Money

Money is any it em or verifiable record t hat is generally accept ed as payment for goods and
services and repayment of debt s, such as t axes, in a part icular count ry or socio-economic
cont ext .[1][2][3] The main funct ions of money are dist inguished as: a medium of exchange, a unit of
account , a st ore of value and somet imes, a st andard of deferred payment .[4][5] Any it em or
verifiable record t hat fulfils t hese funct ions can be considered as money.

A sample picture of a fictional ATM card. The largest part of the world's money exists only as accounting numbers which
are transferred between financial computers. Various plastic cards and other devices give individual consumers the power
to electronically transfer such money to and from their bank accounts, without the use of currency.
In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar
whose legs and arms were amputated, in the left corner

Money is hist orically an emergent market phenomenon est ablishing a commodit y money, but
nearly all cont emporary money syst ems are based on fiat money.[4] Fiat money, like any check or
not e of debt , is wit hout use value as a physical commodit y. It derives it s value by being declared
by a government t o be legal t ender; t hat is, it must be accept ed as a form of payment wit hin t he
boundaries of t he count ry, for "all debt s, public and privat e".[6] Count erfeit money can cause good
money t o lose it s value.

The money supply of a count ry consist s of currency (banknot es and coins) and, depending on t he
part icular definit ion used, one or more t ypes of bank money (t he balances held in checking
account s, savings account s, and ot her t ypes of bank account s). Bank money, which consist s only
of records (most ly comput erized in modern banking), forms by far t he largest part of broad
money in developed count ries.[7][8][9]

Etymology

The word money derives from t he Lat in word moneta wit h t he meaning "coin" via French monnaie.
The Lat in word is believed t o originat e from a t emple of Juno, on Capit oline, one of Rome's
seven hills. In t he ancient world, Juno was oft en associat ed wit h money. The t emple of Juno
Monet a at Rome was t he place where t he mint of Ancient Rome was locat ed.[10] The name
"Juno" may have derived from t he Et ruscan goddess Uni (which means "t he one", "unique", "unit ",
"union", "unit ed") and "Monet a" eit her from t he Lat in word "monere" (remind, warn, or inst ruct ) or
t he Greek word "moneres" (alone, unique).

In t he West ern world a prevalent t erm for coin-money has been specie, st emming from Lat in in
specie, meaning 'in kind'.[11]
 History

A 640 BC one-third stater electrum coin from Lydia

The use of bart er-like met hods may dat e back t o at least 100,000 years ago, t hough t here is no
evidence of a societ y or economy t hat relied primarily on bart er.[12][13] Inst ead, non-monet ary
societ ies operat ed largely along t he principles of gift economy and debt .[14][15] When bart er did
in fact occur, it was usually bet ween eit her complet e st rangers or pot ent ial enemies.[16]

Many cult ures around t he world event ually developed t he use of commodit y money. The
Mesopot amian shekel was a unit of weight , and relied on t he mass of somet hing like 160 grains
of barley.[17] The first usage of t he t erm came from Mesopot amia circa 3000 BC. Societ ies in t he
Americas, Asia, Africa and Aust ralia used shell money – oft en, t he shells of t he cowry (Cypraea
moneta L. or C. annulus L.). According t o Herodot us, t he Lydians were t he first people t o
int roduce t he use of gold and silver coins.[18] It is t hought by modern scholars t hat t hese first
st amped coins were mint ed around 650 t o 600 BC.[19]
Song Dynasty Jiaozi, the world's earliest paper money

The syst em of commodit y money event ually evolved int o a syst em of represent at ive money.
This occurred because gold and silver merchant s or banks would issue receipt s t o t heir
deposit ors – redeemable for t he commodit y money deposit ed. Event ually, t hese receipt s
became generally accept ed as a means of payment and were used as money. Paper money or
banknot es were first used in China during t he Song dynast y. These banknot es, known as "jiaozi",
evolved from promissory not es t hat had been used since t he 7t h cent ury. However, t hey did not
displace commodit y money and were used alongside coins. In t he 13t h cent ury, paper money
became known in Europe t hrough t he account s of t ravellers, such as Marco Polo and William of
Rubruck.[20] Marco Polo's account of paper money during t he Yuan dynast y is t he subject of a
chapt er of his book, The Travels of Marco Polo, t it led "How t he Great Kaan Causet h t he Bark of
Trees, Made Int o Somet hing Like Paper, t o Pass for Money All Over his Count ry."[21] Banknot es
were first issued in Europe by St ockholms Banco in 1661 and were again also used alongside
coins. The gold st andard, a monet ary syst em where t he medium of exchange are paper not es
t hat are convert ible int o pre-set , fixed quant it ies of gold, replaced t he use of gold coins as
currency in t he 17t h–19t h cent uries in Europe. These gold st andard not es were made legal
t ender, and redempt ion int o gold coins was discouraged. By t he beginning of t he 20t h cent ury,
almost all count ries had adopt ed t he gold st andard, backing t heir legal t ender not es wit h fixed
amount s of gold.

