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FIN&BUSMA
ROLE OF MONEY IN OUR ECONOMIC SYSTEM

Romulo, Kim Ashley L.

AC1A
Professor Angelita A. Mando

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ROLE OF MONEY IN OUR ECONOMIC SYSTEM

How Money Works

Money is a liquid asset used to facilitate transactions of value. It is used as a medium of
exchange between individuals and entities. It's also a store of value and a unit of account that can
measure the value of other goods.
Prior to the invention of money, most economies relied on bartering, where individuals would
trade the goods they had directly for those that they needed. This raised the problem of the
double coincidence of wants: a transaction could only take place if both participants had
something that the other needed. Money eliminates this problem by acting as an intermediary
good.
The first known forms of money were agricultural commodities, such as grain or cattle. These
goods were in high demand and traders knew that they would be able to use or trade these goods
again in the future. Cocoa beans, cowrie shells, and agricultural tools have also served as early
forms of money.1
As economies became more complex, money was standardized into currencies. This reduced
transaction costs by making it easier to measure and compare value. Also, the representations of
money became increasingly abstract, from precious metals and stamped coins to paper notes,
and, in the modern era, electronic records.
During World War II, cigarettes became a de facto currency for soldiers in prisoner-of-war
camps. The use of cigarettes as money made tobacco highly desirable, even among soldiers who
did not smoke.2
What Are the Properties of Money?
In order to be most useful, money should be fungible, durable, portable, recognizable, and stable.
These properties reduce the transaction cost of using money by making it easy to exchange.
Money Should Be Fungible
The word fungible refers to a quality that allows one thing to be exchanged, substituted, or
returned for another thing, under the assumption of equivalent value. Thus, units of money
should be interchangeable with one another.
For example, metal coins should have a standard weight and purity. Commodity money should
be relatively uniform in quality. Trying to use a non-fungible good as money results in

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transaction costs that involve individually evaluating each unit of the good before an exchange
can take place.
Money Should Be Durable
Money should be durable enough to retain its usefulness for many, future exchanges. A
perishable good or a good that degrades quickly due to various exchanges will be less useful for
future transactions. Trying to use a non-durable good as money conflicts with money's essential
future-oriented use and value.
Money Should Be Portable
Money should be easy to carry and divide so that a worthwhile quantity can be carried on one's
person or transported. For example, trying to use a good that's difficult or inconvenient to carry
as money could require physical transportation that results in transaction costs.
Money Should Be Recognizable
The authenticity and quantity of the good should be readily apparent to users so that they can
easily agree to the terms of an exchange. Using a non-recognizable good as money can result in
transaction costs relating to authenticating the goods and agreeing on the quantity needed for an
exchange.
Money's Supply Should Be Stable
The supply of the item used as money should be relatively constant over time to prevent
fluctuations in value. Using a non-stable good as money produces transaction costs due to the
risk that its value might rise or fall, because of scarcity or over-abundance, before the next
transaction.
How Is Money Used?
Money primarily functions as the good people use for exchanges of items of value. However, it
also has secondary functions that derive from its use as a medium of exchange.
Money As a Unit of Account
Due to money's use as a medium of exchange for buying and selling and as a value indicator for
all kinds of goods and services, money can be used as a unit of account.
That means money can keep track of changes in the value of items over time and multiple
transactions. People can use it to compare the values of various combinations or quantities of
different goods and services.
Money as a unit of account makes it possible to account for profits and losses, balance a budget,
and value the total assets of a company.

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Money As a Store of Value

Money's usefulness as a medium of exchange in transactions is inherently future-oriented. As
such, it provides a means to store a monetary value for use in the future without having that
value deteriorate.
So, when people exchange items for money, that money retains a particular value that can be
used in other transactions. This ability to function as a store of value facilitates saving for the
future and engaging in transactions over long distances.
Money As a Standard of Deferred Payment
To the extent that money is accepted as a medium of exchange and serves as a useful store of
value, it can be used to transfer value over different time periods in the form of credits and debts.
One person can borrow a quantity of money from someone else for an agreed-upon period of
time, and repay a different agreed-upon quantity of money at a future date.
Different Types of Money
Market-Determined Money
Money can originate out of the spontaneous order of markets. As traders barter for various
goods, some goods will prove more convenient than others because they have the best
combination of the five properties of money listed above.
Over time, these goods may become desirable as objects of exchange, rather than for practical
use. Eventually, people may come to desire a good solely for future trading.
Historically, precious metals such as gold and silver were often used as market-determined
monies. They were highly prized across many different cultures and societies. Today, people in
cashless economies frequently turn to cigarettes, instant noodles, or other nonperishable goods as
a market-determined money substitute.2
Government-Issued Currency
When a certain type of money is widely accepted throughout an economy, government bodies
may begin regulating it as a currency. They may issue standardized coins or notes to further
reduce transaction costs.
A government may also recognize some money as a legal tender, meaning that courts and
government bodies must accept that form of money as a final means of payment.
Issuing money allows the government to benefit from seigniorage, the difference between the
face value of a currency and the cost to produce it.

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For example, if the cost of printing a $100 bill is only $10, the government will earn a $90 profit
for each bill it prints. However, governments that rely too heavily on seigniorage may
inadvertently debase their currency.
$18.32 Trillion
The total value of the M1 money supply in the United States as of August 2023. This is more than
a 10% reduction in M1 compared to May 2022, where it stood at $20.6 Trillion. This illustrates
the variable nature of the money supply.3
Fiat Currency
Many countries issue fiat currency, which is currency that does not represent any type of
commodity. Instead, fiat money is backed by the economic strength of the issuing government. It
derives its value from supply and demand and the stability of the government.
Fiat money allows the issuing government to conduct economic policy by increasing or
reducing the money supply. In the U.S., the Federal Reserve and the Treasury
Department monitor several types of money supplies for the purpose of regulating and mitigating
monetary issues.4
Since fiat money does not represent a real commodity, it falls to the issuing government to
ensure that it meets the five properties of money outlined above.
The International Monetary Fund (IMF) and World Bank serve as global watchdogs for the
exchange of international currencies.56 Governments may enact capital controls or
establish pegs in order to stabilize their currency on the international market.
Money Substitutes and Fiduciary Media
To reduce the burden of carrying large quantities of currency, merchants and traders sometimes
exchange money substitutes such as written statements of debt that can be redeemed later. These
statements can themselves adopt some of the properties of money, particularly if traders use them
in lieu of actual currency.
For example, ancient banks issued bills of exchange to their depositors, stating the amount that
had been deposited and the terms for redemption. Rather than withdraw money from the bank to
make payments, depositors would simply trade their bills, allowing the recipient to redeem or
trade them at will.7
This use of money substitutes can increase the portability and durability of money, as well as
reduce the cost of storage. However, there are risks involved with money substitutes. Banks may
print more bills than they have money to redeem, a practice known as fractional reserve banking.

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If too many people try to make withdrawals at the same time, the bank may suffer from a bank
run.
Fiduciary media are types of money substitutes introduced into circulation that aren't fully
backed by the base money held to back money substitutes.8 For example, paper checks, token
coins, and electronic credit represent contemporary examples of fiduciary media.
Cryptocurrencies As Money
In recent years, digital currencies that do not exist in physical form, such as Bitcoin, have been
introduced. Unlike electronic bank records or payment systems, these virtual currencies are not
issued by a government or other central body. Cryptocurrencies have some of the properties of
money and are sometimes used in online transactions.
Although cryptocurrencies are rarely used in everyday transactions, they have achieved some
utility as a speculative investment or a store of value. Some jurisdictions have recognized
cryptocurrencies as a payment medium, including the government of El Salvador.
What Are the 4 Types of Money?
Money can be something determined by market participants to have value and be exchangeable.
Money can be currency (bills and coins) issued by a government. A third type of money is fiat
currency, which is fully backed by the economic power and good faith of the issuing
government. The fourth type of money is money substitutes, which are anything that can be
exchanged for money at any time. For example, a check written on a checking account at a bank
is a money substitute.
What Is the Difference Between Hard and Soft Money?
Hard money is money that is based on a valuable commodity, such as gold or silver. Since the
supply of these metals is limited, these currencies are less susceptible to inflation than soft
money such as printed banknotes. With no guarantee that extra notes will not be printed, soft
money may be considered risky by some.
Is Cryptocurrency Money?
Cryptocurrency has many of the properties of money and is sometimes used as a medium of
exchange for transactions. Many governments consider cryptocurrency to be a taxable asset, but
very few give it the same legal treatment as a foreign currency. Some jurisdictions, notably El
Salvador, have embraced cryptocurrency.
The Bottom Line
Money is some item of value that allows people and institutions to engage in transactions that
result in an exchange of goods or services.

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Money has to be exchangeable, convenient to carry, recognized as legitimate by all, physically

long-lasting, and have a value that's stable.
Money comes in various forms, including precious metals, currencies, and money substitutes. At
this time, though cryptocurrencies have some of the properties of money, they function without a
central authority and aren't backed by governments. While cryptocurrencies (such as Bitcoin) are
considered property for tax purposes by the IRS, they aren't considered legal tender by the U.S.
government.
Functions of Money - The Economic Lowdown Podcast Series

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Money has taken many forms through the ages: shells, wheels, beads and even cows. All forms,
though, have always had three things in common. Find out what in this eight-minute episode of
our Economic Lowdown Podcast Series. You will also learn how commodity money differs from
representative money and how both differ from today's fiat money.
To provide students with online questions following the episode, register your class through
the Econ Lowdown Teacher Portal.
Learn more about the Q&A Resources for Teachers and Students »

