Money is anything that is generally accepted as
paymentA 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 servicesIn 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. The main functions of money are distinguished as: a
medium of exchangeA 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 accountA unit of account is a standard monetary unit of measurement of the market 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 valueTo act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved....
, and occasionally, a
standard of deferred paymentA 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...
. Money is an
abstractionAbstraction is the process or result of generalization by reducing the information content of a concept or an observable phenomenon, typically to retain only information which is relevant for a particular purpose. For example, abstracting a leather soccer ball to a ball retains only the information...
,
ideaIn the most narrow sense, an idea is just whatever is before the mind when one thinks. Very often, ideas are construed as representational images; i.e. images of some object. In other contexts, ideas are taken to be concepts, although abstract concepts do not necessarily appear as images...
or
conceptThere are two prevailing theories in contemporary philosophy which attempt to explain the nature of concepts . The representational theory of mind proposes that concepts are mental representations, while the semantic theory of concepts holds that they are abstract objects...
,
token instancesIn philosophy and knowledge representation, the type-token distinction is a distinction that separates an abstract concept from the objects which are particular instances of the concept...
of which are the physical
billsA banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. Along with coins, banknotes make up the cash or bearer forms of all modern money...
or
coinA coin is a piece of hard material, usually metal or a metallic material and sometimes made of synthetic materials, usually in the shape of a disc, and most often issued by a government. Coins are used as a form of money in transactions of various kinds, from the everyday circulation coins to the...
s which are carried and traded.
Money originated as
commodity moneyCommodity 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 at the national level are
fiat moneyFiat money is money declared by a government to be legal tender. The term derives from the Latin fiat, meaning "let it be done". Fiat money achieves value because a government demands it in payment of taxes and says it should be used within the country as a "tender" to pay all debts...
systems. Fiat money is without value as a physical commodity, and derives its value by being declared by a government to be
legal tenderLegal tender or forced tender is an offered payment that, by law, cannot be refused in settlement of a debt, and have the debt remain in force....
; that is, it must be accepted as a form of payment within the national boundaries of the country, for "all debts, public and private". By law, the refusal of a legal tender (offering) extinguishes the debt in the same way acceptance does. Some bullion coins such as the
Australian Gold NuggetThe 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 EagleAmerican Eagle bullion coins are produced by the United States Mint.* American Silver Eagle* American Gold Eagle* American Platinum Eagle...
are legal tender, however, they trade
based on the
market priceMarket 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
commodityA commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. It is a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk. In other words, copper is copper. The price of copper is universal,...
, rather than their legal tender
face valueThe 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).
The
money supplyIn economics, money supply or money stock, is the total amount of money available in an economy at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits....
of a country is usually held to consist of
currencyIn economics, the term currency can refer either to a particular currency, for example the US dollar, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation's money supply...
(banknotes and coins) and demand deposits or 'bank money' (the balance held in checking accounts and savings accounts). These
demand depositA demand deposit or bank money refers to the funds held in deposit accounts in commercial banks. These account balances are considered money and usually form the greater part of money supply.-Bank accounts:...
s usually account for a much larger part of the money supply than currency. Bank money is intangible and exists only in the form of various bank records. Despite being intangible, bank money still performs the basic functions of money, as checks are generally accepted as a form of payment and as a means of transferring ownership of deposit money.
More generally, the term "
price systemIn economics, a price system is any economic system that effects its distribution of goods and services with prices and employing any form of money or debt tokens. Except for possible remote and primitive communities, all modern societies use price systems to allocate resources...
" is sometimes used to refer to methods using
commodityA commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. It is a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk. In other words, copper is copper. The price of copper is universal,...
valuation or money accounting systems.
History of money
The use of
barterBartering is a medium in which goods or services are directly exchanged for other goods and/or services without a common unit of exchange . It can be bilateral or multilateral, and usually exists parallel to monetary systems in most developed countries, though to a very limited extent...