Aft er World War II and t he Bret t on Woods Conference, most count ries adopt ed fiat currencies
t hat were fixed t o t he U.S. dollar. The U.S. dollar was in t urn fixed t o gold. In 1971 t he U.S.
government suspended t he convert ibilit y of t he U.S. dollar t o gold. Aft er t his many count ries de-
pegged t heir currencies from t he U.S. dollar, and most of t he world's currencies became
unbacked by anyt hing except t he government s' fiat of legal t ender and t he abilit y t o convert t he
money int o goods via payment . According t o proponent s of modern money t heory, fiat money is
also backed by t axes. By imposing t axes, st at es creat e demand for t he currency t hey issue.[22]

Functions

In Money and the Mechanism of Exchange (1875), William St anley Jevons famously analyzed
money in t erms of four funct ions: a medium of exchange, a common measure of value (or unit of
account ), a standard of value (or st andard of deferred payment ), and a store of value. By 1919,
Jevons's four funct ions of money were summarized in t he couplet :

Money's a mat t er of funct ions four,

A Medium, a Measure, a St andard, a St ore.[23]

This couplet would lat er become widely popular in macroeconomics t ext books.[24] Most modern
t ext books now list only t hree funct ions, t hat of medium of exchange, unit of account , and st ore
of value, not considering a st andard of deferred payment as a dist inguished funct ion, but rat her
subsuming it in t he ot hers.[4][25][26]

There have been many hist orical disput es regarding t he combinat ion of money's funct ions, some
arguing t hat t hey need more separat ion and t hat a single unit is insufficient t o deal wit h t hem all.
One of t hese argument s is t hat t he role of money as a medium of exchange conflict s wit h it s
role as a st ore of value: it s role as a st ore of value requires holding it wit hout spending, whereas
it s role as a medium of exchange requires it t o circulat e.[5] Ot hers argue t hat st oring of value is
just deferral of t he exchange, but does not diminish t he fact t hat money is a medium of
exchange t hat can be t ransport ed bot h across space and t ime. The t erm "financial capit al" is a
more general and inclusive t erm for all liquid inst rument s, whet her or not t hey are a uniformly
recognized t ender.

Medium of exchange

When money is used t o int ermediat e t he exchange of goods and services, it is performing a
funct ion as a medium of exchange. It t hereby avoids t he inefficiencies of a bart er syst em, such
as t he inabilit y t o permanent ly ensure "coincidence of want s". For example, bet ween t wo part ies
in a bart er syst em, one part y may not have or make t he it em t hat t he ot her want s, indicat ing t he
non-exist ence of t he coincidence of want s. Having a medium of exchange can alleviat e t his
issue because t he former can have t he freedom t o spend t ime on ot her it ems, inst ead of being
burdened t o only serve t he needs of t he lat t er. Meanwhile, t he lat t er can use t he medium of
exchange t o seek for a part y t hat can provide t hem wit h t he it em t hey want .

Measure of value

A unit of account (in economics)[27] is a st andard numerical monet ary unit of measurement of t he
market value of goods, services, and ot her t ransact ions. Also known as a "measure" or "st andard"
of relat ive wort h and deferred payment , a unit of account is a necessary prerequisit e for t he
formulat ion of commercial agreement s t hat involve debt .

Money act s as a st andard measure and a common denominat ion of t rade. It is t hus a basis for
quot ing and bargaining of prices. It is necessary for developing efficient account ing syst ems.

