For other uses see Money (disambiguation). Coins and banknotes the two most common physical forms of money.

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context.123 The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and occasionally in the past a standard of deferred payment.45 Any kind of object or secure verifiable record that fulfills these functions can serve as money.

Money originated as commodity money but nearly all contemporary money systems are based on fiat money.4 Fiat money is without intrinsic use value as a physical commodity and derives its value by being declared by a government 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".

The money supply of a country consists of currency (banknotes and coins) and bank money (the balance held in checking accounts and savings accounts). Bank money usually forms by far the largest part of the money supply. 678 Contents 1 History 1.1 Etymology 2 Functions 2.1 Medium of exchange 2.2 Unit of account 2.3 Store of value 2.4 Standard of deferred payment 3 Money supply 3.1 Market liquidity 4 Types of money 4.1 Commodity money 4.2 Representative money 4.3 Fiat money 4.4 Currency 4.5 Commercial bank money 5 Monetary policy 6 See also 7 References History A 640 BC one-third stater electrum coin from Lydia. Main article: History of money

The use of barter-like methods may date back to at least 100000 years ago though there is no evidence of a society or economy that relied primarily on barter.9 Instead non-monetary societies operated largely along the principles of gift economics. When barter did occur it was usually between either complete strangers or potential enemies.10

Many cultures around the world eventually developed the use of commodity money. The shekel was originally a unit of weight and referred to a specific weight of barley which was used as currency.11 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 money 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.12 It is thought by modern scholars that these first stamped coins were minted around 650600 BC.13 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. 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 at the Bretton Woods Conference most countries adopted fiat currencies that were fixed to the US dollar. The US dollar was in turn fixed to gold. In 1971 the US government suspended the convertibility of the US dollar to gold. After this many countries de-pegged their currencies from the US dollar and most of the world's currencies became unbacked by anything except the governments' fiat of legal tender and the ability to convert the money into goods via payment. Etymology

The word "money" is believed to originate from a temple of Hera located on Capitoline one of Rome's seven hills. In the ancient world Hera was often associated with money. The temple of Juno Moneta at Rome was the place where the mint of Ancient Rome was located.14 The name "Juno" may derive from the Etruscan goddess Uni (which means "the one" "unique" "unit" "union" "united") and "Moneta" either from the Latin word "monere" (remind warn or instruct) or the Greek word "moneres" (alone unique).