-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 moneyCommodity 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
shekelShekel , also rendered sheqel, refers to one of many ancient units of weight and currency. The first known usage is from Mesopotamia around 3000 BC. One explanation is given for the origination of this word as to have originally applied to a specific mass of barley, and the first syllable of the...
was an ancient unit of weight and currency. The first usage of the term came from
MesopotamiaMesopotamia "land between the rivers" is a name for the Tigris–Euphrates region in the eastern Mediterranean, largely corresponding to Iraq, as well as northeastern Syria, some parts of southeastern Turkey, and some parts of the Khūzestān Province of southwestern...
circa 3000 BC. and referred to a specific mass of
barleyBarley is a cereal grain derived from the annual grass Hordeum vulgare. It serves as a major animal feed crop, with smaller amounts used for malting and in health food. It is used in soups, stews and barley bread in various countries, such as Scotland and in Africa...
which related other values in a
metricIn mathematics, a metric or distance function is a function which defines a distance between elements of a set. A set with a metric is called a metric space. A metric induces a topology on a set but not all topologies can be generated by a metric...
such as silver, bronze, copper etc. A barley/shekel was originally both a unit of
currencyIn economics, the term currency can refer either to a particular currency, for example the US dollar, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation's money supply...
and a unit of weight. Societies in the Americas, Asia, Africa and Australia used shell money – usually, the shell of the money
cowryCowry, also sometimes spelled cowrie, plural cowries, is the common name for a group of small to large marine gastropods in the family Cypraeidae. The word cowry is also often used to refer to the shells of these snails....
(
Cypraea moneta) were used. According to
HerodotusHerodotus of Halicarnassus was a Greek historian who lived in the 5th century BC and is regarded as the "Father of History" in Western culture. He was the first historian known to collect his materials systematically, test their accuracy to a certain extent and arrange them in a...
, and most modern scholars, the
LydiansLydians were the inhabitants of Lydia, a region in western Anatolia. Their capital was at Sardis. Their recorded history of statehood, which covers three dynasties,manyak,sharmoot,haywaan came to an abrubt end after a military defeat in the 6th century BC, while the account of their roots, mixed...
were the first people to introduce the use of gold and silver coin. It is thought that these first stamped
coinsContextObjects in Spans, commonly abbreviated COinS, is a method of embedding latent OpenURL ContextObjects in the HTML code of Web pages. This allows client software to retrieve bibliographic metadata, e. g...
were minted around 650–600 BC.
The system of
commodity moneyCommodity 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 moneyRepresentative money refers to money that consists of a claim on items of value held elsewhere. Gold certificates and silver certificates are typical examples of representative money, as the term 'representative money' has often been used "to signify that a certain amount of bullion was stored in...
. This occurred because gold and silver merchants or banks would issue receipts to their depositors – redeemable for the
commodity moneyCommodity 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 during the Song Dynasty. These banknotes, known as "
jiaoziJiaozi 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 BancoStockholms 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 standardThe gold standard is a monetary system in which a region's common medium of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold...
, a monetary system where the medium of exchange are paper notes that are convertible into pre-set, fixed quantities of gold, replaced the use of gold coins as currency in the 17th-19th centuries in Europe. These gold standard notes were made
legal tenderLegal tender or forced tender is an offered payment that, by law, cannot be refused in settlement of a debt, and have the debt remain in force....
, 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 IIWorld War II, or the Second World War , was a global military conflict which involved a majority of the world's nations, including all great powers, organized into 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 covertability 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.
Etymology
The word "money" is believed to originate from a temple of
HeraIn the Olympian pantheon of classical Greek Mythology, Hera or Here was the wife and older sister of Zeus. Her chief function was as goddess of women and marriage. In Roman mythology, Juno was the equivalent mythical character. The cow, and later, 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
UniUni 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
rhymeA 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- Communication :*Medium , storage and/or transmission tools used to store and deliver information or data**Data storage device, any physical material that records or holds recorded information...
, a
measureMeasure can mean:* Measurement, the process of establishing the magnitude of some attribute of an object relative to some unit of measurement* Measure , a way to assign non-negative real numbers to subsets...
