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Money
From
Wikipedia,
the free encyclopedia.
Money is a
marketable good or token that acts as a store of value, a medium of
exchange, and a unit of account. Its function arises from a convention
within a community to use the particular good or token as a medium of
exchange. This convention to use whatever material as money can either
be explicit or implicit, freely chosen, or coerced.
The
emergence of
monetary goods is not dependent on central authority or government. It
is a quite natural market phenomenon. In practice, a minority which
holds military and/or information power often takes advantage of this
money need in order to become the primary money maker authority.
History demonstrates that most of the times money is actually a coerced
agreement. A small minority having power forces(using violence or
censorship) the vast majority of the community to reconcile and to
accept this small minority as the ultimate money maker authority. Money
material produced by this small minority is used within an economy as
the exclusive medium of exchange and acts as an intermediary market
good.
Only this "legitimate" money is allowed to take part in trades and
exchanges of other goods; any other medium of exchange is severely
prohibited by law.
Thus in
practice money is the fruit
of power and can be used for
wielding or gaining
more power. Money is not an agreement anymore it is a power
share. Everyone who uses
the money produced by a money maker authority as a
medium of exchange recognizes the authority's power and wants to become a power
shareholder. A money maker authority holds both the power
to share
its own power with power
shareholders and the power to take it back.
Money itself
must
be a scarce good. Many items have been used as money from naturally
scarce precious metals and conch shells through cigarettes to entirely
artificial money such as banknotes.
Modern
money, and
most ancient money too, is essentially a token -- an abstraction. Paper
currency is perhaps the most common type of physical money today.
However, goods such as gold or silver retain many of the essential
properties of money.
The origin
of the
word "money" comes from the Latin word "moneta", which comes from the
temple of Hera the Moneta, where the Roman money came from in the early
days of Rome.
In Greek
language
"Hera Mone tas" means the lonely Hera ("Mone tas" is in Doric dialect,
it is "Mone tes" in Ionic dialect). Zeus once punished
Hera and tied her with a golden chain between earth and sky. Hera, due
to the fact that she was alone between sky and earth tied with gold,
was called moneres or mone (μόνη), which means lonely, and this is
where
the word money comes from. Hera, with the help of Hephaestus, broke the
golden chain and released herself. It is said that all gold found on
earth originates from the fragments of
this golden chain which fell from the sky and became human's mone(y).
Maybe due to
this
fable gold was used in ancient greece only in temples, graves, and
jewels and there was no greek golden coin until 390 BC when the greek
king Philip II of Macedon issued golden
coins. The first golden coins in history were issued by the Lydian king
Croesus around 560 BC. The first greek coins were made of
copper, then of iron, because copper and iron were strong
materials. In 700BC Pheidon, king of Argos, changed the coins from iron
to a rather useless and ornamental metal called
argent and, according to Aristotle, dedicated some of the remaining
iron coins (which were actually iron sticks) to the temple of Hera.
King Pheidon minted the
argent coins in Aegina, at the temple of the goddess of wisdom and war,
Athena the Aphaia (the vanisher), and engraved the coins with a
Chelone(the symbol of capitalism). Chelone
coins were the first
medium of exchange not backed by a real value good. They were
widely accepted and used as the international medium of exchange until
the Peloponnesian War, when the Athenian Drachma replaced them. Some
fables give other figures credit as being the first to implement money.
The word
money in
the greek language is not μόνη (money) it is νόμισμα (nomisma or
numisma)
which derives from the word νομίζω (nomizo) and from the word νόμος
(nomos=law). Numisma gives the
exact meaning and definition of mone(y) as something we think has value
or something that someone convinced us has value while in
reality it has no value. Also, in case we are not convinced that
mone(y) has
value and we do not recognize the mone(y) maker authority, mone(y) is
usually something that we are forced by law to use as the unique
medium of exchange in trades.
Essential
characteristics of money
Money has
the
following three characteristics.
1. It must
be a
medium of exchange
When an
object is
in demand primarily for its use in exchange -- for its ability to be
used in trade to exchange for other things -- then it has this property. This
characteristic allows money to be a standard of deferred payment; i.e.,
a tool for the payment of debt.
2. It must
be a
unit of account
When the
value of
a good is frequently used to measure or compare the value of other
goods or when its value is used to denominate debts then it is
functioning as a unit of account.
