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Object or record accepted as payment
For other uses, see
Money (disambiguation)
Euro
banknotes
and
coins
Money
is any item or verifiable record that is generally accepted as
payment
for
goods and services
and repayment of
debts
, such as
taxes
, in a particular country or socio-economic context.
The primary functions which distinguish money are:
medium of exchange
, a
unit of account
, a
store of value
and sometimes, a
standard of deferred payment
Money was historically an
emergent market phenomenon
that possessed intrinsic value as a
commodity
; nearly all contemporary money systems are based on unbacked
fiat money
without
use value
Its value is consequently derived by social convention, having been declared by a
government
or regulatory entity to be
legal tender
; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private", in the case of the
United States dollar
The
money supply
of a country comprises all
currency in circulation
banknotes
and
coins
currently issued) and, depending on the particular definition used, one or more types of
bank money
(the balances held in
checking accounts
savings accounts
, and other types of
bank accounts
). Bank money, whose value exists on the books of
financial institutions
and can be converted into physical notes or used for
cashless payment
, forms by far the largest part of
broad money
in developed countries.
Etymology
The word money derives from the Latin word
moneta
with the meaning "coin" via French
monnaie
. The Latin word is believed to originate from a temple of
Juno
, on
Capitoline
, one of Rome's seven hills. In the ancient world, Juno 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 have derived from the Etruscan goddess
Uni
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".
History
Main article:
History of money
A 640 BC one-third
stater
electrum
coin from
Lydia
. According to
Herodotus
, the
Lydians
were the first people to introduce the use of
gold
and
silver coins
It is thought by modern scholars that these first stamped
coins
were minted around 650 to 600 BC.
Egyptian gold stater
of
Nectanebo II
: reverse with
hieroglyphs
nfr-nb
, minted in
Egypt
around 360 BC.
The use of
barter
-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 economy
and
debt
10
11
When barter did in fact occur, it was usually between either complete strangers or potential enemies.
12
Many cultures around the world eventually developed the use of
commodity money
. The Mesopotamian
shekel
was a unit of weight, and relied on the mass of something like 160
grains
of
barley
13
failed verification
clarification needed
The first usage of the term came from
Mesopotamia
circa 3000 BC. Societies in the Americas, Asia, Africa and Australia used
shell money
—often, the shells of the
cowry
Cypraea moneta L.
or
C. annulus L.
). According to
Herodotus
, the
Lydians
were the first people to introduce the use of
gold
and
silver coins
14
It is thought by modern scholars that these first stamped
coins
were minted around 650 to 600 BC.
15
Song Dynasty
Jiaozi
, the world's earliest paper money
The system of
commodity money
eventually evolved into a system of
representative money
citation needed
This occurred because gold and silver merchants or banks would issue receipts to their depositors, redeemable for the commodity 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 "
jiaozi
", evolved from
promissory notes
that had been used since the 7th century. However, they did not displace commodity money and were used alongside coins. In the 13th century, paper money became known in Europe through the accounts of travellers, such as
Marco Polo
and
William of Rubruck
16
Marco Polo's account of paper money during the
Yuan dynasty
is the subject of a chapter of his book,
The Travels of Marco Polo
, titled "
How the Great Kaan Causeth the Bark of Trees, Made Into Something Like Paper, to Pass for Money All Over his Country
."
17
Banknotes were first issued in Europe by
Stockholms Banco
in 1661 and were again also used alongside coins. The
gold standard
, 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 tender
, 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
and the
Bretton Woods Conference
, most countries adopted fiat currencies that were fixed to the
U.S. dollar
. The U.S. dollar was in turn fixed to gold. In 1971 the U.S. government suspended the convertibility of the dollar to gold. After this many countries de-pegged their currencies from the U.S. 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. According to proponents of
modern money theory
, fiat money is also backed by taxes. By imposing taxes, states create demand for the currency they issue.