Standard of deferred payment

While standard of deferred payment is dist inguished by some t ext s,[5] part icularly older ones,
ot her t ext s subsume t his under ot her funct ions.[4][25][26] A "st andard of deferred payment " is an
accept ed way t o set t le a debt – a unit in which debt s are denominat ed, and t he st at us of money
as legal t ender, in t hose jurisdict ions which have t his concept , st at es t hat it may funct ion for t he
discharge of debt s. When debt s are denominat ed in money, t he real value of debt s may change
due t o inflat ion and deflat ion, and for sovereign and int ernat ional debt s via debasement and
devaluat ion.

Store of value

To act as a store of value, money must be able t o be reliably saved, st ored, and ret rieved – and
be predict ably usable as a medium of exchange when it is ret rieved. The value of t he money
must also remain st able over t ime. Some have argued t hat inflat ion, by reducing t he value of
money, diminishes t he abilit y of t he money t o funct ion as a st ore of value.[4]

Properties

To fulfill it s various funct ions, money must have cert ain propert ies:[28]

Fungibilit y: it s individual unit s must be capable of mut ual subst it ut ion (i.e., int erchangeabilit y).
 Durabilit y: able t o wit hst and repeat ed use.

Divisibilit y: divisible t o small unit s.

Port abilit y: easily carried and t ransport ed.

Cognizabilit y: it s value must be easily ident ified.

Scarcit y: it s supply in circulat ion must be limit ed.

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 inst rument t hat can fulfill t he funct ions of money (det ailed
above). These financial inst rument s t oget her are collect ively referred t o as t he money supply of
an economy. In ot her words, t he money supply is t he number of financial inst rument s wit hin a
specific economy available for purchasing goods or services. Since t he money supply consist s of
various financial inst rument s (usually currency, demand deposit s, and various ot her t ypes of
deposit s), t he amount of money in an economy is measured by adding t oget her t hese financial
inst rument s creat ing a monetary aggregate.

Modern monet ary t heory dist inguishes among different ways t o measure t he st ock of money or
money supply, reflect ed in different t ypes of monet ary aggregat es, using a cat egorizat ion
syst em t hat focuses on t he liquidit y of t he financial inst rument used as money. The most
commonly used monet ary aggregat es (or t ypes of money) are convent ionally designat ed M1,
M2, and M3. These are successively larger aggregat e cat egories: M1 is currency (coins and bills)
plus demand deposit s (such as checking account s); M2 is M1 plus savings account s and t ime
deposit s under $100,000; M3 is M2 plus larger t ime deposit s and similar inst it ut ional account s.
M1 includes only t he most liquid financial inst rument s, and M3 relat ively illiquid inst rument s. The
precise definit ion of M1, M2, et c. may be different in different count ries.

Anot her measure of money, M0, is also used; unlike t he ot her measures, it does not represent
act ual purchasing power by firms and households in t he economy. M0 is base money, or t he
amount of money act ually issued by t he cent ral bank of a count ry. It is measured as currency
plus deposit s of banks and ot her inst it ut ions at t he cent ral bank. M0 is also t he only money t hat
can sat isfy t he reserve requirement s of commercial banks.
Creation of money

In current economic syst ems, money is creat ed by t wo procedures:

Legal tender, or narrow money (M0) is t he cash creat ed by a Cent ral Bank by mint ing coins and
print ing banknot es.

Bank money, or broad money (M1/M2) is t he money creat ed by privat e banks t hrough t he
recording of loans as deposit s of borrowing client s, wit h part ial support indicat ed by t he cash
ratio. Current ly, bank money is creat ed as elect ronic money.

In most count ries, t he majorit y of money is most ly creat ed as M1/M2 by commercial banks
making loans. Cont rary t o some popular misconcept ions, banks do not act simply as
int ermediaries, lending out deposit s t hat savers place wit h t hem, and do not depend on cent ral
bank money (M0) t o creat e new loans and deposit s.[29]

Market liquidity

"Market liquidit y" describes how easily an it em can be t raded for anot her it em, or int o t he
common currency wit hin an economy. Money is t he most liquid asset because it is universally
recognized and accept ed as a common currency. In t his way, money gives consumers t he
freedom t o t rade goods and services easily wit hout having t o bart er.

Liquid financial inst rument s are easily t radable and have low t ransact ion cost s. There should be
no (or minimal) spread bet ween t he prices t o buy and sell t he inst rument being used as money.