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More episodes:
 The Economic Lowdown Podcast Series
 The Economic Lowdown Video Series
You can subscribe to the Economic Lowdown Podcast Series anywhere you get podcasts.
Spotify | Apple Podcasts
Transcript
Today I'm talking about money.
Money is something that people use every day. We earn it and spend it but don't often think much
about it. Economists define money as any good that is widely accepted as final payment for
goods and services. Money has taken different forms through the ages; examples include cowry
shells in Africa, large stone wheels on the Pacific island of Yap, and strings of beads called
wampum used by Native Americans and early American settlers. What do these forms of money
have in common? They share the three functions of money:
 First: Money is a store of value. If I work today and earn 25 dollars, I can hold on to the
money before I spend it because it will hold its value until tomorrow, next week, or even
next year. In fact, holding money is a more effective way of storing value than holding
other items of value such as corn, which might rot. Although it is an efficient store of
value, money is not a perfect store of value. Inflation slowly erodes the purchasing power
of money over time.
 Second: Money is a unit of account. You can think of money as a yardstick-the device we
use to measure value in economic transactions. If you are shopping for a new computer,
the price could be quoted in terms of t-shirts, bicycles, or corn. So, for instance, your new
computer might cost you 100 to 150 bushels of corn at today's prices, but you would find
it most helpful if the price were set in terms of money because it is a common measure of
value across the economy.
 Third: Money is a medium of exchange. This means that money is widely accepted as a
method of payment. When I go to the grocery store, I am confident that the cashier will
accept my payment of money. In fact, U.S. paper money carries this statement: "This note
is legal tender for all debts, public and private." This means that the U.S. government
protects my right to pay with U.S. dollars.
In order to appreciate the conveniences that money brings to an economy, think about life
without it. Imagine I am a musician-a bassoonist in an orchestra-who has a car that needs to be
repaired. In a world without money, I would need to barter for car repair. In fact, I would need to
find a coincidence of wants-the unlikely case that two people each have something that the other

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wants at the right time and place to make an exchange. In other words, I would need to find a
mechanic who would be willing to exchange car repairs for a private bassoon concert by 9 AM
tomorrow so I can drive to my next orchestra rehearsal. In an economy where people have very
specialized skills, this kind of exchange would take an incredible amount of time and effort; in
fact, it might be nearly impossible. Money reduces the cost of this transaction because, while it
might be very difficult to find a mechanic who would exchange car repairs for bassoon concerts,
it is not hard to find one who would exchange car repairs for money. In fact, without money,
every transaction would require me to find producers who would exchange their goods and
services for bassoon performances. In a money-based economy, I can sell my services as a
bassoon player in an orchestra to those who are willing to pay for orchestra concerts with money.
Then, I can take the money I earn and pay for a variety of goods and services.
Economists say that the invention of money belongs in the same category as the great inventions
of ancient times, such as the wheel and the inclined plane, but how did money develop? Early
forms of money were often commodity money-money that had value because it was made of a
substance that had value. Examples of commodity money are gold and silver coins. Gold coins
were valuable because they could be used in exchange for other goods or services, but also
because the gold itself was valued and had other uses. Commodity money gave way to the next
stage-representative money.
Representative money is a certificate or token that can be exchanged for the underlying
commodity. For example, instead of carrying the gold commodity money with you, the gold
might have been kept in a bank vault and you might carry a paper certificate that represents-or
was "backed"-by the gold in the vault. It was understood that the certificate could be redeemed
for gold at any time. Also, the certificate was easier and safer to carry than the actual gold. Over
time people grew to trust the paper certificates as much as the gold. Representative money led to
the use of fiat money-the type used in modern economies today.
Fiat money is money that does not have intrinsic value and does not represent an asset in a vault
somewhere. Its value comes from being declared "legal tender"-an acceptable form of payment-
by the government of the issuing country. In this case, we accept the value of the money because
the government says it has value and other people value it enough to accept it as payment. For
example, I accept U.S. dollars as income because I'm confident I will be able to exchange the
dollars for goods and services at local stores. Because I know others will accept it, I am
comfortable accepting it. U.S. currency is fiat money. It is not a commodity with its own great
value and it does not represent gold-or any other valuable commodity-held in a vault somewhere.
It is valued because it is legal tender and people have faith in its use as money.
There have been many forms of money in history, but some forms have worked better than
others because they have characteristics that make them more useful. The characteristics of

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money are durability, portability, divisibility, uniformity, limited supply, and acceptability. Let's
compare two examples of possible forms of money:
 A cow. Cattle have been used as money at different points in history.
 A stack of U.S. 20-dollar bills equal to the value of one cow.
Let's run down our list of characteristics to see how they stack up.
1. Durability. A cow is fairly durable, but a long trip to market runs the risk of sickness or
death for the cow and can severely reduce its value. Twenty-dollar bills are fairly durable
and can be easily replaced if they become worn. Even better, a long trip to market does
not threaten the health or value of the bill.
2. Portability. While the cow is difficult to transport to the store, the currency can be easily
put in my pocket.
3. Divisibility. A 20-dollar bill can be exchanged for other denominations, say a 10, a 5, four
1s, and 4 quarters. A cow, on the other hand, is not very divisible.
4. Uniformity. Cows come in many sizes and shapes and each has a different value; cows
are not a very uniform form of money. Twenty-dollar bills are all the same size and shape
and value; they are very uniform.
5. Limited supply. In order to maintain its value, money must have a limited supply. While
the supply of cows is fairly limited, if they were used as money, you can bet ranchers
would do their best to increase the supply of cows, which would decrease their value. The
supply, and therefore the value, of 20-dollar bills—and money in general—are regulated
by the Federal Reserve so that the money retains its value over time.
6. Acceptability. Even though cows have intrinsic value, some people may not accept cattle
as money. In contrast, people are more than willing to accept 20-dollar bills. In fact, the
U.S. government protects your right to use U.S. currency to pay your bills.
Well, it seems "udderly" clear at this point that—based on the characteristics of money—U.S.
20-dollar bills are a much better form of money than cattle.
To summarize, money has taken many forms through the ages, but money consistently has three
functions: store of value, unit of account, and medium of exchange. Modern economies use fiat
money-money that is neither a commodity nor represented or "backed" by a commodity. Even
forms of money that share these function may be more or less useful based on the characteristics
of money.
Barter Economy

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In theory, people are generally able to exchange goods and services without the need for a
monetary transaction between the parties involved. For example, a farmer can exchange 10 kilos.
of apples for 10 liters of milk with another farmer.
An economy based on barter would face several restrictions:
 Each of the parties involved in a transaction would have to want what the other party has
to offer. The two farmers in the example above should agree that x kilograms of apples
are worth y liters of milk and be willing to exchange them at such conditions.
 The goods and services exchanged should be divisible. If the goods are indivisible (such
as a car), the owner wouldn’t be able to use them to purchase other goods and services of
lower value.
 The goods a person can exchange may be perishable, which means their owner should
exchange them or use them before they lose their value. It means that services and many
types of goods wouldn’t allow the value associated with them to be stored.
 Governments may offer incentives to limit barter even when it’s feasible, as it generally
reduces tax revenue.
Once we understand the limits of barter, we can easily understand the functions of money in our
society.
Money as a Medium of Exchange
A medium of exchange is an asset that can be used in a transaction to exchange goods and
services. Gold and other precious metals have been used as a medium of exchange before money
itself, or alongside it.
Not every asset can be used as a medium of exchange. To be a proper medium of exchange, an
asset must have the following characteristics:
1. It must be readily acceptable. It is generally true if the medium of exchange has a known
value. People know how much a $100 dollar bill is worth and have at least an idea of
what it can buy at any given moment.
2. It must be easily divisible. A good medium of exchange should allow small transactions,
as well as large transactions. Banknotes and coins are generally available in different
denominations in order to allow large value transactions, as well as small value ones.
3. It must have a high value relative to its weight. It is because a good medium of exchange
should be easy to transport. Banknotes and coins are light and easy to carry.

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4. It must be difficult to counterfeit. If it’s not, its value would be difficult to know with
reasonable certainty, and it wouldn’t be accepted in transactions.
Money as a Standard of Deferred Payment
The above function is somehow related to the first, as it creates credit and allows transactions to
be settled in the future. To be a standard of deferred payment, money must be an accepted way to
value and settle a debt in the future.
Money as a Store of Wealth
As services can’t be stored and a lot of goods are perishable, society requires more effective
ways of storing wealth. Money can be easily stored, retrieved, and used at a later time, and, at
least in times of low inflation, it’s able to maintain most of its value.
Money as a Measure of Value
Money can be used as a universal unit of account to measure the value of all the goods and
services exchanged in an economy.
In a money-based economy, prices can be indicated using only one measure of value, simplifying
transactions and people’s understanding of how much a good or service is worth.
Conversely, in a barter economy, the prices for a good or service should be established based on
all the other goods or services produced and exchanged.
Precious Metals as Money
Especially in the past, gold and other precious metals have been successfully used as money in
many societies. It is due to the following:
1. They were a good medium of exchange for transactions settled immediately or in the
future, as their value was known, they could be easily divisible, were difficult to
counterfeit, and had a high value relative to their weight.
2. Precious metals are considered a good store of wealth, as they are not perishable goods.
However, others would argue that their success as stores of wealth also depended on
people’s expectations. They are expected to maintain their value because others would
keep valuing them in the future due to the expectations that the demand for items, such as
jewelry and ornaments, would continue to be strong.
3. They were good and simple measures of value. Anybody could easily use grams or
ounces of gold to measure the price of goods and services.
What Is Money?
FINANCE & DEVELOPMENT, September 2012, Vol. 49, No. 3

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Irena Asmundson and Ceyda Oner

Without it, modern economies could not
function
Money may make the world go around, as
the song says. And most people in the
world probably have handled money, many
of them on a daily basis. But despite its
familiarity, probably few people could tell
you exactly what money is, or how it
works.
In short, money can be anything that can
serve as a
• store of value, which means
people can save it and use it
later—smoothing their
purchases over time;
• unit of account, that is,
provide a common base for
prices; or
• medium of exchange,
something that people can
use to buy and sell from one another.
Perhaps the easiest way to think about the role of money is to consider what would change
if we did not have it.
If there were no money, we would be reduced to a barter economy. Every item someone
wanted to purchase would have to be exchanged for something that person could provide.
For example, a person who specialized in fixing cars and needed to trade for food would
have to find a farmer with a broken car. But what if the farmer did not have anything that
needed to be fixed? Or what if a farmer could only give the mechanic more eggs than the
mechanic could reasonably use? Having to find specific people to trade with makes it very
difficult to specialize. People might starve before they were able to find the right person
with whom to barter.
But with money, you don’t need to find a particular person. You just need a market in
which to sell your goods or services. In that market, you don’t barter for individual goods.
Instead you exchange your goods or services for a common medium of exchange—that is,
money. You can then use that money to buy what you need from others who also accept
the same medium of exchange. As people become more specialized, it is easier to produce
more, which leads to more demand for transactions and, hence, more demand for money.
Many monies
To put it a different way, money is something that holds its value over time, can be easily
translated into prices, and is widely accepted. Many different things have been used as
money over the years—among them, cowry shells, barley, peppercorns, gold, and silver.