18
Functions
See also:
Monetary economics
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In
Money and the Mechanism of Exchange (1875)
William Stanley Jevons
famously analyzed money in terms of four functions: a
medium of exchange
, a
common measure of value
(or
unit of account
), a
standard of value
(or
standard of deferred payment
), and a
store of value
. By 1919, Jevons's four functions of money were summarized in the
couplet
Money's a matter of functions four,
A Medium, a Measure, a Standard, a Store.
19
This couplet would later become widely popular in macroeconomics textbooks.
20
Most modern textbooks now list only three functions, that of
medium of exchange
unit of account
, and
store of value
, not considering a standard of deferred payment as a distinguished function, but rather subsuming it in the others.
21
22
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
conflicts with its role as a
store of value
: its role as a store of value requires holding it without spending, whereas its role as a medium of exchange requires it to circulate.
23
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
Main article:
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 inability to permanently ensure "
coincidence of wants
". For example, between two parties in a barter system, one party may not have or make the item that the other wants, indicating the non-existence of the coincidence of wants. Having a medium of exchange can alleviate this issue because the former can have the freedom to spend time on other items, instead of being burdened to only serve the needs of the latter. Meanwhile, the latter can use the medium of exchange to seek for a party that can provide them with the item they want.
Measure of value
Main article:
Unit of account
unit of account
(in economics)
24
is a standard numerical monetary 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.
Money acts as a standard measure and a common denomination of trade. It is thus a basis for quoting and bargaining of prices. It is necessary for developing efficient accounting systems like
double-entry bookkeeping
Standard of deferred payment
Main article:
Standard of deferred payment
While
standard of deferred payment
is distinguished by some texts,
23
particularly older ones, other texts subsume this under other functions.
21
22
clarification needed
A "standard of deferred payment" is an accepted way to settle a
debt
—a unit in which debts are denominated, and the status of money as
legal tender
, in those jurisdictions which have this concept, states that it may function for the discharge of debts. The standard of deferred payment allows people to
buy now pay later
. When debts are denominated in money, the real value of debts may change due to inflation and
deflation
, and for sovereign and international debts via
debasement
and
devaluation
Store of value
Main article:
Store of value
To act as a
store of value
, 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, by reducing the value of money, diminishes the ability of the money to function as a store of value.
failed verification
Properties
The functions of money are that it is a medium of exchange, a unit of account, and a store of value.
25
To fulfill these various functions, money must be:
26
Fungible
: its individual units must be capable of mutual substitution (i.e., interchangeability).
Durable
: able to withstand repeated use.
Divisible: divisible to small units.
Portable: easily carried and transported.
Acceptable: most people must accept the money as payment
Scarce: its supply in circulation must be limited.
26
Money supply
Main article:
Money supply
Money Base, M1 and M2 in the U.S. from 1981 to 2012
Printing paper money at a printing press in
Perm
A person counts a bundle of different
Swedish
banknotes.
In economics, money is any
financial instrument
that can fulfill the functions of money (detailed above). These financial instruments together are collectively referred to as the
money supply
of an economy. In other words, the money supply is the number 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
Economists employ different ways to measure the stock of money or money supply, reflected in different types of monetary aggregates, using a categorization system that focuses on the
liquidity
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; M3 is M2 plus larger time deposits and similar institutional accounts. M1 includes only the most liquid financial instruments, and M3 relatively illiquid instruments. The precise definition of M1, M2, etc. may be different in different countries.
Another measure of money, M0, is also used. M0 is
base money
, or the amount of money actually issued by the
central bank
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
Creation of money
Main article:
Money creation
In current economic systems, money is created by two procedures:
citation needed
Legal tender
, or
narrow money
(M0) is the cash created by a Central Bank by minting coins and printing banknotes.
Bank money
, or
broad money
(M1/M2) is the money created by private banks through the recording of loans as deposits of borrowing clients, with partial support indicated by the
cash ratio
. Currently, bank money is created as electronic money.
Bank money, whose value exists on the books of financial institutions and can be converted into physical notes or used for cashless payment, forms by far the largest part of
broad money
in developed countries.