A debt or an
IOU
can not serve as a unit of account because its value is specified by
comparison to some external reference value.
For example,
if in
some culture people are inclined to measure the worth of things with
reference to goats then we would regard goats as the dominant unit of
account in that culture. We may, for instance, say that today a horse
is
worth 10 goats and a good hut is worth 45 goats. We would also say that
an IOU denominated in goats would change value at much the same rate as
real goats.
3. It must
be a
store of value
When an
object is
purchased primarily to store value for future trade then it is being
used as a store of value. For example, a sawmill might maintain an
inventory of lumber that has market value. Likewise it might keep a
cash box that has some currency that holds market value. Both would
represent a store of value because through trade they can be reliably
converted to other goods at some future date. Most non-perishable goods
have this quality.
Many goods
or
tokens have some of the characteristics outlined above; however, no
good
or token is money unless it can satisfy all three criteria.
Desirable
features
of money
To function
as
money in a modern economy a good or token should possess a number of
features:
* It must have a stable value.
* It must be difficult to counterfeit.
* It must be easily divisible and transportable.
* One artifact of the token or good must
be equivalent to another.
Modern
forms of
money
When using
money
anonymously the most common methods are cash (either coin or
banknotes) and stored-value cards.
When using
money
substitutes in such a way as to leave a financial record of the
transaction the most common methods are checks, debit cards, credit
cards, and digital cash.
Money
and economics
Money is one
of
the most central topics studied in economics and forms its most cogent
link to finance.
The amount
of
money in an economy directly affects inflation and interest rates and
hence has profound effects. A monetary crisis can have very significant
economic effects; particularly if it leads to monetary failure and the
adoption of a much less efficient barter economy. This happened in
Russia during the 1990s.
Nonetheless,
modern economics
seems to have difficulty deciding what exactly money is and what its
functions are. There have
been
many historical arguments regarding the combination of money's
functions. These arguments are
covered in financial capital which is a more general and inclusive term
for all liquid instruments regardless of whether or not they are a
uniformly
recognized tender.
History
of money:
Before money
Prior to the
introduction of money barter
was the only way to exchange goods.
Bartering has several problems, most notably timing constraints. If you
wish to trade pigs for wheat you can only do this when the pigs and
wheat are both available at
the same time and place - and without
proper storage that may be a very brief time. With a trade standard
like gold you can sell your pigs at the "best time" and take the gold
coins. You can then use that gold to buy wheat when the harvest comes
in. Thus the use of money makes all commodities become more liquid.
Where trade
is
common barter systems
usually lead quite rapidly to the emergence of
several key goods with monetary properties. In the early British colony
of New South Wales in Australia rum emerged quite soon after
settlement as the most monetary of goods. When a nation is without a
fiat currency system it is quite common for the fiat currency of
a
neighbouring nation to emerge as the dominant monetary good. In some
prisons where conventional money is prohibited it is quite common for
goods such as cigarettes to take on a monetary quality. Gold has
emerged from the world of barter again and again to take on a
monetary function. It should be noted that the emergence of monetary
goods is not dependent on a central authority or government. It is a
quite natural market phenomenon.
Commodity
money
The first
instances of money were objects which were useful for their intrinsic
value. This was known as commodity money and included any
commonly-available commodity that has intrinsic value; historical
examples include pigs, rare seashells, whale's teeth, and cattle.
Spices
have long been
used as commodity money. Definite indications are available
that both black and white pepper have been used as commodity money
since
hundreds of years before Christ.
Being a valuable commodity pepper has naturally been used as payment.
Attila the Hun reportedly demanded 3,000 pounds in weight of pepper in
408AD as part of a ransom for the city of Rome. In the Middle Ages
there was a French saying, 'As dear as pepper'. In England rent could
be paid in pounds of pepper and so a symbolic minimal amount is known
as a "peppercorn rent".
Even in the
industrialised world, in the absence of other types of money, people
have occasionally used commodities such as tobacco as money. This last
happened on a wide scale after World War II when cigarettes became used
unofficially in Europe in parallel with other currencies for a short
time.
Another
example of
"commodity money" is the shell money of the Solomon Islands. Shells are
painstakingly chipped into rough circles, filed down, and threaded onto
large necklaces which are then used during marriage proposals. For
instance, a father may charge twenty shell money necklaces for his
daughter's hand in marriage.