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At first, the value of money was anchored by its alternative uses, and the fact that there
were replacement costs. For example, you could eat barley or use peppercorns to flavor
food. The value you place on such consumption provides a floor for the value. Anyone
could grow more, but it does take time, so if the barley is eaten the supply of money
declines. On the other hand, many people may want strawberries and be happy to trade for
them, but they make poor money because they are perishable. They are difficult to save for
use next month, let alone next year, and almost impossible to use in trade with people far
away. There is also the problem of divisibility—not everything of value is easily divided,
and standardizing each unit is also tricky; for example, the value of a basket of
strawberries measured against different items is not easy to establish and keep constant.
Not only do strawberries make for bad money, most things do.
But precious metals seemed to serve all three needs: a stable unit of account, a durable
store of value, and a convenient medium of exchange. They are hard to obtain. There is a
finite supply of them in the world. They stand up to time well. They are easily divisible
into standardized coins and do not lose value when made into smaller units. In short, their
durability, limited supply, high replacement cost, and portability made precious metals
more attractive as money than other goods.
Until relatively recently, gold and silver were the main currency people used. Gold and
silver are heavy, though, and over time, instead of carrying the actual metal around and
exchanging it for goods, people found it more convenient to deposit precious metals at
banks and buy and sell using a note that claimed ownership of the gold or silver deposits.
Anyone who wanted to could go to the bank and get the precious metal that backs the note.
Eventually, the paper claim on the precious metal was delinked from the metal. When that
link was broken, fiat money was born. Fiat money is materially worthless, but has value
simply because a nation collectively agrees to ascribe a value to it. In short, money works
because people believe that it will. As the means of exchange evolved, so did its source—
from individuals in barter, to some sort of collective acceptance when money was barley
or shells, to governments in more recent times.
Even though using standardized coins or paper bills made it easier to determine prices of
goods and services, the amount of money in the system also played an important role in
setting prices. For example, a wheat farmer would have at least two reasons for holding
money: to use in transactions (cash in advance) and as a buffer against future needs
(precautionary saving). Suppose winter is coming and the farmer wants to add to his store
of money in anticipation of future expenses. If the farmer has a hard time finding people
with money who want to buy wheat, he may have to accept fewer coins or bills in
exchange for the grain. The result is that the price of wheat goes down because the supply
of money is too tight. One reason might be that there just isn’t enough gold to mint new
money. When prices as a whole go down, it is called deflation. On the other hand, if there
is more money in circulation but the same level of demand for goods, the value of the
money will drop. This is inflation—when it takes more money to get the same amount of
goods and services (see “What Is Inflation?” in the March 2010 issue of F&D). Keeping
the demand for and supply of money balanced can be tricky.

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Manufacturing money
Fiat money is more efficient to use
than precious metals. Adjustments to
its supply do not depend on the amount
of precious metal around. But that adds
its own complication: Precisely
because there is a finite amount of
precious metals, there is a limit on the
amount of notes that can be issued. If
there is no gold or silver to back
money, how do governments know
how much to print? That gets into the
dilemmas governments face. On the
one hand, the authorities will always be
tempted to issue money, because
governments can buy more with it, hire
more people, pay more wages, and
increase their popularity. On the other
hand, printing too much money starts
to push up prices. If people start
expecting that prices will continue to
rise, they may increase their own prices
even faster. Unless the government
acts to rein in expectations, trust in
money will be eroded, and it may
eventually become worthless. That is
what happens during hyperinflation. To
remove this temptation to print money willy-nilly, most countries today have delegated the
task of deciding how much money to print to independent central banks, which are
charged with making the call based on their assessment of the economy’s needs and do not
transfer funds to the government to finance its spending (see “What Is Monetary Policy?”
in the September 2009 issue of F&D). The term “printing money” is something of a
misnomer in itself. Most money today is in the form of bank deposits rather than paper
currency (see box).
Belief can fade
Countries that have been down the path of high inflation experienced firsthand how the
value of money essentially depends on people believing in it. In the 1980s, people in some
Latin American countries, such as Argentina and Brazil, gradually lost confidence in the
currency, because inflation was eroding its value so rapidly. They started using a more
stable one, the U.S. dollar, as the de facto currency. This phenomenon is called unofficial,
or de facto, dollarization. The government loses its monopoly on issuing money—and
dollarization can be very difficult to reverse.

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Some policies governments have used to restore confidence in a currency nicely highlight
the “faith” part of money functioning. In Turkey, for example, the government rebased the
currency, the lira, eliminating six zeros in 2005. Overnight, 1,000,000 liras became 1 lira.
Brazil, on the other hand, introduced a new currency in 1994, the real. In both countries,
citizens went along, demonstrating that as long as everyone accepts that a different
denomination or a new currency is the norm, it simply will be. Just like fiat money. If it is
accepted as money, it is money.
What Is the Money Supply?
The money supply is the sum total of all of the currency and other liquid assets in a country's
economy on the date measured. The money supply includes all cash in circulation and all bank
deposits that the account holder can easily convert to cash.
Governments issue paper currency and coins through their central banks treasuries, or a
combination of both. To keep the economy stable, banking regulators increase or reduce the
available money supply through policy changes and regulatory decisions.
Key Takeaways
 The money supply is the total amount of cash and cash equivalents, such as savings
account balances, circulating in an economy at a given point in time.
 Variations in the money supply take into account non-cash items like credit and loans.
 In the U.S., the Federal Reserve tracks the money supply from month to month.
 The Fed also influences the money supply through actions that increase or decrease the
amount of cash in the system.
 Monetarists view the money supply as the main driver of demand in an economy and
believe that increasing the money supply faster than the increase in real income leads to
inflation.

Investopedia / Madelyn Goodnight

Understanding the Money Supply
In the United States, the Federal Reserve, known as the Fed, is the policy-making body that
regulates the money supply. Its economists track the money supply over time to determine
whether too much money is flowing, which can lead to inflation, or too little money is flowing,
which can cause deflation.
The Fed has a couple of tools it can use to keep the economy growing at a reasonable pace.

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 It controls interest rates by setting the key rates it charges to the nation's banks for
overnight loans of government money. The rates for all other loans are derived from those
federal lending rates.
 It adds or removes cash from the system by changing the amount of money that flows to
banks for use in loans to businesses and consumers.
The money supply is tracked over time as a key factor in analyzing the health of the economy,
pinpointing its weak spots, and developing policies to correct weaknesses. The Fed generally
refers to the money supply as the money stock in its public releases.
$18.12 trillion
As of August 2024, the seasonally adjusted M1 money supply according to the Federal Reserve.1
Effect of the Money Supply on the Economy
An increase in the supply of money typically lowers interest rates, which generates more
investment and puts more money in the hands of consumers, thereby stimulating spending.
Businesses respond by ordering more raw materials and increasing production. The
increased business activity raises the demand for labor.
The opposite can occur if the money supply falls or when its growth rate declines. Banks lend
less, businesses put off new projects, and consumer demand for home mortgages and car loans
declines.
Change in the money supply has long been considered a key factor in driving economic
performance and business cycles. Macroeconomic schools of thought that focus heavily on the
role of money supply include Irving Fisher's Quantity Theory of Money, Monetarism,
and Austrian Business Cycle Theory.
Historically, measuring the money supply has shown that there are relationships between money
supply and inflation and between money supply and price levels.
However, since 2000, these relationships have become less predictable, reducing their reliability
as a guide for monetary policy. Although money supply measures are still widely used, they are
among many economic measures that economists and the Federal Reserve collect, track, and
review.2
Tracking the Money Supply
The Federal Reserve website has a running account of the U.S. money supply month by month
going back to 1999. The Fed refers to the money supply as the money stock.3
The Money Supply Numbers: M1, M2, and Beyond

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The Federal Reserve tracks two distinct numbers on the nation's money supply and labels them
M1 and M2. Each category includes or excludes specific kinds of money. There was yet another
number, M3, but its reporting was discontinued by the Fed in 2006.
There are also M0 and MB, but these are generally included in the main categories rather than
being reported separately.
All of the categories account for the amount of cash in the economy, but each category has a
slightly different definition of cash or liquid assets.
M1
M1, also called narrow money, is often synonymous with money supply in reports from the
financial media. This is a count of all of the notes and coins that are in circulation, whether
they're in someone's wallet or a bank teller's drawer, plus other money equivalents that can be
converted easily to cash.
For example, a regular bank savings account is a money equivalent. The account holder can
convert those savings to cash at any time and instantly.
M2
M2 includes M1 plus short-term time deposits in banks and money market funds. Generally,
terms of less than a year are considered short-term.
M3, M0, and MB
M3, M0, and MB are not separately represented in the Federal Reserve reports on money supply.
 M3, now discontinued, included M2 plus long-term deposits. The Federal Reserve
decided that it added no real information of importance to the numbers and was no longer
useful in its analysis.4
 M0 measures real cash in circulation and bank reserves.
 MB, or money base, is the total supply of currency plus the stored portion of commercial
bank reserves at the central bank. Both M0 and MB are incorporated in M1 and M2.
The Federal Reserve releases the latest numbers on M1 and M2 money supplies weekly and
monthly. The numbers are reported widely by the financial media and are published on the Fed's
website.
What Are the Determinants of the Money Supply?

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The large numbers of M1 or M2 contain components that economists analyze to determine how
money flows through the system and where problems might arise. Economists speak of these
components as the determinants of the money supply. They include the:
 Currency deposit ratio: This is the amount of cash that the public at large is keeping on
hand rather than depositing in banks.
 Reserve ratio: This is the amount of cash that the Federal Reserve requires a bank to
keep in its vaults to satisfy all potential withdrawals by its customers, even in the event of
a run on the banks.
 Excess reserve: This is the amount of money that the banks have available to lend out to
businesses and individuals.
What Happens When the Federal Reserve Limits the Money Supply?
A country’s money supply has a significant effect on its macroeconomic profile, particularly in
relation to interest rates, inflation, and the business cycle. When the Fed limits the money supply
via contractionary or "hawkish" monetary policy, interest rates rise and the cost of borrowing
goes higher.
There is a delicate balance to consider when undertaking these decisions. Limiting the money
supply can slow down inflation, as the Fed intends, but there is also the risk that it will slow
economic growth too much, leading to more unemployment.
How Is the Money Supply Determined?
A central bank regulates the amount of money available in a country. Through monetary policy, a
central bank can undertake an expansionary or contractionary policy.
An expansionary policy aims to increase the money supply. For example, the central bank might
engage in open market operations. That means it will purchase short-term U.S. Treasury bills
using newly-minted money. That money thus enters into circulation.
A contractionary policy would require selling Treasuries. That removes some of the money
circulating in the economy.
What's the Difference Between M0, M1, and M2?
The U.S. money supply is reported in two main categories, M1 and M2. M0 is included in both
M1 and M2.
 M0 is the total amount of paper money and coins in circulation, plus the current amount
of central bank reserves.