27
28
29
In most countries, the majority of money is mostly created as M1/M2 by commercial banks making loans. Contrary to some popular misconceptions, banks do not act simply as intermediaries, lending out deposits that savers place with them, and do not depend on central bank money (M0) to create new loans and deposits.
30
Market liquidity
Main article:
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 recognized and accepted as a common currency. In this way, money gives consumers the
freedom
to trade goods and services easily without having to barter.
Liquid financial instruments are easily
tradable
and have low
transaction costs
. There should be no (or minimal)
spread
between the prices to buy and sell the instrument being used as money.
Types
Commodity
Main article:
Commodity money
A 1914 British
gold sovereign
Many items have been used as
commodity money
such as naturally scarce
precious metals
conch shells
barley
, beads, etc., as well as many other things that are thought of as having
value
. 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.
31
Examples of commodities that have been used as mediums of exchange include gold, silver, copper, rice,
Wampum
, 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 with one another, in various commodity valuation or
price system
economies. The use of commodity money is similar to barter, but a commodity money provides a simple and automatic
unit of account
for the commodity which is being used as money. Although some
gold coins
such as the
Krugerrand
are considered
legal tender
, 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.
32
American Eagles
are imprinted with their gold content and legal tender
face value
33
Representative
Main article:
Representative money
In 1875, the British economist
William Stanley Jevons
described the money used at the time as "
representative money
". Representative money is money that consists of
token coins
paper money
or other physical tokens such as certificates, that can be reliably exchanged for a fixed quantity of a commodity such as gold or silver. 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.
34
Fiat
Main article:
Fiat money
Gold coins are an example of legal tender that are traded for their intrinsic value, rather than their face value.
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
in the U.S.) to be
legal tender
, making it unlawful not to accept the fiat currency as a means of repayment for all debts, public and private.
35
36
Some
bullion coins
such as the
Australian Gold Nugget
and
American Eagle
are legal tender, however, they trade based on the
market price
of the metal content as a
commodity
, rather than their legal tender
face value
(which is usually only a small fraction of their bullion value).
33
37
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.
38
By contrast, commodity money that has been lost or destroyed cannot be recovered.
Demurrage
This section is an excerpt from
Demurrage currency
edit
Demurrage currency
also known as depreciating money
40
: 7
or stamp scrip in its
paper money
form,
41
is a type of money that is designed to gradually lose
purchasing power
at a constant rate.
Demurrage money is often confused with
inflation
, as they both cause money to lose value, but they have
significantly different economic effects
42
: 15–16
Unlike normal money, demurrage is designed to be only a
temporary
store of value
. Demurrage money functions primarily as a
medium of exchange
and a
unit of account
43
40
: 16
Proponents of demurrage currency generally believe that the medium of exchange and store of value functions of traditional money are antagonistic against each other.
44
45
The German-Argentine economist
Silvio Gesell
advocated for demurrage currency as part of the
Freiwirtschaft
economic system. He referred to demurrage as
Freigeld
("free money")—"free" because it would be freed from hoarding and interest.
46
43
Gesell theorized that Freigeld would increase the
velocity of money
, eliminate inflation, reduce unemployment, create an
interest-free economy
, and lead to fewer recessions.
42
: 2
43
John Maynard Keynes
wrote "the idea behind stamped money is sound", but he also criticized it.
47
Demurrage money was used in
ancient Egypt
and in Europe during the
High Middle Ages
. It has been credited for the economic prosperity of those times.
42
: 5–6
48
Shortly after Gesell's death, demurrage currencies peaked in popularity during the
Great Depression
as a series of
emergency currencies
, intended to reinvigorate the
circular flow of income
throughout the economy, due to their faster circulation velocities.
40
: 16–17
42
: 8
Despite their success, most demurrage currencies were banned by central banks for violating national monopolies on currency.
42
: 8
As of 2026, there are only a handful of local demurrage currencies that are still used, with the
Chiemgauer
being the most notable and widely used of them all.