Types

Commodity
A 1914 British gold sovereign

Many it ems have been used as commodit y money such as nat urally scarce precious met als,
conch shells, barley, beads, et c., as well as many ot her t hings t hat are t hought of as having value.
Commodit y money value comes from t he commodit y out of which it is made. The commodit y
it self const it ut es t he money, and t he money is t he commodit y.[30] Examples of commodit ies
t hat have been used as mediums of exchange include gold, silver, copper, rice, Wampum, salt ,
peppercorns, large st ones, decorat ed belt s, shells, alcohol, cigaret t es, cannabis, candy, et c.
These it ems were somet imes used in a met ric of perceived value in conjunct ion wit h one
anot her, in various commodit y valuat ion or price syst em economies. The use of commodit y
money is similar t o bart er, but a commodit y money provides a simple and aut omat ic unit of
account for t he commodit y which is being used as money. Alt hough some gold coins such as t he
Krugerrand are considered legal t ender, t here is no record of t heir face value on eit her side of t he
coin. The rat ionale for t his is t hat emphasis is laid on t heir direct link t o t he prevailing value of
t heir fine gold cont ent .[31] American Eagles are imprint ed wit h t heir gold cont ent and legal t ender
face value.[32]

Representative

In 1875, t he Brit ish economist William St anley Jevons described t he money used at t he t ime as
"represent at ive money". Represent at ive money is money t hat consist s of t oken coins, paper
money or ot her physical t okens such as cert ificat es, t hat can be reliably exchanged for a fixed
quant it y of a commodit y such as gold or silver. The value of represent at ive money st ands in
direct and fixed relat ion t o t he commodit y t hat backs it , while not it self being composed of t hat
commodit y.[33]

Fiat
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 int rinsic value or
guarant ee t hat it can be convert ed int o a valuable commodit y (such as gold). Inst ead, it has
value only by government order (fiat ). Usually, t he government declares t he fiat currency
(t ypically not es and coins from a cent ral bank, such as t he Federal Reserve Syst em in t he U.S.) t o
be legal t ender, making it unlawful not t o accept t he fiat currency as a means of repayment for
all debt s, public and privat e.[34][35]

Some bullion coins such as t he Aust ralian Gold Nugget and American Eagle are legal t ender,
however, t hey t rade based on t he market price of t he met al cont ent as a commodit y, rat her t han
t heir legal t ender face value (which is usually only a small fract ion of t heir bullion value).[32][36]

Fiat money, if physically represent ed in t he form of currency (paper or coins), can be accident ally
damaged or dest royed. However, fiat money has an advant age over represent at ive or commodit y
money, in t hat t he same laws t hat creat ed t he money can also define rules for it s replacement in
case of damage or dest ruct ion. For example, t he U.S. government will replace mut ilat ed Federal
Reserve Not es (U.S. fiat money) if at least half of t he physical not e can be reconst ruct ed, or if it
can be ot herwise proven t o have been dest royed.[37] By cont rast , commodit y money t hat has
been lost or dest royed cannot be recovered.

Coinage

These fact ors led t o t he shift of t he st ore of value being t he met al it self: at first silver, t hen
bot h silver and gold, and at one point t here was bronze as well. Now we have copper coins and
ot her non-precious met als as coins. Met als were mined, weighed, and st amped int o coins. This
was t o assure t he individual t aking t he coin t hat he was get t ing a cert ain known weight of
precious met al. Coins could be count erfeit ed, but t hey also creat ed a new unit of account , which
helped lead t o banking. Archimedes' principle provided t he next link: coins could now be easily
t est ed for t heir fine weight of t he met al, and t hus t he value of a coin could be det ermined, even
if it had been shaved, debased or ot herwise t ampered wit h (see Numismat ics).

In most major economies using coinage, copper, silver, and gold formed t hree t iers of coins. Gold
coins were used for large purchases, payment of t he milit ary, and backing of st at e act ivit ies.
Silver coins were used for midsized t ransact ions, and as a unit of account for t axes, dues,
cont ract s, and fealt y, while copper coins represent ed t he coinage of common t ransact ion. This
syst em had been used in ancient India since t he t ime of t he Mahajanapadas. In Europe, t his
syst em worked t hrough t he medieval period because t here was virt ually no new gold, silver, or
copper int roduced t hrough mining or conquest . Thus t he overall rat ios of t he t hree coinages
remained roughly equivalent .