, a
standardA technical standard is an established norm or requirement. It is usually a formal document that establishes uniform engineering or technical criteria, methods, processes and practices....
, a store." That is, money functions as a
medium of exchangeA 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 accountA unit of account is a standard monetary unit of measurement of the market 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 paymentA 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 valueTo act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved....
. However, most modern textbooks now list only three functions, that of
medium of exchangeA 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 accountA unit of account is a standard monetary unit of measurement of the market 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 valueTo act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved....
, 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 exchangeA 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 valueTo act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved....
: 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 is the property of a good or a commodity whose individual units are capable of mutual substitution. Examples of highly fungible commodities are crude oil, wheat, orange juice, precious metals, and currencies....
: that is, one unit or piece must be perceived as equivalent to any other, which is why diamondIn 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 the second most stable form of carbon, after graphite; however, the conversion rate from diamond to graphite is...
s, works of artArt is the process or product of deliberately arranging elements in a way that appeals to the senses or emotions. It encompasses a diverse range of human activities, creations, and modes of expression, including music, literature, film, sculpture, and paintings...
or real estateReal estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location.
"Real estate" The American Heritage Dictionary of the English Language, Fourth Edition. Houghton Mifflin...
are not suitable as money.
- A specific weight, or measure, or size to be verifiably countable. For instance, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
Store of value
To act as a
store of value, a commodity, a form of money, or
financial capitalFinancial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
must be able to be reliably saved, stored, and retrieved — and be predictably useful when it is so retrieved. Fiat currency like paper or
electronic moneyElectronic money refers to money or scrip which is exchanged only electronically. Typically, this involves use of computer networks, the internet and digital stored value systems...
no longer backed by gold in most countries is not considered by some economists to be 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
debtDebt is that which is owed; usually referencing assets owed, but the term can also cover moral obligations and other interactions not requiring money. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned...
– a unit in which debts are denominated, and the status of money as
legal tenderLegal tender or forced tender is an offered payment that, by law, cannot be refused in settlement of a debt, and have the debt remain in force....
, 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
inflationIn 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 price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real...
and deflation, and for sovereign and international debts via
debasementDebasement 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
devaluationDevaluation is a reduction in the value of a currency with respect to other monetary units. In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate...
.
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 supplyIn economics, money supply or money stock, is the total amount of money available in an economy at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits....
of an economy. 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 types of monetary aggregates, using a categorization system that focuses on the liquidity of the financial instrument used as money.
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
freedomFreedom is the right to act according to ones will without being held up by the power of others. From a philosophical point of view, it can be defined as the capacity to determine your own choices...
to trade goods and services easily without having to barter.
Liquid financial instruments are easily
tradableA tradable good or service 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, the less tradable a good is...
and have low
transaction costIn 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.
Measures of money
The money supply is the amount of financial instruments within a specific economy available for purchasing goods or services. The money supply is usually measured as three escalating categories M1, M2 and M3. The categories grow in size with M1 being currency (coins and bills) and checking account deposits. M2 is currency, checking account deposits and savings account deposits, and M3 is M2 plus
time depositA time deposit is a money deposit at a banking institution that cannot be withdrawn for a certain "term" or period of time. When the term is over it can be withdrawn or it can be held for another term...
s. M1 includes only the most liquid financial instruments, and M3 relatively illiquid instruments.
Another measure of money, M0, is also used, although unlike the other measures, it does not represent actual purchasing power by firms and households in the economy. M0 is base money, or the amount of money actually issued by the
central bankA central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to a lend a government its currency...
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.
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 moneyRepresentative money refers to money that consists of a claim on items of value held elsewhere. Gold certificates and silver certificates are typical examples of representative money, as the term 'representative money' has often been used "to signify that a certain amount of bullion was stored in...
, such as the
gold standardThe gold standard is a monetary system in which a region's common medium of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold...