Coinage
Main article:
Coin
Ancient Jewish coin
, engraved
menorah
, from the
Hasmoneon kingdom
37-40 BCE
These factors led to the shift of the store of value being the metal itself: at first silver, then both silver and gold, and at one point there was bronze as well. Now we have copper coins and other non-precious metals as coins. Metals were mined, weighed, and stamped into coins. This was to assure the individual taking the coin that he was getting a certain known weight of precious metal. Coins could be counterfeited, but they also created a new
unit of account
, which helped lead to banking.
Archimedes' principle
provided the next link: coins could now be easily tested for their
fine
weight of the metal, and thus the value of a coin could be determined, even if it had been shaved, debased or otherwise tampered with (see
Numismatics
).
In most major economies using coinage, copper, silver, and gold formed three tiers of coins. Gold coins were used for large purchases, payment of the military, and backing of state activities. Silver coins were used for midsized transactions, and as a unit of account for taxes, dues, contracts, and fealty, while copper coins represented the coinage of common transaction. This system had been used in ancient
India
since the time of the
Mahajanapadas
. In Europe, this system worked through the
medieval
period because there was virtually no new gold, silver, or copper introduced through mining or conquest.
citation needed
Thus the overall ratios of the three coinages remained roughly equivalent.
Paper
Main article:
Banknote
Huizi currency
, issued in 1160
In
premodern China
, the need for credit and for circulating a medium that was less of a burden than exchanging thousands of
copper coins
led to the introduction of
paper money
. This economic phenomenon was a slow and gradual process that took place from the late
Tang dynasty
(618–907) into the
Song dynasty
(960–1279). It began as a means for merchants to exchange heavy coinage for
receipts
of deposit issued as
promissory notes
from shops of wholesalers, notes that were valid for temporary use in a small regional territory. In the 10th century, the Song dynasty government began circulating these notes amongst the traders in their
monopolized
salt industry. The Song government granted several shops the sole right to issue banknotes, and in the early 12th century the government finally took over these shops to produce state-issued currency. Yet the banknotes issued were still regionally valid and temporary; it was not until the mid 13th century that a standard and uniform government issue of paper money was made into an acceptable nationwide currency. The already widespread methods of
woodblock printing
and then
Pi Sheng
's
movable type
printing by the 11th century was the impetus for the massive production of paper money in premodern China.
Paper money from different countries
At around the same time in the
medieval Islamic world
, a vigorous
monetary economy
was created during the 7th–12th centuries on the basis of the expanding levels of circulation of a stable high-value currency (the
dinar
). Innovations introduced by economists, traders and merchants of the Muslim world include the earliest uses of
credit
49
cheques
savings accounts
transactional accounts
, loaning,
trusts
exchange rates
, the transfer of credit and
debt
50
and
banking institutions
for loans and
deposits
50
need quotation to verify
In Europe, paper money was first introduced in
Sweden
in 1661. Sweden was rich in copper, thus, because of copper's low value, extraordinarily big coins (often weighing several kilograms) had to be made. The advantages of paper currency were numerous: it reduced transport of gold and silver, and thus lowered the risks; it made loaning gold or silver at interest easier since the specie (gold or silver) never left the possession of the lender until someone else redeemed the note; and it allowed for a division of currency into credit and specie backed forms. It enabled the sale of
stock
in
joint stock companies
, and the redemption of those
shares
in the paper.
However, these advantages are held within their disadvantages. First, since a note has no intrinsic value, there was nothing to stop issuing authorities from printing more of it than they had specie to back it with. Second, because it increased the money supply, it increased inflationary pressures, a fact observed by
David Hume
in the 18th century. The result is that paper money would often lead to an inflationary bubble, which could collapse if people began demanding hard money, causing the demand for paper notes to fall to zero. The printing of paper money was also associated with wars, and financing of wars, and therefore regarded as part of maintaining a
standing army
. For these reasons, paper currency was held in suspicion and hostility in Europe and America. It was also addictive since the speculative profits of trade and capital creation were quite large. Major nations established
mints
to print money and mint coins, and branches of their treasury to collect taxes and hold gold and silver stock.