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 M1 is the most frequently reported headline number. It is M0 plus money held in regular
savings accounts and travelers' checks.
 M2 is all of M1 plus money invested in short-term assets that mature in less than a year,
like some certificates of deposit.
Why Does the Money Supply Expand or Contract?
Consider a Main Street bank as a microcosm of the economy as a whole. Local people are
prospering lately, so they have more money to save. They deposit it in the bank. The bank keeps
part of the deposits in a vault but lends most of it out to other individuals and businesses. The
loans are repaid with interest, and the bank has more money to loan. Times are good, and the
money supply is increasing.
But what happens when times are not so good? Bank deposits fall because people are just getting
by or, worse, losing their jobs. The bank has less money to lend. In any case, businesses and
individuals shy away from big spending due to the poor economy. The money supply decreases.
The Bottom Line
The money supply may be one of the most tangible and understandable subjects in economics.
It's a count of every bit of cash floating around the entire U.S. economy. Every dollar and every
coin, down to the small change that people have in their pockets.
Analyzing the number is harder. Economists want to know precisely where that money is and
how it is being used. Is it being hoarded or splurged? Invested or spent on day-to-day
necessities? The Federal Reserve considers the money supply when evaluating what kind of
monetary policy to enact.
Definition and Functions of Money
In order to understand the fundamentals of economics, it is imperative to have a good
understanding of money. In this article, we will look at the definition of money from an
economics perspective and also the various functions of money.
Suggested Videos
Introduction to Economics

Definition of Money
Money, in simple terms, is a medium of exchange. It is instrumental in the exchange of goods
and/or services.

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Further, money is the most liquid assets among all our assets. It also has general acceptability as
a means of payment along with its liquid nature.
Usually, the Central Bank or Government of a country creates and issues money. Also called cash
money, this is a legal tender and hence there is a legal compulsion on citizens to accept it.
Browse more Topics under Money
 Quantity Theory of Money
 Meaning and Causes of Inflation
 Forms of Inflation
 Impacts of Inflation
 Effects of Inflation on Production and Distribution of Wealth
 Control Of Inflation
 Money Supply
Credit money is another form of money which the banks create through loan transactions.

Functions of Money
There are many static and dynamic functions of money as follows:
Static Functions of Money
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These functions are:

 A medium of Exchange – In an exchange economy, money plays an intermediary role. It
makes the exchange system smooth and convenient.
 A measure of Value – The value of a product or service is determined on the basis of the
money needed for its possession. This helps in making the exchange a mutually profitable
activity.
 The Standard of Deferred Payments – Money plays an important role in lending and
borrowing. Money is taken as a loan and repaid after a time-gap.
 Store of Value – You can store the purchasing power of money and keep a part of it for
future use – monetary savings. You can use your current income for current consumption
as well as future consumption through savings.
Learn more about Quantity Theory of Money here in detail.
Dynamic Functions of Money:
These functions are:
 Money can activate idle resources and put them into productive channels.
 Therefore, it helps in increasing output, employment, and also income levels.
 Further, it helps in converting savings into investments.
 The creation of new money governments of modern economies can spend more than
what they earn.
Value of Money
The value of money simply implies its exchange value. It means the number/amount of goods
and/or services that you can obtain in exchange for a single unit of money.
Further, the value of money is inversely proportional to the price of goods/services. Therefore, if
the price level increases, the value of money decreases and vice-versa.

Forms of Money
We can classify the total money supply of an economy into two broad groups – Cash Money and
Credit Money, including all other financial assets. The degree of money-ness of different assets is
different.

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The Components of Money Supply

The components of the money supply are as follows:
 1. Paper Money and Coins (Currency)
 Issuer: The Central Bank or Government is responsible for issuing paper money and
coins, which are collectively known as "currency."
 Acceptance: Currency is universally accepted as a means of payment within a country.
This is because it's backed by the government's promise to pay the bearer (the person
holding the money) a specific amount of gold or foreign exchange in return (although this
is not typically practiced in modern economies).
 Example: Think of a US dollar bill or a Canadian five-dollar coin.
2. Demand Deposit
 Definition: A demand deposit is a type of bank account where the depositor has the right
to withdraw funds on demand, without any notice or restrictions.
 Legal Obligation: Banks have a legal obligation to pay the depositor the amount of
money in their demand deposit account whenever they request it.
 Liquid: Demand deposits are highly liquid (easy to convert into cash) because they can
be withdrawn immediately.
 Example: A checking account is a common type of demand deposit.
3. Near Money or Money Substitute
 Definition: Near money refers to assets that are highly liquid, meaning they can be easily
converted into cash, but are not considered "money" in the strictest sense because they
don't have the same legal backing as currency or demand deposits.
 Acceptance: Near money is widely accepted as a means of payment, but there's no legal
compulsion behind its acceptance. It's accepted because of its convenience and the
general trust placed in the institution issuing it.
 Example: A bank check is a good example of near money. While it's a commonly
accepted form of payment, it's not legal tender. It relies on the bank's promise to pay the
holder.
4. Term Deposit

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 Definition: A term deposit (also called a time deposit) is a type of bank account where
the depositor agrees to keep their money in the account for a fixed period of time, usually
in exchange for a higher interest rate.
 Less Liquid: Term deposits are less liquid than demand deposits because the depositor
cannot access their funds before the maturity date without penalties.
 Example: A certificate of deposit (CD) is a common type of term deposit.
 5. Other Financial Assets
 Definition: These are assets issued by non-banking financial intermediaries (like
investment firms, mutual fund companies, or insurance companies).
 Less Liquid: These assets are generally less liquid than demand deposits or near money.
They may have specific terms or conditions for their use.
 Examples: These can include things like:
 Bonds: These represent loans to companies or governments.
 Shares (Stocks): These represent ownership in a company.
 Mutual Funds: These pool money from multiple investors to invest in a variety of
assets.
Key Takeaways:
 Money: The most liquid forms of money are currency and demand deposits. They are
universally accepted and backed by a legal promise to pay.
 Near Money: Near money is highly liquid, but it doesn't have the same legal backing as
money. It's still widely accepted because of its convenience and trust.
 Other Financial Assets: These are less liquid and have specific terms and conditions for
their use.

Learning Objectives
By the end of this section, you will be able to:
 Explain the various functions of money
 Contrast commodity money and fiat money

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Money for the sake of money is not an end in itself. You cannot eat dollar bills or wear your bank
account. Ultimately, the usefulness of money rests in exchanging it for goods or services. As the
American writer and humorist Ambrose Bierce (1842–1914) wrote in 1911, money is a “blessing
that is of no advantage to us excepting when we part with it.” Money is what people regularly
use when purchasing or selling goods and services, and thus both buyers and sellers must widely
accept money. This concept of money is intentionally flexible, because money has taken a wide
variety of forms in different cultures.
Barter and the Double Coincidence of Wants
To understand the usefulness of money, we must consider what the world would be like without
money. How would people exchange goods and services? Economies without money typically
engage in the barter system. Barter—literally trading one good or service for another—is highly
inefficient for trying to coordinate the trades in a modern advanced economy. In an economy
without money, an exchange between two people would involve a double coincidence of wants,
a situation in which two people each want some good or service that the other person can
provide. For example, if an accountant wants a pair of shoes, this accountant must find someone
who has a pair of shoes in the correct size and who is willing to exchange the shoes for some
hours of accounting services. Such a trade is likely to be difficult to arrange. Think about the
complexity of such trades in a modern economy, with its extensive division of labor that involves
thousands upon thousands of different jobs and goods.
Another problem with the barter system is that it does not allow us to easily enter into future
contracts for purchasing many goods and services. For example, if the goods are perishable it
may be difficult to exchange them for other goods in the future. Imagine a farmer wanting to buy
a tractor in six months using a fresh crop of strawberries. Additionally, while the barter system
might work adequately in small economies, it will keep these economies from growing. The time
that individuals would otherwise spend producing goods and services and enjoying leisure time
they spend bartering.
Functions for Money
Money solves the problems that the barter system creates. (We will get to its definition soon.)
First, money serves as a medium of exchange, which means that money acts as an intermediary
between the buyer and the seller. Instead of exchanging accounting services for shoes, the
accountant now exchanges accounting services for money. The accountant then uses this money
to buy shoes. To serve as a medium of exchange, people must widely accept money as a method
of payment in the markets for goods, labor, and financial capital.
Second, money must serve as a store of value. In a barter system, we saw the example of the
shoemaker trading shoes for accounting services. However, she risks having her shoes go out of
style, especially if she keeps them in a warehouse for future use—their value will decrease with

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each season. Shoes are not a good store of value. Holding money is a much easier way of storing
value. You know that you do not need to spend it immediately because it will still hold its value
the next day, or the next year. This function of money does not require that money is
a perfect store of value. In an economy with inflation, money loses some buying power each
year, but it remains money.
Third, money serves as a unit of account, which means that it is the ruler by which we measure
values. For example, an accountant may charge $100 to file your tax return. That $100 can
purchase two pair of shoes at $50 a pair. Money acts as a common denominator, an accounting
method that simplifies thinking about trade-offs.
Finally, another function of money is that it must serve as a standard of deferred payment.
This means that if money is usable today to make purchases, it must also be acceptable to make
purchases today that the purchaser will pay in the future. Loans and future agreements are stated
in monetary terms and the standard of deferred payment is what allows us to buy goods and
services today and pay in the future. Thus, money serves all of these functions— it is a medium
of exchange, store of value, unit of account, and standard of deferred payment.
Commodity versus Fiat Money
Money has taken a wide variety of forms in different cultures. People have used gold, silver,
cowrie shells, cigarettes, and even cocoa beans as money. Although we use these items
as commodity money, they also have a value from use as something other than money. For
example, people have used gold throughout the ages as money although today we do not use it as
money but rather value it for its other attributes. Gold is a good conductor of electricity and the
electronics and aerospace industry use it. Other industries use gold too, such as to manufacture
energy efficient reflective glass for skyscrapers and is used in the medical industry as well. Of
course, gold also has value because of its beauty and malleability in creating jewelry.
As commodity money, gold has historically served its purpose as a medium of exchange, a store
of value, and as a unit of account. Commodity-backed currencies are dollar bills or other
currencies with values backed up by gold or other commodities held at a bank. During much of
its history, gold and silver backed the money supply in the United States. Interestingly, antique
dollars dated as late as 1957, have “Silver Certificate” printed over the portrait of George
Washington, as Figure 27.2 shows. This meant that the holder could take the bill to the
appropriate bank and exchange it for a dollar’s worth of silver.