In the Western world a prevalent term for coin-money has been specie stemming from Latin in specie meaning 'in kind'.15 Functions Economics   Economies by region  Africa  North America South America  Asia Europe  Oceania General categories Microeconomics  Macroeconomics History of economic thought Methodology  Mainstream & heterodox Mathematical & statistical methods Mathematical economics   Game theory Optimization  Computational Econometrics   Experimental Statistics  National accounting Fields and subfields Behavioral  Cultural  Evolutionary Growth  Development  History International  Economic systems Monetary and Financial economics Public and Welfare economics Health  Education  Welfare Population  Labour  Managerial Business  Information Industrial organization  Law Agricultural  Natural resource Environmental  Ecological Urban  Rural  Regional  Geography Lists Journals Publications Categories Topics Economists Economy: concept and history Business and Economics Portal This box: view talk In the past money was generally considered to have the following four main functions which are summed up in a rhyme found in older economics textbooks: "Money is a matter of functions four a medium a measure a standard a store." That is money functions as a medium of exchange a unit of account a standard of deferred payment and a store of value.5 However 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.41617 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 is in conflict 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.5 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.18 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 'double coincidence of wants' problem. Unit of account Main article: Unit of account A unit of account is a standard numerical unit of measurement of the market value of goods services and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt. To function as a 'unit of account' whatever is being used as money must be: Divisible into smaller units without loss of value; precious metals can be coined from bars or melted down into bars again. Fungible: that is one unit or piece must be perceived as equivalent to any other which is why diamonds works of art or real estate are not suitable as money. A specific weight or measure or size to be verifiably countable. For instance coins are often milled with a reeded edge so that any removal of material from the coin (lowering its commodity value) will be easy to detect. Store of value Main article: Store of value To act as a store of value a 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.4 Standard of deferred payment Main article: Standard of deferred payment While standard of deferred payment is distinguished by some texts5 particularly older ones other texts subsume this under other functions.41617 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. 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. Money supply Main article: Money supply In economics money is a broad term that refers to any financial instrument that can fulfill the functions of money (detailed above). These financial instruments together are collectively referred to as the money supply of an economy. In other words the money supply is the amount 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. Modern monetary theory distinguishes among different ways to measure the 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 $100000; and M3 is M2 plus larger time deposits and similar institutional accounts. M1 includes only the most liquid financial instruments and M3 relatively illiquid instruments. Another measure of money M0 is also used; unlike the other measures it does not represent actual purchasing power by firms and households in the economy. M0 is base money or the amount of money actually issued by the central 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. 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 recognised and accepted as the 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 of money Currently most modern monetary systems are based on fiat money. However for most of history almost all money was commodity money such as gold and silver coins. As economies developed commodity money was eventually replaced by representative money such as the gold standard as traders found the physical transportation of gold and silver burdensome. Fiat currencies gradually took over in the last hundred years especially since the breakup of the Bretton Woods system in the early 1970s. Commodity money 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.19 Examples of commodities that have been used as mediums of exchange include gold silver copper rice 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 to one another in various commodity valuation or Price System economies. 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.20 American Eagles are imprinted with their gold content and legal tender face value.21 Representative money Main article: Representative money In 1875 economist William Stanley Jevons described what he called "representative money" i.e. money that consists of token coins 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.22 Fiat money Main article: Fiat money Fiat money or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead it has value only by government order (fiat). Usually the government declares the fiat currency (typically notes and coins from a central bank such as the Federal Reserve System in the U.S.) to be legal tender making it unlawful to not accept the fiat currency as a means of repayment for all debts public and private.2324 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).2125 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.26 By contrast commodity money which has been lost or destroyed cannot be recovered. Currency Main article: currency Currency refers to physical objects generally accepted as a medium of exchange. These are usually the coins and banknotes of a particular government which comprise the physical aspects of a nation's money supply. The other part of a nation's money supply consists of bank deposits (sometimes called deposit money) ownership of which can be transferred by means of cheques debit cards or other forms of money transfer. Deposit money and currency are money in the sense that both are acceptable as a means of payment.27 Money in the form of currency has predominated throughout most of history. Usually (gold or silver) coins of intrinsic value (commodity money) have been the norm. However nearly all contemporary money systems are based on fiat money modern currency has value only by government order (fiat). Usually the government declares the fiat currency (typically notes and coins issued by the central bank) to be legal tender making it unlawful to not accept the fiat currency as a means of repayment for all debts public and private.2829 Commercial bank money Main article: Demand deposit Demand deposit in cheque form. 