A generally acceptable and convenient medium of exchange, in order to avoid the problems of barter; also a representation of value and a means of storing value. It is usually in the form of coins or notes, but it can be any generally accepted object. Originally coins of gold or silver had an intrinsic value of their own; today, the intrinsic value of coins is virtually nothing. Until the 1920s, money was backed by gold (the gold standard): a pound note or dollar bill could be exchanged for a given amount of gold (hence such words on banknotes as promise to pay) and the amount of money issued by banks was related to the amount of gold held. The first bank notes issued in Europe were by the Bank of Stockholm in 1661. Money is now increasingly not in tangible form, but consists of balances in accounts at banks, exchange being by means of cheques, credit-cards or charge-cards, and by credit-transfer, where one account is reduced (debited) and another increased (credited) by the same amount electronically. Modern systems are reducing the dependence on cash, hence the emergence of the phrase, the cashless society. Many definitions of money are in use. In the UK, for example, the narrow definition, M0, refers to the stock of notes and coins in circulation, banks' till money, and bankers' balances at the Bank of England. Also in use are M1, M2, M3, and other measures, each containing additional items.
Economics offers various definitions for money, though it is now commonly defined by the functions attached to any good or token that functions in trade as a medium of exchange, store of value, and unit of account. Some authors explicitly require money to be a standard of deferred payment, too . In common usage, money refers more specifically to currency, particularly the many circulating currencies with legal tender status conferred by a national state; deposit accounts denominated in such currencies are also considered part of the money supply, although these characteristics are historically comparatively recent.
The use of money provides an alternative to barter, which is considered in a modern, complex economy to be inefficient because it requires a coincidence of wants between traders, and an agreement that these needs are of equal value, before a transaction can occur. The efficiency gains through the use of money are thought to encourage trade and the division of labour, in turn increasing productivity and wealth.
A number of commodity money systems were amongst the earliest forms of money to emerge. cowries were used as a money in ancient China and throughout the South Pacific.
Under a commodity money system, the objects used as money have intrinsic value, i.e., they have value beyond their use as money. For example, gold coins retain value because of gold's useful physical properties besides its value due to monetary usage, whereas paper notes are only worth as much as the monetary value assigned to them. Commodity money is usually adopted to simplify transactions in a barter economy, and so it functions first as a medium of exchange. It quickly begins functioning as a store of value, since holders of perishable goods can easily convert them into durable money.
Fiat money is a relatively modern invention. A central authority (government) creates a new money object that has negligible inherent value. The widespread acceptance of fiat money is most frequently enhanced by the central authority mandating the money's acceptance under penalty of law and demanding this money in payment of taxes or tribute.
In many languages,the word for money is the same as or similar to the word for silver or gold. The French, appart from the word Monnaie, they also use the word argent (which means 'silver'), to mean money 1. The word translated "money" Old Testament is "keseph," but this word actually means "silver". Likewise, the Greek words underlying the translation "money" in the New Testament actually mean silver or a certain weight of silver. The modern notion of the word "money" as currency (fiat money or paper notes) is a very recent development in the meaning of the word "money." The change in meaning to pure paper notes was aided by Roosevelt in 1933 when Americans were required to turn in their gold for paper, but the silver coins in use continued to be "money" in the original sense (with a brief period of debasement during WWII) until 1964 when the silver was removed from U.S. coins. Despite the attempt by the central bank to enforce the new meaning of the word money as standing for paper currency or electronic credits, there has always been a significant number of scholars who point out that this is just a deception and that "money" must be real substance, i.e.
History
Money has developed over the years from gold, silver, copper, brass, iron, stones, or shells to paper, or electronic entries being managed by complex international banking systems.
Essential characteristics
Money is generally considered to have the following three characteristics:
1. It is a store of value
To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved.
Desirable features
To function as money, the monetary item should possess a number of features:
To be a medium of exchange:
It should have liquidity, and be easily tradable, with a low spread between the prices to buy and sell, in other words, a low transaction cost. This is why oil, coal, vermiculite, or water are not suitable as money even though they are valuable. It should be fungible: that is, one unit or piece must be exactly equivalent to another, which is why diamonds, works of art or real estate are not suitable as money.Money also is typically that which has the least declining marginal utility, meaning that as you accumulate more units of it, each unit is worth about the same as the prior units, and not substantially less.
For these reasons, gold and silver have been chosen again and again throughout history as money in more societies and in more cultures and over longer time periods than any other items.
One key benefit of these features of money is that it facilitates and encourages trade, as barter is far less efficient.