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Figure 27.2 A Silver Certificate and a Modern U.S. Bill Until 1958, silver certificates were
commodity-backed money—backed by silver, as indicated by the words “Silver Certificate”
printed on the bill. Today, The Federal Reserve backs U.S. bills, but as fiat money (inconvertible
paper money made legal tender by a government decree). (Credit: "One Dollar Bills" by
“The.Comedian”/Flickr Creative Commons, CC BY 2.0)
As economies grew and became more global in nature, the use of commodity monies became
more cumbersome. Countries moved towards the use of fiat money. Fiat money has no intrinsic
value, but is declared by a government to be a country's legal tender. The United States’ paper
money, for example, carries the statement: “THIS NOTE IS LEGAL TENDER FOR ALL
DEBTS, PUBLIC AND PRIVATE.” In other words, by government decree, if you owe a debt,
then legally speaking, you can pay that debt with the U.S. currency, even though it is not backed
by a commodity. The only backing of our money is universal faith and trust that the currency has
value, and nothing more.
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Sure! Here’s a structured arrangement of the provided information about the role of money in the
economic system, based on the content by Dr. Sachidanand Sinha:

What Is Money?
Money is an economic unit that functions as a generally recognized medium of exchange for
transactional purposes within an economy. It provides essential services that reduce transaction
costs, particularly the problem of the double coincidence of wants.
Key Functions of Money:
 Medium of Exchange: Money facilitates the buying and selling of goods and services,
allowing for smoother transactions than barter systems, which require a direct exchange
of goods.
 Reduction of Transaction Costs: Money eliminates the need for individuals to find
others who have what they want and who also want what they have, addressing the
double coincidence of wants.
Forms of Money:
1. Commodity Money: Originates from commodities with intrinsic value (e.g., gold,
silver).
2. Legal Tender: Officially issued currency recognized by the government as acceptable for
settling debts.
3. Fiat Money: Currency that has no intrinsic value but is established as money by
government regulation.
4. Money Substitutes: Instruments that can be used as money but are not legal tender (e.g.,
checks).
5. Fiduciary Media: Claims to money that are backed by trust, like bank deposits.
6. Cryptocurrencies: Digital currencies that utilize cryptographic techniques for secure
transactions and are being developed for international exchange.

Understanding Money

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Money is commonly referred to as currency, and each government operates its own monetary
system. In recent years, cryptocurrencies have emerged as alternatives for financing and
international transactions.
Characteristics of Money:

 Liquidity: Money acts as a liquid asset, meaning it can easily be used to settle
transactions.
 General Acceptance: Its value is based on the acceptance by individuals and businesses
within a governmental economy, as well as internationally through foreign exchange
markets.
 Value Determination: The current value of monetary currency is not necessarily derived
from the physical materials used to produce it. Instead, its value comes from the
collective agreement of its worth, allowing it to be used in future transactions.
The Evolution of Money:

Economic money systems were developed to facilitate exchange and provide a centralized
medium for buying and selling in markets, thus replacing barter systems. By using a common
currency, participants in an economy can avoid the problems associated with the double
coincidence of wants inherent in barter systems.
Essential Properties of Money
To be most effective, a currency should possess certain properties:

1. Fungibility:
o Units of the good should be of relatively uniform quality, allowing them to be
interchangeable. Non-fungible goods create transaction costs because each unit
must be individually evaluated for exchange.

2. Durability:

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o The physical characteristics of the good should allow it to retain its usefulness
over time and be reused in multiple transactions. Non-durable goods risk
becoming worthless for future exchanges.
3. Portability:
o Money should be easy to carry and transfer, allowing individuals to make
transactions without difficulty.
4. Recognizability:
o Currency should be easily recognizable and accepted in transactions by all
participants in the economy. This ensures that it can be used effectively as a
medium of exchange.
5. Stability:
o The value of the currency should remain relatively stable over time to maintain
trust and encourage its use in future transactions.
Conclusion
Money plays a critical role in the economic system by serving as a medium of exchange that
simplifies transactions and facilitates trade. Its characteristics—fungibility, durability, portability,
recognizability, and stability—are essential for its effectiveness. As economies evolve, the forms
and functions of money continue to adapt, with innovations like cryptocurrencies emerging to
meet the needs of modern commerce.
This structured format organizes the information clearly, making it easier to understand the role
of money in the economic system. Let me know if you need further details or adjustments!
Money
A unit of measure that is generally accepted and recognized as a medium of exchange in the
economy
Written byCFI Team
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What is Money?

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Money refers to any verifiable record that is accepted as a medium of exchange for payment of
goods and services and repayment of debts in a specific country. Throughout history,
governments adopted different forms of money, such as gold, silver, coins, and banknotes.

The value of money is not necessarily derived from the materials used in its production, but from
the willingness of consumers to agree to a displayed value and agree to use this value in future
transactions. For money to be accepted as a form of payment in a country, the government must
declare the currency as a legal tender for use in financial transactions.
Summary
 Money is defined as a unit of measure that is generally accepted and recognized as a
medium of exchange in the economy.
 For a commodity or currency to be recognized as money, it must be fungible, stable,
recognizable, portable, and durable.
 Different countries around the world use their own monetary systems, which are
regulated by a central monetary authority.
Functions of Money
The following are the main functions of money:

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1. Medium of exchange
The primary function of money is to be a medium of exchange. It means that money serves as an
intermediary instrument in the acquisition of goods and services. The basic assumption of
designating money as a medium of exchange is that one cannot acquire a good or service without
providing the other party with something of material importance in exchange.
2. Store of value
For money to serve as a store of value, it should be reliably saved for future use and be used as a
medium of exchange when it is retrieved. As a store of value, money can be used to store value
obtained through current production processes or trade activities for use at a future date.
Traders can store the value of the goods to trade them at a future time and/or different location.
Therefore, money makes it possible to save for the future, and participate in transactions in
different geographical locations.
3. Measure of value
Money is employed as a measure of value in the market to determine the actual value of specific
goods and/or services. A unit of account is required when formulating legal agreements that
involve debt. Therefore, money acts as a standard measure of trade, and it is used as a basis for
making trading quotations and bargaining for better prices in transactions.
4. Standard of deferred payment
A standard of deferred payment is considered one of the accepted methods of settling debts. For
example, Person A can lend Person B an amount equivalent to $10,000 for one year, with an
agreement to repay the loaned amount after the expiry of one year. The stored value in the sum
loaned to Person B is transferred from Person A in exchange for an agreed amount of stored
value at a future date.
Person B can then use the loaned funds to purchase other goods and services in exchange for
repayment at a future date. It, in essence, means that Person A loaned the use of the goods and
services that Person B purchased, even though he did not originally own the goods and services.
Properties that Money Must Meet
For a currency or commodity to be recognized as money, it must meet the following properties:
1. Fungibility
Fungibility refers to the property of a commodity whose individual units should be
interchangeable with each other, and the units should be distinguishable from each other. If

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individual units of the same commodity come in different quantities, it means that the
commodity will not be consistent when used in future transactions.
For example, diamonds are not perfectly fungible because of their varying sizes, colors, grades,
and cuts. Nevertheless, the U.S. dollar is perfectly fungible, and $10 is interchangeable with two
$5s or ten $1s.
2. Durability
Money should be durable enough to withstand repeated usage and retain its usefulness for use in
future transactions. The commodity or currency should remain functional, without requiring
frequent maintenance or repair over its lifetime. If the commodity is not durable, it will degrade
quickly with repeated use, and it will not be useful for future transactions.
3. Portability
Money should be divisible into small quantities so that consumers can carry different quantities
of the commodity with ease. It should be convenient for consumers to carry smaller quantities of
the commodity when purchasing goods and services from retail stores. If the commodity is
immovable or indivisible, consumers will have to incur additional costs to physically transport
the commodity.
4. Recognizable
The commodity used as money should be easily identifiable so that users agree on its
authenticity and quantity. It makes transactions easier because both parties in the transaction
agree to the terms of exchange without incurring additional costs of paying to verify the
authenticity of the goods by all parties in the exchange.
When the commodity is non-recognizable, the parties in the transaction will incur transaction
costs to verify its authenticity and distinguish between real money and counterfeit money.
5. Stability
The value placed on the commodity against other goods that it trades with should be relatively
stable. The commodity’s value should either be consistent or gradually increasing over time. A
commodity whose value fluctuates frequently is unsuitable since it will create value disparities
when used as a measure of value and a medium of exchange. An unstable commodity will
require frequent re-evaluation to determine its actual value in successive transactions.
The Role of Money
“The mint makes it first, it is up to you to make it last.” - Evan Esar

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As humans have evolved, so has the concept of trade and money. We determined that a barter
economy, or a moneyless economy that relied on trade, would work for a simple society, but it
could not work for a complex society. Without money, trade is not always easy or mutually
beneficial. The use of money has made life and trade much easier on a country and its
population. Money functions as a medium of exchange, a measure of value, and a store of value.
Money is portable, durable, easily divisible, and limited in availability. Money has evolved so
much over the last two hundred years that it has moved from gold and silver coins to paper
currency, to checks, debit cards, and credit cards.
Universal Generalizations
 Money is what people in a society regularly use when purchasing or selling goods and
services
 Money is any substance that functions as a medium of exchange, a measure of value, and
a store of value.
 Money serves several functions: a medium of exchange, a unit of account, a store of
value, and a standard of deferred payment.
Guiding Questions
 What functions does money serve in an economy?
 What is the characteristic of commodity money, fiat money, and representative money?
 What are the advantages and disadvantages of bartering, using currency and credit/debit
cards for exchanges?
Functions of Money
What does money actually do? Economists usually subdivide its functions into three categories:
a medium of exchange, a store of value, and a unit of value.
Video: Functions of Money
Defining money is almost as tricky as defining air. It's something we use every day, but most
people don't stop to think about what money is. Money is hard for most people to describe
because, at its core, money is an idea. Conceptually, anything is considered money if it functions
as:
1. a medium of exchange,
2. a store of value, and
3. a unit of account.