At this time both silver and gold were considered
legal tender
, and accepted by governments for taxes. However, the
instability in the ratio
between the two grew over the 19th century, with the increase both in the supply of these metals, particularly silver, and of trade. This is called
bimetallism
and the attempt to create a bimetallic standard where both gold and silver backed currency remained in circulation occupied the efforts of inflationists. Governments at this point could use currency as an instrument of policy, printing paper currency such as the
United States greenback
, to pay for military expenditures. They could also set the terms at which they would redeem notes for specie, by limiting the amount of purchase, or the minimum amount that could be redeemed.
Banknotes of different currencies with a face value of 5000
By 1900, most of the industrializing nations were on some form of a gold standard, with paper notes and silver coins constituting the circulating medium. Private banks and governments across the world followed
Gresham's law
: keeping gold and silver paid but paying out in notes. This did not happen all around the world at the same time, but occurred sporadically, generally in times of war or financial crisis, beginning in the early part of the 20th century and continuing across the world until the late 20th century, when the regime of floating fiat currencies came into force. One of the last countries to break away from the
gold standard
was the United States in 1971.
No country anywhere in the world today has an enforceable gold standard or
silver standard
currency system.
Commercial bank
Main article:
Demand deposit
A check, used as a means of converting funds in a
demand deposit
to cash
Commercial bank money or
demand deposits
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
51
Commercial bank money is created by commercial banks whose
reserves
(held as cash and other highly liquid assets) typically constitute only a fraction of their
deposits
, while the banks maintain an obligation to redeem all these deposits upon demand - a practise known as
fractional-reserve banking
52
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
money multiplier
theory presents the process of creating commercial bank money as a multiple (greater than 1) of the amount of
base money
created by the country's
central bank
, the multiple itself being a function of the
legal regulation
of banks imposed by financial regulators (e.g., potential
reserve requirements
) beside the business policies of
commercial banks
and the preferences of
households
- factors which the central bank can influence, but not control completely.
53
Contemporary central banks generally do not control the creation of money, nor do they try to, though their interest rate-setting monetary policies naturally affect the amount of loans and deposits that commercial banks create.
54
55
56
Digital or electronic
Main articles:
Digital money
and
Bitcoin
Café in
Delft
accepting Bitcoin
The development of computer technology in the second part of the twentieth century allowed money to be represented digitally. By 1990, in the United States all money transferred between its central bank and commercial banks was in electronic form. By the 2000s most money existed as
digital currency
in bank databases.
57
In 2012, by number of transaction, 20 to 58 percent of transactions were electronic (dependent on country).
58
Anonymous digital currencies were developed in the early 2000s. Early examples include
Ecash
bit gold
RPOW
, and
b-money
. In 2008,
Bitcoin
introduced the concept of a decentralised, borderless currency that requires no
trusted third party
59
Instead, it relies on a distributed network of
nodes
running
open-source software
to enforce the system’s rules and reach
consensus
, allowing it to operate without permission from banks or governments.
60
Monetary policy
Main article:
Monetary policy
US dollar banknotes
When gold and silver were used as money, the money supply could grow only if the supply of these metals was increased by mining. This rate of increase would accelerate during periods of
gold rushes
and discoveries, such as when Columbus traveled to the
New World
and brought back gold and silver to Spain, or when gold was
discovered in California in 1848
. This caused inflation, as the value of gold went down. However, if the rate of
gold mining
could not keep up with the growth of the economy, gold became relatively more valuable, and prices (denominated in gold) would drop, causing deflation. Deflation was the more typical situation for over a century 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 amount of money in the economy is influenced by
monetary policy
, which is the process by which a
central bank
influences the economy to achieve specific goals. Often, the goal of monetary policy is to maintain low and stable
inflation
, directly via an
inflation targeting
strategy,
61
or indirectly via a
fixed exchange rate system
against a major currency with a stable inflation rate.