, 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 systemThe 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 moneyCommodity 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 metalA precious metal is a rare naturally occurring metallic chemical element of high economic value,which is not radioactive . 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,
barleyBarley is a cereal grain derived from the annual grass Hordeum vulgare. It serves as a major animal feed crop, with smaller amounts used for malting and in health food. It is used in soups, stews and barley bread in various countries, such as Scotland and in Africa...
, beads etc., as well as many other things that are thought of as having
valueValue may refer to:*Value **Value theory*Value *Value **Theory of value*Value investing*Value *Value *Value *Value *Value -See also:...
. 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
goldGold is a chemical element with the symbol Au and an atomic number of 79. It has been a highly sought-after precious metal for coinage, jewelry, and other arts since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial deposits. Gold is...
,
silverSilver is a 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...
,
copperCopper 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 rather soft and malleable and a freshly-exposed surface has a pinkish or peachy color...
,
riceRice is the seed of a monocot plant Oryza sativa, of the grass family . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East, South, Southeast Asia, the Middle East, Latin America, 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
valueValue may refer to:*Value **Value theory*Value *Value **Theory of value*Value investing*Value *Value *Value *Value *Value -See also:...
in conjunction to one another, in various commodity valuation or
Price SystemIn economics, a price system is any economic system that effects its distribution of goods and services with prices and employing any form of money or debt tokens. 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 accountA unit of account is a standard monetary unit of measurement of the market 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
KrugerrandThe Krugerrand is a South African gold coin, first minted in 1967 to help market South African gold. It is produced by the South African Mint Company.-History:...
are considered
legal tenderLegal tender or forced tender is an offered payment that, by law, cannot be refused in settlement of a debt, and have the debt remain in force....
, there is no record of their face value on either side of the coin. The rationale for this is that emphasis is laid on their direct link to the prevailing value of their fine gold content.
American EagleThe 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. Offered in 1/10 oz, 1/4 oz, 1/2 oz, and 1 oz denominations, these coins are guaranteed by the U.S. government...
s are imprinted with their gold content and legal tender
face valueThe 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...
.
South AfricaThe Republic of South Africa is a country located at the southern tip of Africa, with a coastline on the Atlantic and Indian Oceans. To the north lie Namibia, Botswana and Zimbabwe, to the east are Mozambique and Swaziland, while Lesotho is an independent country surrounded by South Africa.Modern...
ranks among the very few countries where gold coins have been minted as negotiable currency and still remain available for general purchase The
ISO currency codeISO 4217 is the international standard describing three-letter codes to define the names of currencies established by the International Organization for Standardization...
of gold bullion is
XAUXAU can mean multiple things:* A currency code under the ISO 4217 standard, denominating one troy ounce of gold.* A symbol for the Philadelphia Gold and Silver Index, an index of precious metal mining company stocks that are traded on the Philadelphia Stock Exchange.* XAU Limited - A company...
. ISO 4217 includes codes not only for currencies, but also for precious metals (
goldGold is a chemical element with the symbol Au and an atomic number of 79. It has been a highly sought-after precious metal for coinage, jewelry, and other arts since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial deposits. Gold is...
,
silverSilver is a 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...
,
palladiumPalladium is a chemical element with the chemical symbol Pd and an atomic number of 46. Palladium is a rare and lustrous silvery-white metal that was discovered in 1803 by William Hyde Wollaston, who named it after the asteroid Pallas, which in turn, was named after the epithet of the Greek...
and
platinumPlatinum is a chemical element with the chemical symbol Pt and an atomic number of 78. Its name is derived from the Spanish term platina del Pinto, which is literally translated into "little silver of the Pinto River." It is in Group 10 of the periodic table of elements...
; by definition expressed per one
troy ounceThe troy ounce is a unit of imperial measure. In the present day it is most commonly used to gauge the weight and therefore the price of precious metals....
, as compared to "1 USD") and certain other entities used in international finance, e.g.
Special Drawing RightsSpecial Drawing Rights are potential claims on the freely usable currencies of International Monetary Fund members. SDRs have the ISO 4217 currency code XDR.-Definition:...
.