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Given that money can have such a broad interpretation, we use monetary aggregates to measure
the money supply, with categories based on liquidity.
Key Terms
The Three Functions of Money
Money is just one of many types of assets. What makes money different from other assets is its
ability to do more than just store value. Most importantly, for an asset to be considered money, it
must be accepted as a form of payment.
Interestingly, almost anything can be money as long as it can act as:
 a medium of exchange
 a store of value
 a unit of account
A Medium of Exchange
The most important function of money is its use as a way of buying things, in other words, as
a medium of exchange. If your grandmother sends you \$20$20 dollar sign, 20tucked in a
birthday card, you can take that and buy whatever you want with that money. Well, up to \
$20$20dollar sign, 20 worth of whatever you want.
A Store of Value
What if you have money, but don’t know what you want to spend it on yet? But, suppose you had
no idea what you wanted? You save that \$20$20dollar sign, 20 in your room and spend another
day. That is money acting as a store of value. If money fails as a store of value, it will also fail as
a medium of exchange. If money didn’t keep its value for later, you would have to spend it
immediately on something before it became worthless.
A Unit of Account
This function makes transactions easier to carry out because it means money can give a specific
value to something. Suppose there are three people with goods to trade. Caleb wants to sell a
snake habitat in exchange for three pizzas, Cadell wants to sell a pizza in exchange for two
movie tickets, and Caprice wants to sell four movie tickets in exchange for two snake habitats.
Trying to untangle these exchange prices would cause quite a headache. Instead, it's much easier
to value these goods using a single, common currency.

Example of Money

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Image credit: "Front of the U.S. \$100$100dollar sign, 100 Federal Reserve note," Wikimedia
Commons

Image credit: "Schrutebuck," methodshop.com, [CC BY 2.0]

M1 = cash and coins in circulation + checkable bank deposits + travelers checks

M2 = M1 + savings accounts + small CDs + money market mutual funds
Common Misperceptions
 Monetary aggregates might be easy to confuse with each other. An easy way to remember
them is that the higher the number on the aggregate is, the less liquid that kind of money
is. M2 is less liquid than M1.

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 It might be confusing that checking accounts are considered narrow money, but savings
accounts are considered near money. The reason for this is that savings accounts tend to
have some limitations on them that checking accounts usually do not. Most checking
accounts are demand deposit. Savings accounts frequently will have limitations such as
being only able to make five withdrawals per month or having to wait ten days after you
deposit money to get them.
 You might see a reference to an even broader monetary aggregate in your textbook or
class and be confused why it isn't here. The monetary aggregate M3 is tracked in some
countries, but not others (the U.S. stopped tracking this category in 2006). If you see M3
elsewhere, the most important thing to remember about it is that M3 is less liquid than
M2. In fact, you might even see a broader category called L, which is even less liquid
than M3. -Are cryptocurrencies money? There is actually some debate about whether
cryptocurrencies (such as bitcoin) are money or just a financial asset. In fact, central
banks around the world are grappling with this question right now, and there isn’t any
consensus on this issue. The main sticking point to argue that cryptocurrencies aren’t
money is that they generally cannot be used as legal tender (in other words, to buy stuff).
Not a lot of stores are equipped to take cryptocurrencies to buy goods and services, at
least not yet. As of right now, cryptocurrencies aren’t included in either the narrow or
broad definition of the money supply.
Money, Finance, and the Economic System
Introduction to Financial Stability and Economic Processes
Finance is an integral part of any monetary economy, yet it operates differently from other
economic processes like production, exchange, savings, and investment. While all these
processes may involve money to some degree, finance uniquely interacts with money through
trust and promises. Trust becomes a central factor because finance inherently deals with contracts
and agreements between borrowers and lenders. This reliance on promises introduces the
potential for broken commitments, distinguishing finance from other economic activities.
Finance also plays a unique role in facilitating production, exchange, and wealth accumulation,
emphasizing its importance as a tool for stability and progress in modern economies.
Understanding finance requires recognizing it as both a private activity and a public good, given
its broader implications for society.

Finance and Its Relation to Money

Exploring the Connection Between Finance and Money

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Finance is deeply interconnected with money, particularly fiat money, which serves as a
foundation for economic transactions. This section delves into their shared characteristics and
explains why finance cannot function independently of monetary systems.

What Is Finance?
Defining Finance
According to Webster’s Dictionary, finance has four definitions:
1. Liquid resources: Finance represents the money or assets controlled by individuals,
businesses, or governments.
2. System of operations: It encompasses the circulation of money, granting credit, making
investments, and providing banking services.
3. Management of funds: Finance is also the science behind managing resources
efficiently.
4. Obtaining capital: The process of acquiring funds for operations or growth.
Although these definitions provide a starting point, they lack depth in understanding finance's
broader role. Specifically:
 They do not explain how finance integrates with the broader economic system.
 They fail to clarify whether finance serves as an end goal or merely a facilitator of other
objectives.
Finance as a Facilitator of Economic Efficiency
Finance enhances the efficiency of resource allocation and risk management across time and
geography. It allows societies to match resources with their optimal uses, enabling production
and fostering growth. This efficiency contributes to societal prosperity by supporting long-term
development, wealth accumulation, and better resource utilization.

The Relationship Between Finance and Money

Fiat Money and Its Services
Fiat money, issued by governments, lacks intrinsic value but plays a pivotal role in economic
transactions. Its services include:

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1. Unit of Account: Fiat money provides a standard measure of value for goods and
services, enabling consistent pricing.
2. Medium of Exchange: Unlike barter systems, where exchanges require a double
coincidence of wants, fiat money simplifies transactions. It is universally accepted as a
means of payment, providing certainty in trade.
3. Store of Value: Fiat money preserves purchasing power over time, provided inflation is
controlled and trust in the currency remains intact.
Finance: Extending Money's Utility
Finance builds upon these services by creating instruments like loans and bonds that provide
liquidity and enable resource allocation over time. By introducing trust-based agreements,
finance transforms the static value of money into dynamic economic activity.

Essence of Finance
Finance as a System of Trust
Finance involves promises that introduce uncertainty into transactions. A lender extends money
to a borrower based on trust in repayment. This trust element is central to finance and
distinguishes it from immediate exchanges of goods for money.
Example: Loans and Credit
Consider a bank loan:
 A borrower receives money upfront but must repay it with interest over time.
 The lender evaluates the borrower’s trustworthiness to minimize the risk of default.
Finance introduces the potential for higher returns (interest or dividends) but also exposes
participants to greater risk, making trust management crucial.

Private and Social Benefits of Finance

Facilitating Resource Allocation
Finance ensures that resources flow to their most productive uses. For instance:
 Savers deposit funds in banks, which lend them to businesses needing capital for
expansion.

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 Investment markets allow individuals to fund startups or innovative projects.

By channeling resources efficiently, finance fosters innovation, job creation, and economic
growth.
Wealth Accumulation
Modern finance enables wealth accumulation through savings accounts, retirement funds, and
investment portfolios. These mechanisms allow individuals and societies to build capital over
time.
Risk Management
Financial markets provide tools to manage risks. For example:
 Insurance policies mitigate financial losses from unforeseen events.
 Derivatives help businesses hedge against fluctuations in interest rates or commodity
prices.

Finance in Economic Development

Historical Evolution
Finance has evolved significantly over time, from simple barter systems to complex financial
instruments like bonds, derivatives, and mutual funds. Key innovations include:
1. Banking: The emergence of banks in Europe during the 15th century revolutionized
resource allocation.
2. Fiat Money: Introduced in the 17th century, fiat money enabled governments to manage
economies more effectively.
3. Derivatives: In recent decades, derivatives have become essential for risk management
and market efficiency.

Challenges and Risks in Finance

Financial Crises
When financial systems fail, the impact on the broader economy can be severe. Crises often arise
from:
 Over-leveraging: Excessive borrowing increases vulnerability to market shocks.

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 Loss of trust: If trust in financial institutions erodes, markets can collapse.

Systemic Risk
Systemic risk occurs when financial instability spreads across sectors, causing widespread
economic disruption. Effective regulation is essential to prevent such risks from materializing.

Modern Finance: Innovations and Trends

Role of Technology
The rise of fintech (financial technology) has transformed finance by:
 Enabling digital payments and online banking.
 Expanding access to credit and investment platforms.
Globalization
Finance has become increasingly interconnected, with global markets facilitating cross-border
investment and trade. While this enhances opportunities, it also introduces new risks, such as
currency fluctuations and geopolitical tensions.
Money as economic category is described by economists as value of effort which is socially
necessary and also as one of the phenomena of human activity. In various periods of its
development, people were convinced that they managed secrets of endless multiplying money.
People who drew such conclusions tried to convince others about it with the same certainty.
However, the economic reality verifies the view concerning the phenomenon of money and the
possibility of its endless multiplication, at the same time asking: Is the modern money reliable
creation of human activity which may be accepted without any objections? Only a few decades
ago, very few economists questioned its reliability. Nevertheless, nowadays critical opinions
referring to the modern role of money in the economy are more common.
Also, this study may fall within this tendency. The main purpose of this article is to present
chosen (negative) aspects of functioning of money and its role in the modern economy. In order
to pursue the accepted objective, the method of analysis and idiographic method were used as
research methods. The history of the role of money in the development and functioning of
economy and society were presented in the article. Four major tendencies which influence the
negative assessment, i.e. generation of economic crises; the development of instruments of
financial engineering which are used for speculations; the detachment of money from the real
economy as well as drastic inequality of its distribution were indicated on the basis of the
conducted analysis. The attempt of presentation of modern money in the new role was conducted
in the final part of the article. The role, which will enable to eliminate negative tendencies and to

