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

, high unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

, shortages of 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
History of the Soviet Union (1985-1991)
The history of the Soviet Union from 1982 through 1991, spans the period from Leonid Brezhnev's death and funeral until the dissolution of the Soviet Union. Due to the years of Soviet military buildup at the expense of domestic development, economic growth stagnated...

.

Governments and central banks have taken both regulatory and free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

 approaches to monetary policy. Some of the tools used to control the money supply include:
  • changing the interest rate
    Interest rate
    An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...

     at which the central bank loans money to (or borrows money from) the commercial banks
  • currency purchases or sales
  • increasing or lowering government borrowing
    Government debt
    Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...

  • increasing or lowering government spending
    Government spending
    Government spending includes all government consumption, investment but excludes transfer payments made by a state. Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final...

  • manipulation of exchange rate
    Exchange rate
    In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...

    s
  • raising or lowering bank reserve requirements
  • regulation or prohibition of private currencies
    Private currency
    A private currency is a currency issued by a private organization. It is often contrasted with fiat currency issued by governments or central banks. In many countries, the issue of private paper currencies is severely restricted by law....

  • taxation or tax breaks on imports or exports of capital into a country


In the US, the Federal Reserve is responsible for controlling the money supply, while in the Euro area the respective institution is the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...

. Other central banks with significant impact on global finances are the Bank of Japan
Bank of Japan
is the central bank of Japan. The Bank is often called for short. It has its headquarters in Chuo, Tokyo.-History:Like most modern Japanese institutions, the Bank of Japan was founded after the Meiji Restoration...

, People's Bank of China
People's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...

 and the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...

.

For many years much of monetary policy was influenced by an economic theory
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 known as monetarism. Monetarism
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...

 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
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

 and Anna Schwartz
Anna Schwartz
Anna Jacobson Schwartz is an economist at the National Bureau of Economic Research in New York City, and according to Paul Krugman "one of the world's greatest monetary scholars"...

 supported by the work of David Laidler
David Laidler
David Ernest William Laidler has been one of the foremost scholars of monetarism. He published major economics journal articles on the topic in the late 1960s and early 1970s...

, and many others. The nature of the demand for money changed during the 1980s owing to technical, institutional, and legal factors and the influence of monetarism has since decreased.

See also


  • Coin of account
    Coin of account
    A coin of account is a unit of money that does not exist as an actual coin but is used in figuring prices or other amounts of money. For example, the mill is a coin of account in the United States...

  • Currency market
  • Electronic money
    Electronic money
    Electronic money is money or scrip that is only exchanged electronically. Typically, this involves the use of computer networks, the internet and digital stored value systems...

  • Labor-time voucher
  • Leper colony money
  • Local Exchange Trading Systems
    Local Exchange Trading Systems
    Local exchange trading systems , also known as LETSystems, are locally initiated, democratically organised, not-for-profit community enterprises that provide a community information service and record transactions of members exchanging goods and services by using the currency of locally created...

  • Money bag
    Money bag
    A money bag is a bag of money used to hold and transport coins and banknotes from/to a mint, bank, ATM, milled, business, or other institution...

  • Non-market economics
  • Numismatics
    Numismatics
    Numismatics is the study or collection of currency, including coins, tokens, paper money, and related objects. While numismatists are often characterized as students or collectors of coins, the discipline also includes the broader study of money and other payment media used to resolve debts and the...

     — Collection and study of money
  • Orders of magnitude (currency)
    Orders of magnitude (currency)
    This page is a progressive and labeled list of the SI currency orders of magnitude, with certain examples appended to some list objects.-External links:*...

  • Seignorage
  • Slang terms for money
    Slang terms for money
    Slang terms for money often derive from the appearance and features of banknotes or coins, their values, historical associations or the units of currency concerned...

  • Tax
    Tax
    To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

  • World currency
    World currency
    In the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world's primary reserve currency...

  • Protection Systems
    Intelligent banknote neutralisation system
    Intelligent Banknote Neutralisation System is a security system which protects valuables against unauthorised access to its contents by rendering it unusable by marking all the cash as stolen by a degradation agent when an attempted attack on the system is detected.Well neutralised banknotes...