Paper

Huizi currency, issued in 1160

In premodern China, t he need for credit and for circulat ing a medium t hat was less of a burden
t han exchanging t housands of copper coins led t o t he int roduct ion of paper money, commonly
known t oday as "banknot e"s. This economic phenomenon was a slow and gradual process t hat
t ook place from t he lat e Tang dynast y (618–907) int o t he Song dynast y (960–1279). It began as
a means for merchant s t o exchange heavy coinage for receipt s of deposit issued as promissory
not es from shops of wholesalers, not es t hat were valid for t emporary use in a small regional
t errit ory. In t he 10t h cent ury, t he Song dynast y government began circulat ing t hese not es
amongst t he t raders in t heir monopolized salt indust ry. The Song government grant ed several
shops t he sole right t o issue banknot es, and in t he early 12t h cent ury t he government finally
t ook over t hese shops t o produce st at e-issued currency. Yet t he banknot es issued were st ill
regionally valid and t emporary; it was not unt il t he mid 13t h cent ury t hat a st andard and uniform
government issue of paper money was made int o an accept able nat ionwide currency. The
already widespread met hods of woodblock print ing and t hen Pi Sheng's movable t ype print ing by
t he 11t h cent ury was t he impet us for t he massive product ion of paper money in premodern
China.

Paper money from different countries

At around t he same t ime in t he medieval Islamic world, a vigorous monet ary economy was
creat ed during t he 7t h–12t h cent uries on t he basis of t he expanding levels of circulat ion of a
st able high-value currency (t he dinar). Innovat ions int roduced by economist s, t raders and
merchant s of t he Muslim world include t he earliest uses of credit ,[38] cheques, savings account s,
t ransact ional account s, loaning, t rust s, exchange rat es, t he t ransfer of credit and debt ,[39] and
banking inst it ut ions for loans and deposit s.[39]

In Europe, paper money was first int roduced in Sweden in 1661. Sweden was rich in copper, t hus,
because of copper's low value, ext raordinarily big coins (oft en weighing several kilograms) had t o
be made. The advant ages of paper currency were numerous: it reduced t ransport of gold and
silver, and t hus lowered t he risks; it made loaning gold or silver at int erest easier since t he specie
(gold or silver) never left t he possession of t he lender unt il someone else redeemed t he not e; it
allowed for a division of currency int o credit and specie backed forms. It enabled t he sale of
st ock in joint st ock companies, and t he redempt ion of t hose shares in t he paper.

However, t hese advant ages are held wit hin t heir disadvant ages. First , since a not e has no int rinsic
value, t here was not hing t o st op issuing aut horit ies from print ing more of it t han t hey had specie
t o back it wit h. Second, because it increased t he money supply, it increased inflat ionary
pressures, a fact observed by David Hume in t he 18t h cent ury. The result is t hat paper money
would oft en lead t o an inflat ionary bubble, which could collapse if people began demanding hard
money, causing t he demand for paper not es t o fall t o zero. The print ing of paper money was also
associat ed wit h wars, and financing of wars, and t herefore regarded as part of maint aining a
st anding army. For t hese reasons, paper currency was held in suspicion and host ilit y in Europe and
America. It was also addict ive since t he speculat ive profit s of t rade and capit al creat ion were
quit e large. Major nat ions est ablished mint s t o print money and mint coins, and branches of t heir
t reasury t o collect t axes and hold gold and silver st ock.

At t his t ime bot h silver and gold were considered legal t ender, and accept ed by government s for
t axes. However, t he inst abilit y in t he rat io bet ween t he t wo grew over t he 19t h cent ury, wit h t he
increase bot h in t he supply of t hese met als, part icularly silver, and of t rade. This is called
bimet allism and t he at t empt t o creat e a bimet allic st andard where bot h gold and silver backed
currency remained in circulat ion occupied t he effort s of inflat ionist s. Government s at t his point
could use currency as an inst rument of policy, print ing paper currency such as t he Unit ed St at es
greenback, t o pay for milit ary expendit ures. They could also set t he t erms at which t hey would
redeem not es for specie, by limit ing t he amount of purchase, or t he minimum amount t hat could
be redeemed.
Banknotes of different currencies with a face value of 5000