Problems with gold as money
There is no perfect money, although silver or gold may come closest to this standard. When gold is demonetized and forced to compete with paper currencies it does have a spread of about 4% to buy and sell in terms of the paper currency, whereas paper money can be exchanged without the 4 to 5 percent preminum imposed by the market preference for paper. Accordingly the premium's charged would drop to nothing in an economy that recognized silver or gold as lawful money. Gold today is a relatively small market (in terms of paper currency), and the price of gold can move substantially higher if a few billion dollars tries to buy gold. Although gold itself does not decay, gold coins are easily scratched or damaged, and this can reduce their value, and fungibility or of gold coins (athough no where near as fast as inflation reduces the value of paper). In 2006 they were running low on gold and silver with which to manipulate the market, and the debt overhanging the fiat money fractional reserve system will soon deflate. This will cause the buying power of silver and gold to rise to extreme levels at first, and then to be used as money until the next system of fiat money, or fiat electronic credit is imposed on the world.
In the history of the Several States of America such attitudes as "gold is the money of monarchs"* helped to maintain a bi-metallic money system that rejected credit and debt as currency. 1052.)
Problems with paper as money
Due to the ease of production paper money may lose value through inflation and in todays electronic era, vast quantities of money can be created with a few key strokes. Perhaps the biggest criticism of paper money relates to the fact that its stability is generally subject to the whim of government regulation rather than the disciplines of market phenoma. Paper money can be easily damaged or destroyed by every day hazard from fire, water, termites and simple wear and tear. Money in the form of minted coins is sometimes destroyed by children placing it on rail road tracks or in amusement park machines which restamp it. Paper money is also subject to counterfeiting.
Modern forms
Banknotes (also known as paper money) and coins are the most liquid forms of tangible money and are commonly used for small person-to-person transactions.
There are also less tangible forms of money, which nevertheless serve the same functions as money. Checks, debit cards and wire transfers are used as means to more easily transfer larger amounts of money between bank accounts. Electronic money is an entirely non-physical currency that is traded and used over the internet.
Credit
orCredit is often loosely referred to as money. Money is used to buy goods and services, whereas credit buys goods and services on the promise to pay with money in the future.
This distinction between money and credit causes much confusion in discussions of monetary theory. In lay terms, and when convenient in academic discussion, credit and money are frequently used interchangeably. For example, bank deposits are generally included in summations of the national broad money supply. However, any detailed study of monetary theory needs to recognize the proper distinction between money and credit.
Federal Reserve notes, which are used as money in the United States, are difficult to describe in terms of credit or debt or money.
Since Federal Reserve notes are used in the United States as the most common medium of exchange, unit of account, and store of value, they are considered money by the majority of the population. To measure this kind of credit money, various forms of credit are counted together and listed as M1 or M2.
Economics
Money is one of the most central topics studied in economics and forms its most cogent link to finance. Monetarism is an economic theory which predominantly deals with the supply and demand for money. Technical, institutional, and legal changes changed the nature of the demand for money during the 1980s.
Monetary policy aims to manage the money supply, inflation and interest to affect output and employment. Inflation is the decrease in the value of a specific currency over time and can be caused by dramatic increases in the money supply. The interest rate, the cost of borrowing money, is an important tool used to control inflation and economic growth in monetary economics. Central banks are often made responsible for monitoring and controlling the money supply, interest rates and banking.
There have been many historical arguments regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all.
In Scotland and Northern Ireland private sector banks are licensed to print their own paper money by the government. Some of these private currencies are backed by historic forms of money such as gold, as in the case of digital gold currency.
It is possible for privately issued money to be backed by any other material, although some people argue about perishable materials. It is important to understand though that, as long as money is above all an agreement to use something as a medium of exchange, it is up to a community (or to whoever holds the power within a community) to decide whether money should be backed by whatever material or should be totally virtual.
Future
Today, gold and paper money can be traded electronically via online systems.
Supply
The money supply is the amount of money available within a specific economy available for purchasing goods or services. The categories grow in size with M3 representing all forms of money (including credit) and M0 being just base money (coins, bills, and central bank deposits). In the United States, the Federal Reserve is responsible for controlling the money supply, while in the Euro area the respective institution is the ECB.
When gold is used as money, the money supply can grow in either of two ways. First, the money supply can increase as the amount of gold increases by new gold mining at about 2% per year, but it can also increase more during periods of gold rushes and discoveries, such as when Columbus discovered the new world and brought gold back to Spain, or when gold was discovered in California in 1848. Second, the money supply can increase when the value of gold goes up, as this makes existing stocks of gold more valuable. Deflation was the more typical situation for over a century when gold was used as money in the U.S. from 1792 to 1913.
Australia - Australian Dollar (AUD) Canada - Canadian Dollar (CAD) European Monetary Union (EUR-12) - Euro (EUR) Hong Kong - Hong Kong Dollar (HKD) Japan - Japanese Yen (JPY) Switzerland - Swiss Franc (CHF) United Kingdom - Pound Sterling (GBP) United States - US Dollar (USD)Besides these currencies gold and silver are traded globally on the currency markets: Gold (XAU) quoted in 1 ounce increments Silver (XAG) quoted in 1000 ounce increments
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