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 SystemThe Federal Reserve System is the central banking system of the United States. It was created in 1913 by the enactment of the Federal Reserve Act, largely as a response to a series of financial panics or bank runs, particularly a severe panic in 1907...
in the U.S.) to be
legal tenderLegal tender or forced tender is an offered payment that, by law, cannot be refused in settlement of a debt, and have the debt remain in force....
, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private.
Fiat money, if physically represented in the form of currency (paper or coins) can be accidentally damaged or destroyed. However, fiat money has an advantage over representative or commodity money, in that the same laws that created the money can also define rules for its replacement in case of damage or destruction. For example, the U.S. government will replace mutilated Federal Reserve notes (U.S. fiat money) if at least half of the physical note can be reconstructed, or if it can be otherwise proven to have been destroyed. By contrast, commodity money which has been lost or destroyed cannot be recovered.
Credit money
Credit moneyCredit money is any claim against a physical or legal person that can be used for the purchase of goods and services. Examples of credit money include personal IOUs, and in general any financial instrument or bank money market account certificate) which is not immediately repayable in specie, on...
is any claim against a physical or legal person that can be used for the purchase of goods and services. Credit money differs from commodity and fiat money in two ways: It is not payable on demand (although in the case of fiat money, "demand payment" is a purely symbolic act since all that can be demanded is other types of fiat currency) and there is some element of risk that the real value upon fulfillment of the claim will not be equal to real value expected at the time of purchase.
This risk comes about in two ways and affects
both buyer and seller. First it is a claim and the claimant may default (not pay). High levels of default have destructive supply side effects. If manufacturers and service providers do not receive payment for the goods they produce, they will not have the resources to buy the labor and materials needed to produce new goods and services. This reduces supply, increases prices and raises
unemploymentUnemployment occurs when a person is available to work and seeking work but currently without work. The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed...
, possibly triggering a period of
stagflationStagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time. The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the term in a speech to Parliament in 1965...
. In extreme cases, widespread defaults can cause a lack of confidence in lending institutions and lead to economic depression. For example, abuse of credit arrangements is considered one of the significant causes of the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
of the 1930s.
The second source of risk is time. Credit money is a promise of
future payment. If the interest rate on the claim fails to compensate for the combined impact of the
inflationIn economics, the inflation rate is a measure of inflation, the rate of increase of a price index .It is the percentage rate of change in price level over time....
(or deflation) rate and the
time value of moneyThe time value of money is the value of money figuring in a given amount of interest earned over a given amount of time.For example, 100 dollars of today's money invested for one year and earning 5 percent interest will be worth 105 dollars after one year...
, the seller will receive less real value than anticipated. If the interest rate on the claim overcompensates, the buyer will pay more than expected. The process of
fractional-reserve bankingFractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand...
has a cumulative effect of
money creationMoney creation is the process by which new money is produced or issued. Three ways to create money are; by manufacturing paper currency or metal coins, through debt and lending, and by government policies such as quantitative easing. The practices and regulation of production, issue and redemption...
by banks.
Representative money
In 1875 economist
William Stanley JevonsWilliam Stanley Jevons was an English economist and logician. His book The Theory of Political Economy expounded upon the "final" utility theory of value...
described what he called "
representative moneyRepresentative money refers to money that consists of a claim on items of value held elsewhere. Gold certificates and silver certificates are typical examples of representative money, as the term 'representative money' has often been used "to signify that a certain amount of bullion was stored in...
," i.e., money that consists of
token coinIn 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
goldGold is a chemical element with the symbol Au and an atomic number of 79. It has been a highly sought-after precious metal for coinage, jewelry, and other arts since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial deposits. Gold is...
or
silverSilver is a 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.
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 rushes 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 1848The California Gold Rush began on January 24, 1848, when gold was discovered by James Wilson Marshall at Sutter's Mill, in Coloma, California. News of the discovery soon spread, resulting in some 300,000 men, women, and children coming to California from the rest of the United States and...
. This causes inflation, as the value of gold goes down. However, if the rate of gold mining 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
centuryA 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
governmentA government is the body within a community, political entity or organization which has the authority to make and enforce rules, laws and regulations.....