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create a new financial order based on the redefinition of paradigms which are binding in the
sphere of finance.
1. The historical background of the positive and negative role of money Money and its use have
created positive and negative assessments since the dawn of the world. In the positive aspect,
money improves and determines processes of market exchange through its functions, i.e.
circular, financial/accounting, paying, saving and international settlements. It is the basis of
operation and development of given states as well as of the whole global economy, including
development of the 45 aldemar Gajda he ole of oney in the Contemporary onomy civilisation of
humankind. It may be metaphorically stated that money is a heart of the financial system of
economy.1 Financial markets created by money are the places of work of millions of
welleducated and well-paid specialists who work in banks, pension and insurance funds,
investment funds, consulting and supervising companies, etc. However, despite its positive role,
it also creates negative associations. Money from its beginning, has been used to pursue any
possible objectives through centuries of evolution, to the present day. An example from the
history of Christianity. Almost 2000 years ago, Jesus, due to money, for the first time and only
once in his life, used force casting away money traffickers from the temple in Jerusalem. Gaining
control over buying and selling market of a special coin called “temple half-shekel” was an
economic reason of throwing away the traffickers from the temple. It was the only one coin
which was made of half of ounce of pure silver and it did not have the image of a pagan emperor
and which could be used by the Jews to pay the tax temple, i.e. offer to God. Using the huge
demand for “half-shekels” the money traffickers bought them monopolizing the market and
afterwards they sold it with a huge profit. According to Jesus, it was a violation of sanctity of the
house of God.2 Whereas in the history of the biggest and most important states of the world,
money was used to achieve military (making wars), economic as well as political targets. The
overthrow of Stuarts dynasty in England, is a good example. The conflict between the English
money traffickers with the kings from the dynasty caused financing the invasion of William III of
Orange, who overthrew the Stuarts in 1688 and took the English throne. Financing of great wars
was another aim of the use of money. “I know of absolute certainty, that the division of the
United States into federations of equal force was decided long before the Civil War by the high
financial powers of Europe. These bankers were afraid that the United States, if they remained in
one block and as one nation, would attain economic and financial independence, which would
upset their financial domination over Europe and the world,” Otto von Bismarck said about the
American Civil War.3 Also the First and the Second World War were based on the phenomenon
of the use of money. Hitler did not have any money for war. “The characteristic feature of our
economic programme is that we do not have it at all,” he said.4 The economists, Hjalmar Schacht
and John Dulles, created the foundations of the military power of the Third Reich making
financial fundaments of the development of the newest and one of the biggest arms industry of
that time through the implementation of the Mefo bills of a little-known company Mettalurgische
Forschungsgesellschaft guaranteed by the Reich’s bank and German companies. The companies

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which had Mefo bills could exchange them into discounted cash in each German bank. And in
turn, each bank could sell it in the Reichsbank. There had been DM 12 billion in the bills before
the annex of Austria. Hitler could only take over Austria, the Czech Republic and afterwards the
remaining states of Europe and Africa to cover the bills.
2. Money in the contemporary economy Despite the systematic economic development after the
Second World War which has been due to the skilful use of money, more and more frequently its
role is perceived in negative tendencies. The sources of these tendencies include:
– generation of economic crises by the financial systems, including the last from the beginning of
2008, which has been the most serious since the Great Depression,
– a very quick development of new instruments of financial engineering which is used for
speculations, e.g. Subprime, CDS,
– detachment of money from the real economy,
– drastic inequality of the distribution of money.
The last economic crisis was a crisis of financial engineering. The usage of the new instruments
of financial engineering such as subprime in the real estate sector in the US became a main
reason of global economic crisis. The underlying cause may be seen in the monetary policy of
the US. Since 1971, when president Nixon suspended convertibility of dollar into gold, each
crisis which has appeared in the US was combated with the increase of available monetary base
and low interest 4 H.J. Braun, The German Economy in the Twentieth Century, Taylor & Francis,
Hamburg 2010, p. 67. 47 aldemar Gajda he ole of oney in the Contemporary onomy rates5 . The
increase of monetary base as well as seeking new instruments of financial engineering was a
reason of deregulation made at the end of the 1990s of the 20th century. It enabled the creation,
sale and marketing of derivatives which were created on the basis of illiquid primary
instruments, such as loans and credits. It enabled securitisation of mortgages, which means its
selling as well as issuing new securities secured with properties financed with mortgages. Banks
sold mortgages to intermediaries such as: Federal National Mortgage Association as well as
Federal Home Loan Mortgage Corporation, which in turn, issued on their basis liquid securities
and sold them to other financial institutions, e.g.: investment banks, insurance companies,
pension or investment funds. The sale of mortgages by banks allowed them to dispose them from
their balance sheets and credit risk transfer to other financial institutions. Banks could provide
subsequent loans thus increasing lending through numerous securitisation without the necessity
of increasing its capital base. Hence, securities secured with credit assets were created. The main
advantage of these securities was that one package of primary instruments could be used many
times as the base of issuing. It caused a huge increase of the value of these securities on the
financial markets. The free movement of capital enabled influx of foreign investors who
recognised liquid securities as good and secure investments.6 Nevertheless, they created “a

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finance bubble” which, sooner or later, had to have negative influence on whole global economy
introducing it into one of the biggest economic crises in the history. In October 2008, there was
the biggest fall on the London and Tokio Stock Exchange for 20 years. 2.3 trillion dollars
evaporated only during four days in October 2008, whereas losses in 2008 were estimated for 8.3
trillion dollars. At the same time, states of the EU spent over 1.8 trillion euros on rescuing
financial system (as guarantee and capital injection to the financial system).
That crisis was neither the first nor the last, whose cause was not overproduction, like the
classics of economic cycles, but functioning financial system and development of derivative
elements which created new, utopian money. Detachment of money from the real economy is one
of the biggest, negative results of the impact of money on the economy. The classical role of
money in the economy is characterised with the use of the following functions: circular
(exchange), financial/accounting (value measure), paying, saving and international settlements.
Due to these functions, money improves and determines processes of market exchange but
should also influence keeping the economic balance on the market. A rule which says that the
value of the issued cash and the cash which is in circulation equals annual value of supply of
products and services divided by the multiple of circulation of this cash in a year is an essential
condition of the balance. According to this cardinal principle, annual increase of the value of
supply of products and services should be balanced with the increased supply of money which is
equal approximately to the value of economic growth. Hence, in balanced economy, overall
value of financial transactions should be equal to annual overall of exchange of products and
services as well as social benefits and taxes. According to Bojarski, maintaining the above-
mentioned conditions of money and economy stability and having at the same time development
stimulation is one of the most important principles of preserving balance between the supply of
money and the real economy. Therefore, it should be sought to restore a close relation of
issuance and circulation of financial settlement means with the real economy and creation of
liquidity and solvency conditions with its increase.8 Modern realties are completely different
than the requested balance model. The data of 1970 indicated that 90% of cash flow
corresponded to economic transactions connected with the real economy and only 10% to the
speculative transactions. Nowadays only 3% corresponds to the real economy, whereas 97% to
the speculative transactions. According to the Bank for International Settlements in Basel, which
renders its services to over 140 central banks and national financial institutions, in 1989, daily
financial transactions in the world constituted in total USD 740 billion, in 2007 it was USD 1.7
trillion. Whereas in 2013, the value of transactions was USD 5.3 trillion per day. 8 W. Bojarski,
Autonomiczne i prospołeczne systemy finansowe w warunkach kryzysu, Konferencja Naukowa
WSZ-SW i KRS (in print). 49 aldemar Gajda he ole of oney in the Contemporary onomy
Progressive detachment of the processes and financial systems from the real economy and
development of independent and uncontrolled, speculative capital involving international
markets, sooner or later, will lead to tragic economic consequences and necessity of seeking a
new financial order. Drastic inequality of distribution of money is another negative result of the

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influence of money on the economy. The operation of modern financial systems reverses natural
economic order connected with a fair division of effects of management. It leads to such negative
consequences as a very big social stratification, serious impoverishment and even destitution of a
part of society as well as hoarding huge wealth by small groups of people. According to data of
2014 given by Oxfam, organisation which is engaged into charity, and published by Forbes, 85
the richest people in the world have wealth which equals 3.5 billion of the poorest who constitute
half of the population of the world. The wealth of 85 multibillionaires is estimated at 1.7 trillion
dollars. Forbes also informs that 1645 billionaires accumulated, in 2014, property worth USD 6.5
trillion, i.e. almost one third of the biggest economy of the world, the US. In the last year,
increase in value of the property of this group was USD 1 trillion. 1% of the population of the
world accumulated the wealth which equals to USD 110 trillion (almost twice bigger as annual
GDP of all economies of the world).9 Such a huge concentration of modern economic resources
by a small number of people constitutes a risk for balanced growth of the global economy and
coherence and stability of societies.
3. ecessity of changes on financial markets A concept of changes referring to changes in
functioning of money in its wider sense in the modern economy proposed in this study refers to
two aspects. The former is related to the elimination of political dysfunction connected with the
breach of financial and economic order by a state. Cicero in 55 BC indicated cardinal principles
of functioning of finances of a state, i.e. budget of a state has to be balanced, payment deficit
reduced and the public debt decreased; the authorities must 9 Forbes, 85-najbogatszych ma tyle
pieniędzy co połowa świata, www.forbes.pl/85-najbogatszychma-tyle-pieniedzy-co-polowa-
swiata,artykuly,169784,1,1.html (accessed: 3.02.2015). 50 Gospodarka reionalna i
międzynarodowa be controlled and their arrogance must be eliminated.10 In spite of the lapse of
time, these principles have been up-to-date. Almost in all states of the world cardinal rules of
functioning of finances of a state mentioned by Cicero are not followed. The world debt
constitutes over USD 61 trillion. According to the official data of the U.S. Treasury Department,
the public debt of U.S exceeded, in 2014, USD 18 trillion and in the last year it was almost one
trillion dollars bigger. In 2012, the relation of public debt to GDP in the US exceeded 100%. The
public debt of Japan is USD 14 trillion. Taking into account its relation to GDP which is 237%,
this debt is one of the biggest in the world. The debt of Italy reached a value of USD 2.7 trillion
and the relation to GDP which is over 132.6%. France and Great Britain have debt which is 90%
in relation to GDP with nominal value constituting USD 2.5 trillion and USD 2.3 trillion,
respectively. Germany USD 2.8 trillion, China over USD 2 trillion, Canada USD 1.6 trillion,
Brazil USD 1.5 trillion. The debt of Poland is USD 296 billion which equals to 57.48% of our
GDP. Existing lack of balanced budget as well as increasing public debt of most states of the
world may result in: stopping the pace of growth of particular countries and, at the same time,
the increase of GDP of the whole global economy, increase of costs of servicing the debts
(absorbing money which could be spent on the development of economies through
innovativeness and absorption of Union or world funds), existing of inflation processes, fall of