62
In some cases, the central bank may pursue various supplementary goals. For example, it is clearly stated in the
Federal Reserve Act
that the
Board of Governors
and the
Federal Open Market Committee
should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
63
A failed monetary policy can have significant detrimental effects on an economy and the society that depends on it. These include
hyperinflation
stagflation
recession
, high unemployment, 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
Monetary policy strategies have changed over time.
64
Some of the tools used to conduct contemporary monetary policy include:
65
changing the
interest rate
at which the central bank loans money to (or borrows money from) the commercial banks
open market operations
including currency purchases or sales
forward guidance
, i.e. publishing forecasts to communicate the likely future course of monetary policy
raising or lowering bank
reserve requirements
In the U.S., the
Federal Reserve
is responsible for conducting monetary policy, while in the
eurozone
the respective institution is the
European Central Bank
. Other central banks with a significant impact on global finances are the
Bank of Japan
People's Bank of China
and the
Bank of England
During the 1970s and 1980s monetary policy in several countries was influenced by an
economic theory
known as monetarism.
Monetarism
argued 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
and
Anna Schwartz
66
supported by the work of
David Laidler
67
and many others. It turned out, however, that maintaining a monetary policy strategy of targeting the money supply did not work very well: The relation between money growth and inflation was not as tight as expected by monetarist theory, and the short-run relation between the money supply and the interest rate, which is the chief instrument through which the central bank can influence output and inflation, was unreliable. Both problems were due to unpredictable shifts in the
demand for money
. Consequently, starting in the early 1990s a fundamental reorientation took place in most major central banks, starting to target inflation directly instead of the money supply and using the interest rate as their main instrument.
68
Locality
President
J. K. Paasikivi
illustrated in a former Finnish
10 mark
banknote from 1980
The definition of money says it is money only "in a particular country or socio-economic context". In general, communities only use a single measure of value, which can be identified in the prices of goods listed for sale. There might be multiple media of exchange, which can be observed by what is given to purchase goods ("medium of exchange"), etc. In most countries, the government acts to encourage a particular forms of money, such as requiring it for taxes and punishing
fraud
Some places do maintain two or more currencies, particularly in border towns or high-travel areas. Shops in these locations might list prices and accept payment in multiple currencies. Otherwise, foreign currency is treated as a
financial asset
in the local market. Foreign currency is commonly bought or sold on
foreign exchange markets
by travelers and traders.
Communities can change the money they use, which is known as
currency substitution
. This can happen intentionally, when a government issues a new currency. For example, when Brazil moved from the
Brazilian cruzeiro
to the
Brazilian real
. It can also happen spontaneously, when the people refuse to accept a currency experiencing
hyperinflation
(even if its use is encouraged by the government).
The money used by a community can change on a smaller scale. This can come through innovation, such as the adoption of
cheques (checks)
Gresham's law
says that "bad money drives out good". That is, when buying a good, a person is more likely to pass on less-desirable items that qualify as "money" and hold on to more valuable ones. For example, coins with less silver in them (but which are still valid coins) are more likely to circulate in the community. This may effectively change the money used by a community.
The money used by a community does not have to be a currency issued by a government. A famous example of community adopting a new form of money is prisoners-of-war using cigarettes to trade.
69
Financial crimes
Counterfeiting
Main article:
Counterfeit money
Counterfeit money is imitation currency produced without the legal sanction of the state or government. Producing or using counterfeit money is a form of fraud or forgery. Counterfeiting is almost as old as money itself. Plated copies (known as
Fourrées
) have been found of
Lydian coins
which are thought to be among the first western coins.
70
Historically, objects that were difficult to counterfeit (e.g. shells, rare stones, precious metals) were often chosen as money.
71
Before the introduction of
paper money
, the most prevalent method of counterfeiting involved mixing base metals with pure gold or silver. A form of counterfeiting is the production of documents by legitimate printers in response to fraudulent instructions. During
World War II
, the
Nazis
forged British pounds and American dollars.
72
73
Today some of the finest counterfeit banknotes are called
Superdollars
because of their high quality and likeness to the real U.S. dollar. There has been significant counterfeiting of
Euro
banknotes and coins since the launch of the currency in 2002, but considerably less than for the U.S. dollar.