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.30 Commercial bank money is created through fractional-reserve banking the banking practice where banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder while maintaining the simultaneous obligation to redeem all these deposits upon demand.3132 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 process of fractional-reserve banking has a cumulative effect of money creation by commercial banks as it expands money supply (cash and demand deposits) beyond what it would otherwise be. Because of the prevalence of fractional reserve banking the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators. The money supply of a country is usually held to be the total amount of currency in circulation plus the total amount of checking and savings deposits in the commercial banks in the country. Monetary policy Main article: Monetary policy When gold and silver are used as money the money supply can grow only if the supply of these metals is increased by mining. This rate of increase will accelerate during periods of gold rushes and discoveries such as when Columbus discovered the new world and brought back gold and silver to Spain or when gold was discovered in California in 1848. This causes inflation as the value of gold goes down. However if the rate of gold mining cannot keep up with the growth of the economy gold becomes relatively more valuable and prices (denominated in gold) will drop causing deflation. Deflation was the more typical situation for over a 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 control of the amount of money in the economy is known as monetary policy. Monetary policy is the process by which a government central bank or monetary authority manages the money supply to achieve specific goals. Usually the goal of monetary policy is to accommodate economic growth in an environment of stable prices. For example it is clearly stated in the Federal Reserve 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.33 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. Governments and central banks have taken both regulatory and free market approaches to monetary policy. Some of the tools used to control the money supply include: changing the interest rate at which the central bank loans money to (or borrows money from) the commercial banks currency purchases or sales increasing or lowering government borrowing increasing or lowering government spending manipulation of exchange rates raising or lowering bank reserve requirements regulation or prohibition of private currencies taxation or tax breaks on imports or exports of capital into a country In the US the Federal Reserve is responsible for controlling the money supply while in the Euro area the respective institution is the European Central Bank. Other central banks with significant impact on global finances are the Bank of Japan People's Bank of China and the Bank of England. For many years much of monetary policy was influenced by an economic theory known as monetarism. Monetarism is an economic theory which argues that management of the money supply should be the primary means of regulating economic activity. The stability of the demand for money prior to the 1980s was a key finding of Milton Friedman and Anna Schwartz34 supported by the work of David Laidler35 and many others. The nature of the demand for money changed during the 1980s owing to technical institutional and legal factors and the influence of monetarism has since decreased. See also Wikiquote has a collection of quotations related to: Money Look up money in Wiktionary the free dictionary. Wikimedia Commons has media related to: Money Coin of account Currency market Electronic money Labor-time voucher Leper colony money Local Exchange Trading Systems Money bag Non-market economics Numismatics Collection and study of money Orders of magnitude (currency) Seignorage Slang terms for money Tax World currency References Mishkin Frederic S. (2007). The Economics of Money Banking and Financial Markets (Alternate Edition). Boston: Addison Wesley. p. 8. ISBN 0-321-42177-9.  What Is Money By John N. Smithin 1. Retrieved July-17-09. "money : The New Palgrave Dictionary of Economics". The New Palgrave Dictionary of Economics. http://www.dictionaryofeconomics.com/articleidpde2008M000217&editioncurrent&qmoney&topicid&resultnumber5. Retrieved 18 December 2010.  a b c d e Mankiw N. Gregory (2007). "2". Macroeconomics (6th ed.). New York: Worth Publishers. pp. 2232. ISBN 0-7167-6213-7.  a b c d T.H. Greco. Money: Understanding and Creating Alternatives to Legal Tender White River Junction Vt: Chelsea Green Publishing (2001). ISBN 1-890132-37-3 Boyle David (2006). The Little Money Book. The Disinformation Company. pp. 37. ISBN 978-1932857269.  "On2 Money / A History of Money". pbs.org. http://www.pbs.org/newshour/on2/money/history.html. Retrieved 2009-04-20.  Bernstein Peter A Primer on Money and Banking and Gold Wiley 2008 edition pp29-39 Mauss Marcel. 'The Gift: The Form and Reason for Exchange in Archaic Societies.' pp. 36-37. Graeber David. 'Toward an Anthropological Theory of Value'. pp. 153-154. Kramer History Begins at Sumer pp. 5255. Herodotus. Histories I 94 "Goldsborough Reid. "World's First Coin"". Rg.ancients.info. 2003-10-02. http://rg.ancients.info/lion/article.html. Retrieved 2009-04-20.  D'Eprio Peter & Pinkowish Mary Desmond (1998). What Are The Seven Wonders Of The World First Anchor Books p.192. ISBN 0-385-49062-3 "Online Etymology Dictionary". Etymonline.com. http://www.etymonline.com/index.phpsearchspecie&searchmodephrase. Retrieved 2009-04-20.  a b Krugman Paul & Wells Robin Economics Worth Publishers New York (2006) a b Abel Andrew; Bernanke Ben (2005). "7". Macroeconomics (5th ed.). Pearson. pp. 266269. ISBN 0201327899.  Theory of Money and Credit Library of Economics and Liberty Mises Ludwig von. The Theory of Money and Credit (Indianapolis IN: Liberty Fund Inc. 1981) trans. H. E. Batson. Available online here 2; accessed 9 May 2007; Part One: The Nature of Money Chapter 3: The Various Kinds of Money Section 3: Commodity Money Credit Money and Fiat Money Paragraph 25. RandRefinery.com. Retrieved July-18-09. a b USMINT.gov. Retrieved July-18-09. Jevons William Stanley (1875). "XVI: Representative Money". Money and the Mechanism of Exchange. ISBN 1596052600. http://oll.libertyfund.org/optioncomstaticxt&staticfileshow.php%3Ftitle318&chapter9990&layouthtml&Itemid27. Retrieved 2009-06-28.  Deardorff Prof. Alan V. (2008). "Deardorff's Glossary of International Economics". Department of Economics University of Michigan. http://www-personal.umich.edu/alandear/glossary/f.html. Retrieved 2008-07-12.  Black Henry Campbell (1910). "A Law Dictionary Containing Definitions Of The Terms And Phrases Of American And English Jurisprudence Ancient And Modern" page 494. West Publishing Co. Blacks Law Dictionary defines the word "fiat" to mean "a short order or warrant of a Judge or magistrate directing some act to be done; an authority issuing from some competent source for the doing of some legal act" Tom Bethell (1980-02-04). "Crazy as a Gold Bug". New York (New York Media) 13 (5): p. 34. http://books.google.com/booksid6OUCAAAAMBAJ&pgPA33&dqsilver+krugerrand.  Retrieved July-18-09 Shredded & mutilated: Mutilated Currency Bureau of Engraving and Printing. Retrieved 2007-05-09. Bernstein Peter (2008) 1965. "Chapters 45". A Primer on Money Banking and Gold (3rd ed.). Hoboken NJ: Wiley. ISBN 978-0-470-28758-3. OCLC 233484849.  Deardorff Prof. Alan V. (2008). "Deardorff's Glossary of International Economics". Department of Economics University of Michigan. http://www-personal.umich.edu/alandear/glossary/f.html. Retrieved 2008-07-12.  Black Henry Campbell (1910). "A Law Dictionary Containing Definitions Of The Terms And Phrases Of American And English Jurisprudence Ancient And Modern" page 494. West Publishing Co. Blacks Law Dictionary defines the word "fiat" to mean "a short order or warrant of a Judge or magistrate directing some act to be done; an authority issuing from some competent source for the doing of some legal act" Sullivan Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River New Jersey: Pearson Prentice Hall. p. 258. ISBN 0130630853.  The Bank Credit Analysis Handbook: A Guide for Analysts Bankers and Investors by Jonathan Golin. Publisher: John Wiley & Sons (August 10 2001). ISBN 0-471-84217-6 ISBN 978-0-471-84217-0 Bankintroductions.com - Economic Definitions The Federal Reserve. 'Monetary Policy and the Economy". (PDF) Board of Governors of the Federal Reserve System (2005-07-05). Retrieved 2007-05-15. Milton Friedman Anna Jacobson Schwartz (1971). Monetary History of the United States 18671960. Princeton N.J: Princeton University Press. ISBN 0-691-00354-8.  David Laidler (1997). Money and Macroeconomics: The Selected Essays of David Laidler (Economists of the Twentieth Century). Edward Elgar Publishing. 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