One
interesting
example of commodity money is the huge limestone coins from the
Micronesian island of Yap, quarried at great peril from a source
several hundred miles away. The value of the coin was determined by its
size — the largest of which could range from nine to twelve feet in
diameter and weigh several tons. Displaying a large coin, often outside
one's home, was a considerable status symbol and source of prestige in
that society. Due to the obvious inconvenience associated with moving a
coin islanders would often only
trade promises of ownership rather than
actually moving it. In some cases coins which had been lost at sea
were still used for exchange in this way. These agreements could be
thought of as a kind of representative money.
Once a
commodity
becomes used as money it takes on a value that is often somewhat
different from what the commodity is intrinsically worth or useful for.
Being able to use something as money in a society adds an extra use to
it and so adds value to it. This extra use is a convention of society
and how extensive the use of money is within the society will affect
the value of the monetary commodity. So although commodity money is
real it should not be seen as having a fixed value in absolute terms.
Its value is still socially determined to a large extent. A prime
example is gold which has been valued differently by many different
societies, but perhaps none valued it more than those who used it as
money. Fluctuations in the value of commodity money can be strongly
influenced by supply and demand, whether current or predicted (if a
local gold mine is about to run out of ore, the relative market value
of gold may go up in anticipation of a shortage).
Money can be
anything that the parties agree is tradable, but the usability of a
particular sort of money varies widely. Desirable features of a good
basis for money include being able to be stored for long periods of
time, the ability to be carried around easily, and difficult to find
on its own so that it is actually worth something. Again, supply and
demand play a key role in determining value.
Metals like
gold
and silver have been used as commodity money for thousands of years in
the form of metal dust, nuggets, rings, bracelets, and assorted
pieces. Eventually the Lydians began minting gold and silver around 560
BC.
Gold and
silver
are both quite soft metals and coins minted from the pure metals
suffer from wear or deformation in daily use. Fortunately these metals
are also easily alloyed with a less expensive metal, frequently copper,
in order to improve the durability of the resulting coins. Typically
alloys of metals, such as sterling
silver or 22 carat gold, are
used to make coins more durable. These are alloys of 90% or more
precious metal as alloys of
less than 90% do not improve hardness or
durability very much and so are usually considered monetary
debasement.
Standardized
coinage
It was the
discovery of the touchstone that paved the way for metal-based
commodity money and coinage. Any soft metal can be tested for purity on
a touchstone allowing one to quickly calculate the total content of a
particular metal in a lump. Gold is a soft metal which is also hard to
come by, dense, and storable. For these reasons gold as a money spread
very quickly from Asia Minor, where it first gained wide use, to the
entire world.
Using such a
system still required several steps and some math. The touchstone
allowed you to estimate the amount of gold in an alloy which was then
multiplied by the weight to find the amount of gold alone in a lump.
To make this
process easier the concept of standard coinage was introduced. Coins
were pre-weighed and pre-alloyed so as long as you were aware of the
origin of the coin no use of the touchstone was required. Coins were
typically minted by governments in a carefully protected process and
then stamped with an emblem that guaranteed the weight and value of the
metal. It was however extremely common for governments to assert that
the value of such money lay in its emblem and to subsequently debase
the currency by lowering the content of valuable metal.
Although
gold and
silver were commonly used to mint coins other metals could be used.
Ancient Sparta minted coins from iron to discourage its citizens from
engaging in foreign trade. In the early seventeenth century Sweden
lacked more precious metal and so produced "plate money", which were
large slabs of copper approximately 50cm or more in length and width,
appropriately stamped with indications of their value.
Metal based
coins
had the advantage of carrying their value within the coins themselves.
On the other hand they induced manipulations: the clipping of coins in
attempts to get and recycle the precious metal. The bigger problem was
the simple co-existence of gold, silver, and copper coins in Europe's
nations. English and Spanish traders placed a higher value on gold
coins than their neighbors with the effect that
the English gold-based guinea coin began to rise against the English
silver based crown in the 1670s and 1680s and with the consequence that
silver was ultimately pulled out of England. The effect was worsened
with Asian traders not sharing the European
appreciation of gold altogether — gold left Asia and silver left Europe
in quantities European observers like Isaac Newton, Master of the Royal
Mint, observed with uneasiness.
Stability
came
into the system with national Banks guaranteeing to change money into
gold at a promised rate. This stability did not, however, come easily.