By 1900, most of t he indust rializing nat ions were on some form of a gold st andard, wit h paper
not es and silver coins const it ut ing t he circulat ing medium. Privat e banks and government s
across t he world followed Gresham's law: keeping gold and silver paid but paying out in not es.
This did not happen all around t he world at t he same t ime, but occurred sporadically, generally in
t imes of war or financial crisis, beginning in t he early part of t he 20t h cent ury and cont inuing
across t he world unt il t he lat e 20t h cent ury, when t he regime of float ing fiat currencies came
int o force. One of t he last count ries t o break away from t he gold st andard was t he Unit ed
St at es in 1971.

No count ry anywhere in t he world t oday has an enforceable gold st andard or silver st andard
currency syst em.

Commercial bank

A check, used as a means of converting funds in a demand deposit to cash

Commercial bank money or demand deposit s are claims against financial inst it ut ions t hat can be
used for t he purchase of goods and services. A demand deposit account is an account from
which funds can be wit hdrawn at any t ime by check or cash wit hdrawal wit hout giving t he bank or
financial inst it ut ion any prior not ice. Banks have t he legal obligat ion t o ret urn funds held in
demand deposit s immediat ely upon demand (or 'at call'). Demand deposit wit hdrawals can be
performed in person, via checks or bank draft s, using aut omat ic t eller machines (ATMs), or
t hrough online banking.[40]
Commercial bank money is creat ed t hrough fract ional-reserve banking, t he banking pract ise
where banks keep only a fract ion of t heir deposit s in reserve (as cash and ot her highly liquid
asset s) and lend out t he remainder, while maint aining t he simult aneous obligat ion t o redeem all
t hese deposit s upon demand.[41][42] Commercial bank money differs from commodit y and fiat
money in t wo ways: first ly it is non-physical, as it s exist ence is only reflect ed in t he account
ledgers of banks and ot her financial inst it ut ions, and secondly, t here is some element of risk t hat
t he claim will not be fulfilled if t he financial inst it ut ion becomes insolvent . The process of
fract ional-reserve banking has a cumulat ive effect of money creat ion by commercial banks, as it
expands t he money supply (cash and demand deposit s) beyond what it would ot herwise be.
Because of t he prevalence of fract ional reserve banking, t he broad money supply of most
count ries is a mult iple (great er t han 1) of t he amount of base money creat ed by t he count ry's
cent ral bank. That mult iple (called t he money mult iplier) is det ermined by t he reserve
requirement or ot her financial rat io requirement s imposed by financial regulat ors.

The money supply of a count ry is usually held t o be t he t ot al amount of currency in circulat ion
plus t he t ot al value of checking and savings deposit s in t he commercial banks in t he count ry. In
modern economies, relat ively lit t le of t he money supply is in physical currency. For example, in
December 2010 in t he U.S., of t he $8853.4 billion in broad money supply (M2), only $915.7 billion
(about 10%) consist ed of physical coins and paper money.[43]

Digital or electronic

The development of comput er t echnology in t he second part of t he t went iet h cent ury allowed
money t o be represent ed digit ally. By 1990, in t he Unit ed St at es all money t ransferred bet ween
it s cent ral bank and commercial banks was in elect ronic form. By t he 2000s most money exist ed
as digit al currency in bank dat abases.[44] In 2012, by number of t ransact ion, 20 t o 58 percent of
t ransact ions were elect ronic (dependent on count ry).[45]

Non-nat ional digit al currencies were developed in t he early 2000s. In part icular, Flooz and Beenz
had gained moment um before t he Dot -com bubble. Not much innovat ion occurred unt il t he
concept ion of Bit coin in 2008, which int roduced t he concept of a crypt ocurrency – a
decent ralised t rust less currency.[46]

Monetary policy
US dollar banknotes

When gold and silver are used as money, t he money supply can grow only if t he supply of t hese
met als is increased by mining. This rat e of increase will accelerat e during periods of gold rushes
and discoveries, such as when Columbus discovered t he New World and brought back gold and
silver t o Spain, or when gold was discovered in California in 1848. This causes inflat ion, as t he
value of gold goes down. However, if t he rat e of gold mining cannot keep up wit h t he growt h of
t he economy, gold becomes relat ively more valuable, and prices (denominat ed in gold) will drop,
causing deflat ion. Deflat ion was t he more t ypical sit uat ion for over a cent ury when gold and
paper money backed by gold were used as money in t he 18t h and 19t h cent uries.