74
Money laundering
Main article:
Money laundering
Money laundering is the process in which the proceeds of crime are transformed into ostensibly legitimate money or other assets. However, in several legal and regulatory systems the term money laundering has become
conflated
with other forms of financial crime, and sometimes used more generally to include misuse of the financial system (involving things such as securities,
digital currencies
, credit cards, and traditional currency), including
terrorism financing
tax evasion
, and evading of
international sanctions
See also
Money portal
Calculation in kind
Coin of account
Commons-based peer production
Counterfeit money
Digital currency
Finance
Foreign exchange market
Free Money Day
Gift economy
Intelligent banknote neutralisation system
Labour voucher
Leprosy colony money
Local exchange trading system
Monetary economics
Money bag
Money management
Non-monetary economy
Seigniorage
Slang terms for money
Social capital
Universal basic income
Velocity of Money
World currency
Notes
The etymology for demurrage currency comes from the concept of
demurrage
. In the shipping industry, "demurrage" refers to a charge that is assessed to the operator of a ship that fails to load or unload within the agreed upon timeframe. A ship that takes more time than it has been allotted in the schedule to load or unload affects the ability of other ships to do likewise. Therefore, a financial penalty is assessed to discourage such behavior. Demurrage money applies the same principle, but to money.
39
In other contexts, demurrage may refer to the
carrying cost
associated with owning or holding currency over a given period, rather than the money itself. For
commodity money
such as spices, demurrage is the cost of storing and securing the spices. For paper currency, it can take the form of a periodic tax, such as a
stamp tax
, on currency holdings.
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Further reading
Brzezinski, Adam; Palma, Nuno; Velde, François R. (2024). "
Understanding Money Using Historical Evidence
".
Annual Review of Economics
Chown, John F.
A History of Money: from AD 800
(Psychology Press, 1994).
Davies, Glyn, and Duncan Connors.
A History of Money
(4th ed. U of Wales Press, 2016)
excerpt
Ferguson, Niall
The Ascent of Money: A Financial History of the World
(2009)
excerpt
Keen, Steve
(February 2015).
"What Is Money and How Is It Created?"
argues, "Banks create money by issuing a loan to a borrower; they record the loan as an asset, and the money they deposit in the borrower's account as a liability. This, in one way, is no different to the way the Federal Reserve creates money ... money is simply a third party's promise to pay which we accept as full payment in exchange for goods. The two main third parties whose promises we accept are the government and the banks ... money ... is not backed by anything physical, and instead relies on trust. Of course, that trust can be abused ... we continue to ignore the main game: what the banks do (for good and for ill) that really drives the economy."
Forbes
Kuroda, Akinobu.
A Global History of Money
(Routledge, 2020).
excerpt
Hartman, Mitchell (October 30, 2017).
"How Much Money Is There in the World?"
. I've Always Wondered... (story series).
Marketplace
American Public Media
. Retrieved
October 31,
2017
Lanchester, John
, "The Invention of Money: How the heresies of two bankers became the basis of our modern economy",
The New Yorker
, 5 & 12 August 2019, pp. 28–31.
Schurtz, Heinrich
An Outline of the Origins of Money
(University of Chicago Press, 2024). Translated and annotated, with an introduction by Enrique Martino and Mario Schmidt. Foreword by
Michael Hudson
PDF
Weatherford, Jack.
The history of money
(2009). by a cultural anthropologist.
excerpt
External links
Media related to
Money
category
) at Wikimedia Commons
Quotations related to
Money
at Wikiquote
The dictionary definition of
money
at Wiktionary
Works related to
Money
at Wikisource
"Money"
, BBC Radio 4 discussion with Niall Ferguson, Richard J. Evans and Jane Humphries (
In Our Time
, Mar. 1, 2001)
Bastable, Charles Francis (1911).
"Money"
Encyclopædia Britannica
. Vol. 18 (11th ed.). pp.
694–
708.
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