The Bank of
England risked a national financial catastrophe in the 1730s when
customers demanded their money to be changed into gold in a moment of
crisis. Eventually London's merchants saved the bank and the nation
with financial guarantees.
Representative
money
The system
of
commodity money in many instances evolved into a system of
representative money. In this system the material that constitutes the
money itself had very little intrinsic value, but none the less such
money achieves significant market value through being scarce as an
artifact.
Paper
currency and
non-precious coinage was backed by a government or bank's promise to
redeem it for a given weight of precious metal, such as silver. This is
the origin of the term "British Pound" for instance; it was a unit of
money backed by a Tower pound of sterling silver - hence the currency
Pound Sterling.
For much of
the
nineteenth and twentieth centuries many currencies were based on
representative money through the use of the gold standard.
Fiat
money
An example
of fiat
money is the new international currency the Euro. Its introduction
changed the face of money, superseding many of the world's oldest
currencies.
Fiat money refers
to money that is not backed by reserves of another commodity. The money
itself is given value by government fiat (Latin for "let it be done")
or decree, enforcing legal tender laws, previously known as "forced
tender" whereby debtors are legally relieved of the debt if they
(offer to) pay it off in the government's money. By law the refusal of
"legal tender" money in favor of some other form of payment is illegal
and has at times in history (Rome under Diocletian, and
post-revolutionary France during the collapse of the assignats) invoked
the death penalty.
Governments
through history have often switched to forms of fiat money in times of
need, such as war, sometimes by suspending the service they provided of
exchanging their money for gold and other times by simply printing the
money that they needed. When governments produce money more rapidly
than economic growth the money supply overtakes economic value.
Therefore the excess money eventually dilutes the market value of all
money issued. This is called inflation.
In 1971 the US
finally switched to fiat money indefinitely. At this point in
time many
of the economically developed countries' currencies were fixed to the
US dollar and so this single step meant
that much of the western world's currencies became fiat money based.
Money
supply
The money
supply
is the amount of money available within a specific economy available
for purchasing goods or sevrices. The supply is usually considered as
four escalating categories: M0, M1, M2 and M3. The categories grow in
size with M3 representing all forms of money and M0 being just physical
money (coins and bills). In the United States the Federal Reserve is
responsible for controlling the money supply (monetary policy).
Growing
the money
supply
Historically
money
was a metal (gold, silver, etc,) or other object that was difficult to
duplicate, but easy to transport and divide. Later it consisted of
paper notes, now issued by all modern governments. With the rise of
modern industrial capitalism it has gone through several phases
including but not limited to:
1.
Bank notes - paper issued by banks as an interest-bearing loan. (These
were common in the 19th century but not seen anymore.)
2.
Paper notes - coins with varying amounts of precious metal (usually
called legal tender) issued by various governments. There is also a
near-money in the form of interest bearing bonds issued by governments
with solid credit ratings.
3.
Bank credit - the creation of chequable deposits in the granting
of various loans to business, government, and individuals. (It is
critical that we understand that when a bank makes a loan that is new
money and when a loan is paid off that money is destroyed. Only the
interest paid on it remains.)
Shrinking
the
money supply
Perhaps the
most
obvious way money can be destroyed is if paper bills are burned or
taken out of circulation by the central bank. But it should be
remembered that legal tender usually constitutes less than 4% of the
broad money supply.
Another way
money
can be destroyed is when any bank loan is paid off or defaulted upon,
or
any government bond is redeemed, the money value of the contract or
bond
is destroyed(taken out of circulation).
Money can be
destroyed if savers withdraw funds from a bank, in which case that
money can no longer be used for lending. Bank savings are actually a
kind of loans — savers loan their money to a bank at a low interest
rate or merely in exchange for the benefit of convenience or its
security. The bank then uses this loan to loan to other people at a
higher rate of interest which results in profit for the bank. When this
happens
the money exists in two or more places at once and so the money
supply increases. When a saver withdraws money the loan is "paid off"
and it can no longer exist in more than one place at once, and this
"double money" disappears.
In extreme
forms
a bank run or panic may drive a bank into insolvency and, if uninsured,
the savings of all its depositors are lost. Such bank failures were a
major cause of the tremendous contraction in the money supply that
occurred during the Great Depression, particularly in the United
States. As a result many U.S. banking reforms were subsequently enacted
during the New Deal, including the creation of the Federal Deposit
Insurance Corporation to guarantee private bank deposits.
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