, central bank, or monetary authority manages the
money supplyIn economics, money supply or money stock, is the total amount of money available in an economy at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits....
to achieve specific goals. Usually the goal of monetary policy is to accommodate economic growth in an environment of stable prices. For example, it is clearly stated in the
Federal Reserve ActThe Federal Reserve Act is the act of Congress that created the Federal Reserve System, the central banking system of the United States of America, which was signed into law by President Woodrow Wilson.-Background:...
that the
Board of GovernorsA board of governors is usually the governing board of a public entity or non-profit organizations. It is the public equivalent of the private board of directors....
and the
Federal Open Market CommitteeThe Federal Open Market Committee , a component of 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 supply....
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
hyperinflationIn economics, hyperinflation is inflation that is very high or "out of control", a condition in which prices increase rapidly as a currency loses its value....
,
stagflationStagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time. The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the term in a speech to Parliament in 1965...
,
recessionIn economics, a recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way...
, high
unemploymentUnemployment occurs when a person is available to work and seeking work but currently without work. The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed...
, 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 UnionThe Soviet Union's collapse into independent nations began early in 1985. After years of Soviet military buildup at the expense of domestic development, economic growth was at a standstill. Failed attempts at reform, a stagnant economy, and war in Afghanistan led to a general feeling of...
.
Governments and central banks have taken both regulatory and free market approaches to monetary policy. Some of the tools used to control the money supply include:
- changing the interest rate
An interest rate is the price a borrower pays for the use of money they do not own, for instance a small company might borrow from a bank to kick start their business, and the return a lender receives for deferring the use of funds, by lending it to the borrower...
at which the government loans or borrows money
- currency purchases or sales
- increasing or lowering government borrowing
- increasing or lowering government spending
- manipulation of exchange rate
In finance, the exchange rates between two currencies specifies how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency...
s
- raising or lowering bank reserve requirements
- regulation or prohibition of private currencies
- 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 BankThe European Central Bank is one of the world's most important central banks, responsible for monetary policy covering the 16 member States of the Eurozone. It was established by the European Union in 1998 with its headquarters in Frankfurt, Germany.-History:Technically the predecessor to the ECB...
. Other central banks with significant impact on global finances are the
Bank of Japanis the central bank of Japan. The Bank is often called for short.-History:Like most modern Japanese institutions, the Bank of Japan was born after the Meiji Restoration...
,
People's Bank of ChinaThe 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 EnglandThe Bank of England is, despite its name, the central bank of the whole of the United Kingdom and is the model on which most modern, large central banks have been based. It was established in 1694 to act as the English Government's banker, and to this day it still acts as the banker for the UK...
.
For many years much of monetary policy was influenced by an economic theory known as monetarism.
MonetarismMonetarism 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 longer periods and that objectives of monetary policy are best met by targeting the growth rate of the money supply.Monetarism today...
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 FriedmanMilton Friedman was an American economist, statistician and public intellectual, and a recipient of the Nobel Memorial Prize in Economics...
and
Anna SchwartzAnna 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 LaidlerDavid 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
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...
- Counterfeit#Counterfeiting of Money
- Currency market
- Electronic money
Electronic money refers to money or scrip which is exchanged only electronically. Typically, this involves use of computer networks, the internet and digital stored value systems...
- Fractional reserve banking
- Full reserve banking
- Labor-time voucher
- Local Exchange Trading Systems
Local Exchange Trading Systems also known as LETSystems are local, non-profit exchange networks in which goods and services can be traded without the need for printed currency. In some places, e.g...
- Monetary economics
- Non-market economics
Non-market economics is the study of the production, trade, and distribution of goods and services via mechanisms other than the market, in other words using systems other than the Price system. Non-market economies do not operate through the exchange of money. Barter is usually considered a type...
- 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...
— Collection and study of money
- Seignorage
- Slang terms for money
Slang terms for money often derive from the appearance and features of banknotes or coinage, their values, historical associations or the units of currency concerned...
- 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...