Modern-day monet ary syst ems are based on fiat money and are no longer t ied t o t he value of
gold. The cont rol of t he amount of money in t he economy is known as monet ary policy.
Monet ary policy is t he process by which a government , cent ral bank, or monet ary aut horit y
manages t he money supply t o achieve specific goals. Usually, t he goal of monet ary policy is t o
accommodat e economic growt h in an environment of st able prices. For example, it is clearly
st at ed in t he Federal Reserve Act t hat t he Board of Governors and t he Federal Open Market
Commit t ee should seek "t o promot e effect ively t he goals of maximum employment , st able
prices, and moderat e long-t erm int erest rat es."[47]

A failed monet ary policy can have significant det riment al effect s on an economy and t he societ y
t hat depends on it . These include hyperinflat ion, st agflat ion, recession, high unemployment ,
short ages of import ed goods, inabilit y t o export goods, and even t ot al monet ary collapse and
t he adopt ion of a much less efficient bart er economy. This happened in Russia, for inst ance,
aft er t he fall of t he Soviet Union.

Government s and cent ral banks have t aken bot h regulat ory and free market approaches t o
monet ary policy. Some of t he t ools used t o cont rol t he money supply include:

changing t he int erest rat e at which t he cent ral bank loans money t o (or borrows money from)
t he commercial banks

currency purchases or sales

increasing or lowering government borrowing

increasing or lowering government spending

manipulat ion of exchange rat es

raising or lowering bank reserve requirement s

regulat ion or prohibit ion of privat e currencies

t axat ion or t ax breaks on import s or export s of capit al int o a count ry

In t he US, t he Federal Reserve is responsible for cont rolling t he money supply, while in t he Euro
area t he respect ive inst it ut ion is t he European Cent ral Bank. Ot her cent ral banks wit h a
significant impact on global finances are t he Bank of Japan, People's Bank of China and t he Bank
of England.

For many years much of monet ary policy was influenced by an economic t heory known as
monet arism. Monet arism is an economic t heory which argues t hat management of t he money
supply should be t he primary means of regulat ing economic act ivit y. The st abilit y of t he demand
for money prior t o t he 1980s was a key finding of Milt on Friedman and Anna Schwart z[48]
support ed by t he work of David Laidler,[49] and many ot hers. The nat ure of t he demand for
money changed during t he 1980s owing t o t echnical, inst it ut ional, and legal fact ors and t he
influence of monet arism has since decreased.

Locality
A former Finnish 10 mark banknote from 1980. President J. K. Paasikivi illustrated in a banknote.

The definit ion of money says it is money only "in a part icular count ry or socio-economic cont ext ".
In general, communit ies only use a single measure of value, which can be ident ified in t he prices
of goods list ed for sale. There might be mult iple media of exchange, which can be observed by
what is given t o purchase goods ("medium of exchange"), et c. In most count ries, t he government
act s t o encourage a part icular forms of money, such as requiring it for t axes and punishing fraud.

Some places do maint ain t wo or currencies, part icularly in border t owns or high-t ravel areas.
Shops in t hese locat ions might list prices and accept payment in mult iple currencies. Ot herwise,
foreign currency is t reat ed as an financial asset in t he local market . Foreign currency is commonly
bought or sold on foreign exchange market s by t ravelers and t raders.

Communit ies can change t he money t hey use, which is known as currency subst it ut ion. This can
happen int ent ionally, when a government issues a new currency. For example, when Brazil moved
from t he Brazilian cruzeiro t o t he Brazilian real. It can also happen spont aneously, when t he
people refuse t o accept a currency experiencing hyperinflat ion (even if it s use is encouraged by
t he government ).

The money used by a communit y can change on a smaller scale. This can come t hrough
innovat ion, such as t he adopt ion of cheques (checks). Gresham's law says t hat "bad money drives
out good". That is, when buying a good, a person is more likely t o pass on less-desirable it ems
t hat qualify as "money" and hold on t o more valuable ones. For example, coins wit h less silver in
t hem (but which are st ill valid coins) are more likely t o circulat e in t he communit y. This may
effect ively change t he money used by a communit y.

The money used by a communit y does not have t o be a currency issued by a government . A
famous example of communit y adopt ing a new form of money is prisoners-of-war using
cigaret t es t o t rade.[50]

Financial crimes
Counterfeiting

Count erfeit money is imit at ion currency produced wit hout t he legal sanct ion of t he st at e or
government . Producing or using count erfeit money is a form of fraud or forgery. Count erfeit ing is
almost as old as money it self. Plat ed copies (known as Fourrées) have been found of Lydian
coins which are t hought t o be among t he first west ern coins.[51] Hist orically, object s t hat were
difficult t o count erfeit (e.g. shells, rare st ones, precious met als) were oft en chosen as money.[52]
Before t he int roduct ion of paper money, t he most prevalent met hod of count erfeit ing involved
mixing base met als wit h pure gold or silver. A form of count erfeit ing is t he product ion of
document s by legit imat e print ers in response t o fraudulent inst ruct ions. During World War II, t he
Nazis forged Brit ish pounds and American dollars. Today some of t he finest count erfeit
banknot es are called Superdollars because of t heir high qualit y and likeness t o t he real U.S. dollar.
There has been significant count erfeit ing of Euro banknot es and coins since t he launch of t he
currency in 2002, but considerably less t han for t he U.S. dollar.[53]

Money laundering

Money laundering is t he process in which t he proceeds of crime are t ransformed int o ost ensibly
legit imat e money or ot her asset s. However, in several legal and regulat ory syst ems t he t erm
money laundering has become conflat ed wit h ot her forms of financial crime, and somet imes used
more generally t o include misuse of t he financial syst em (involving t hings such as securit ies,
digit al currencies, credit cards, and t radit ional currency), including t errorism financing, t ax evasion,
and evading of int ernat ional sanct ions.

See also

Calculat ion in kind Labour voucher

Coin of account Leprosy colony money

Commons-based peer product ion Local exchange t rading syst em

Digit al currency Money bag

Foreign exchange market Orders of magnit ude (currency)

Gift economy Seigniorage

Int elligent banknot e neut ralisat ion syst em Slang t erms for money
 Social capit al World currency

Velocit y of Money Count erfeit money

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Further reading

Keen, St eve (February 2015). "What Is Money and How Is It Creat ed?" (ht t ps://www.forbes.co
m/sit es/st evekeen/2015/02/28/what -is-money-and-how-is-it -creat ed/) Uses argument s
from Graziani, August o (1989), The Theory of the Monetary Circuit, Thames Papers in Polit ical
Economy, Spring: pp. 1–26. "Banks creat e money by issuing a loan t o a borrower; t hey record
t he loan as an asset , and t he money t hey deposit in t he borrower’s account as a liabilit y. This, in
one way, is no different t o t he way t he Federal Reserve creat es money ... money is simply a
t hird part y’s promise t o pay which we accept as full payment in exchange for goods. The t wo
main t hird part ies whose promises we accept are t he government and t he banks ... money ... is
not backed by anyt hing physical, and inst ead relies on t rust . Of course, t hat t rust can be
abused ... we cont inue t o ignore t he main game: what t he banks do (for good and for ill) t hat
really drives t he economy." Forbes

Hart man, Mit chell (Oct ober 30, 2017). "How Much Money Is There in t he World?" (ht t ps://www.
market place.org/2017/10/30/world/how-much-money-t here-world) . I've Always Wondered...
(st ory series). Marketplace. American Public Media. Ret rieved Oct ober 31, 2017.

Lanchest er, John, "The Invent ion of Money: How t he heresies of t wo bankers became t he
basis of our modern economy", The New Yorker, 5 & 12 August 2019, pp. 28–31.

External links

Media relat ed t o Money (cat egory) at Wikimedia Commons

Quot at ions relat ed t o Money at Wikiquot e

The dict ionary definit ion of money at Wikt ionary

Works relat ed t o Money at Wikisource

"Money" (ht t p://www.bbc.co.uk/programmes/p00547ch) , BBC Radio 4 discussion wit h Niall

Ferguson, Richard J. Evans and Jane Humphries (In Our Time, Mar. 1, 2001)
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