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credibility on the international financial markets (further increase of costs of servicing the debt)
as well as potential increase of social tensions in particular states caused by the lack of pay rises
in public sector, limited increase in pensions, social expenses as well as necessity to increase
taxes by the governments of these states. The latter aspect concerns only necessity of changes on
the financial markets in order to eliminate described negative influence of money on the
economy. In this matter, one may find various concepts in the literature on subject, even the ones
which are radically connected with absolute and rapid liquidation of the financial markets as
necessary condition to create new social system. The necessity of implementation of new
solutions for functioning of money is indispensable. Nevertheless, it seems that the reasonable
and possible to implement changes should be based on renewed science and common education
rather than on the radical concepts which evoke to liquidation of the global financial markets
(which are not possible to introduce due to present conditions). The present and future role of
economic sciences concerns the creation of new financial structure (but not only financial),
which may be created concurrently to the present by way of evolution. The new structure should
be based on new paradigms. The process of devaluation of binding paradigms in economic
sciences is perceived. However, most academic centres still create analyses of claimed benefits
of the present economic and financial order. Technical progress has introduced societies into the
epoch of abundance of products and services and it frees them from hard work very quickly. It
causes that the paradigms accepted for the epoch of shortage are not binding any more. Also
generation of more common worldwide crises which negatively influence economy and society
by financial systems enforces changes of their principles. This new situation requires from
science re-evaluation of bases and creation of a new financial system based on new paradigms.
Hence, the determination of a new role of money is the basis. Taking into account scientific
perspective, one should consider if a new redefinition of the role of money should not be based
on the new paradigm negating money as goods. Money is abstraction, agreement of a person
accepting it in its role, a symbol, information, it has a very low value therefore it should not be
treated as goods. Thus, the role of intermediary of value and value measure should be restored.
Eliminating the opportunity to create debt money, new means of payment as derivatives of real
money, currency speculations, etc.11 It will enable to limit or eliminate its negative role in
causing crises or using instruments of financial engineering in its broad sense. It will
undoubtedly influence the stability of particular economies and, at the same time, global
economy. Another considered new paradigm should be to cover the value of money in goods,
thus balancing the economy through maintaining balance between supply of money and its real
economy and it was described above. A proposed change of the financial system basing on
renewed science and redefinition of its assumptions with newly adopted paradigms of its
functioning must be supported by universal economic education. The education which will allow
societies to make rational choices in compliance with their business not the business of markets
and financial elites. Economically-educated societies will have opportunity to choose between
the old and the appearing new economic and financial system. Paying special attention to notions

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connected with social and economic problems, focus on fairness and balance of financial
systems, i.e. basic assumptions of properly working global economic system should be one of
priorities in the system of universal economic education.
The development of economics caused that the theory of money belongs to its best developed
fields and it is one of the fastest growing fields of knowledge. New derivative instruments of
money give more and more sophisticated and complicated opportunities of its creation. It causes
that there are two spheres, real and financial, in the current economic reality. The real one is
connected with real material products and services related to them, whereas the financial sphere
refers mainly to transactions with money or its derivatives constituting subject matters. In
practice, it causes detachment of money from the real economy and more common negative
consequences for economy which are described in this article. Therefore, it seems necessary to
indicate those unbeneficial tendencies and take measures which are to increase their effects and,
in a longer term, target at their elimination. The recommendations of the changes of the role of
money which result from this study are an attempt of such actions. The proposed changes refer to
three aspects:
1. Eliminating political dysfunctionality connected with the breach of the financial and economic
order by a state.
2. Changes on financial markets through new paradigms for functioning of money worked out by
science:
– Paradigm 1 – negation of money as goods and a new redefinition of the role of money,
– Paradigm 2 – money covered in goods, as a result balance of economy through maintaining
balance between the supply of money and the real economy.
3. Universal economic education of societies. 53 aldemar Gajda he ole of money in the
Contemporary economy The recommendations presented above (conclusions) concerning the
necessity of making changes in functioning of money in its broad sense in the modern economy
are neither a remedy nor ready-to-use solution, but the collection of desiderata for economics as
proposal and attempt to rise discussion.
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.[1][2][3] 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.[4] 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

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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.
[5]
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".[6]
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.[7] It is thought by modern scholars that these first stamped coins were minted around 650
to 600 BC.[8]
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. [9][10] Instead, non-monetary
societies operated largely along the principles of gift economy and debt.[11][12] When barter did in
fact occur, it was usually between either complete strangers or potential enemies. [13]
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.[14] The first usage of the term came from Mesopotamia circa 3000 BC.

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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.[15] It is thought by modern scholars that
these first stamped coins were minted around 650 to 600 BC.[16]

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.[17] 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."[18] 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.

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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.[19]
Functions
See also: Monetary economics
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.[20]
This couplet would later become widely popular in macroeconomics textbooks. [21] 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.[4][22][23]
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. [24] 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

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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
A unit of account (in economics)[25] 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,[24] particularly older ones,
other texts subsume this under other functions.[4][22][23][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. 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.[4][failed verification]
Properties
The functions of money are that it is a medium of exchange, a unit of account, and a store of
value.[26] To fulfill these various functions, money must be:[27]
 Fungible: its individual units must be capable of mutual substitution (i.e.,
interchangeability).

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 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.[27]
Money supply
Main article: Money supply

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Money Base, M1 and M2 in the U.S. from 1981 to 2012

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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.

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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.[28][29][30]
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.[31]
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

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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. [32] 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.[33] American Eagles are imprinted with their gold
content and legal tender face value.[34]
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

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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.[35]
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.[36][37]
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).[34][38]
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. [39] By contrast, commodity
money that has been lost or destroyed cannot be recovered.
Coinage
Main article: Coin

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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

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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

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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.

Pa
per 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,[40] cheques, savings
accounts, transactional accounts, loaning, trusts, exchange rates, the transfer of credit and debt,
[41]
and banking institutions for loans and deposits.[41][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.

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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

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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

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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.[42]
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.[43] 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.[44] 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.[45][46][47]
Digital or electronic
Main article: Digital money
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.[48] In 2012, by number of transaction, 20 to 58 percent of
transactions were electronic (dependent on country).[49]
Anonymous digital currencies were developed in the early 2000s. Early examples
include Ecash, bit gold, RPOW, and b-money. Not much innovation occurred until the
conception of Bitcoin in 2008, which introduced the concept of a decentralised currency that
requires no trusted third party.[50]
Monetary policy
Main article: Monetary policy

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U
S 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,[51] or indirectly via a fixed exchange rate system against a major currency with
a stable inflation rate.[52] 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." [53]

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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. [54] Some of the tools used to conduct
contemporary monetary policy include:[55]
 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[56] supported by the
work of David Laidler,[57] 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. [58]
Locality

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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.

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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.[59]
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. [60] Historically, objects that were
difficult to counterfeit (e.g. shells, rare stones, precious metals) were often chosen as money.
[61]
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. 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.[62]
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.
Money for the sake of money is not an end in itself. You cannot eat dollar bills or wear your bank
account. Ultimately, the usefulness of money rests in exchanging it for goods or services. As the
American writer and humorist Ambrose Bierce (1842–1914) wrote in 1911, money is a “blessing
that is of no advantage to us excepting when we part with it.” Money is what people regularly
use when purchasing or selling goods and services, and thus money must be widely accepted by
both buyers and sellers. This concept of money is intentionally flexible, because money has
taken a wide variety of forms in different cultures.
Barter and the Double Coincidence of Wants

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To understand the usefulness of money, we must consider what the world would be like without
money. How would people exchange goods and services? Economies without money typically
engage in the barter system. Barter—literally trading one good or service for another—is highly
inefficient for trying to coordinate the trades in a modern advanced economy. In an economy
without money, an exchange between two people would involve a double coincidence of wants,
a situation in which two people each want some good or service that the other person can
provide. For example, if an accountant wants a pair of shoes, this accountant must find someone
who has a pair of shoes in the correct size and who is willing to exchange the shoes for some
hours of accounting services. Such a trade is likely to be difficult to arrange. Think about the
complexity of such trades in a modern economy, with its extensive division of labor that involves
thousands upon thousands of different jobs and goods.
Another problem with the barter system is that it does not allow us to easily enter into future
contracts for the purchase of many goods and services. For example, if the goods are perishable
it may be difficult to exchange them for other goods in the future. Imagine a farmer wanting to
buy a tractor in six months using a fresh crop of strawberries. Additionally, while the barter
system might work adequately in small economies, it will keep these economies from growing.
The time that individuals would otherwise spend producing goods and services and enjoying
leisure time is spent bartering.
Functions for Money
Money solves the problems created by the barter system. (We will get to its definition soon.)
First, money serves as a medium of exchange, which means that money acts as an intermediary
between the buyer and the seller. Instead of exchanging accounting services for shoes, the
accountant now exchanges accounting services for money. This money is then used to buy shoes.
To serve as a medium of exchange, money must be very widely accepted as a method of payment
in the markets for goods, labor, and financial capital.
Second, money must serve as a store of value. In a barter system, we saw the example of the
shoemaker trading shoes for accounting services. But she risks having her shoes go out of style,
especially if she keeps them in a warehouse for future use—their value will decrease with each
season. Shoes are not a good store of value. Holding money is a much easier way of storing
value. You know that you do not need to spend it immediately because it will still hold its value
the next day, or the next year. This function of money does not require that money is
a perfect store of value. In an economy with inflation, money loses some buying power each
year, but it remains money.
Third, money serves as a unit of account, which means that it is the ruler by which other values
are measured. For example, an accountant may charge $100 to file your tax return. That $100 can
purchase two pair of shoes at $50 a pair. Money acts as a common denominator, an accounting
method that simplifies thinking about trade-offs.

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Finally, another function of money is that money must serve as a standard of deferred
payment. This means that if money is usable today to make purchases, it must also be acceptable
to make purchases today that will be paid in the future. Loans and future agreements are stated in
monetary terms and the standard of deferred payment is what allows us to buy goods and
services today and pay in the future. So money serves all of these functions— it is a medium of
exchange, store of value, unit of account, and standard of deferred payment.
Commodity versus Fiat Money
Money has taken a wide variety of forms in different cultures. Gold, silver, cowrie shells,
cigarettes, and even cocoa beans have been used as money. Although these items are used
as commodity money, they also have a value from use as something other than money. Gold, for
example, has been used throughout the ages as money although today it is not used as money but
rather is valued for its other attributes. Gold is a good conductor of electricity and is used in the
electronics and aerospace industry. Gold is also used in the manufacturing of energy efficient
reflective glass for skyscrapers and is used in the medical industry as well. Of course, gold also
has value because of its beauty and malleability in the creation of jewelry.
As commodity money, gold has historically served its purpose as a medium of exchange, a store
of value, and as a unit of account. Commodity-backed currencies are dollar bills or other
currencies with values backed up by gold or other commodity held at a bank. During much of its
history, the money supply in the United States was backed by gold and silver. Interestingly,
antique dollars dated as late as 1957, have “Silver Certificate” printed over the portrait of George
Washington, as shown in Figure 1. This meant that the holder could take the bill to the
appropriate bank and exchange it for a dollar’s worth of silver.

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Fi
gure 1. A Silver Certificate and a Modern U.S. Bill. Until 1958, silver certificates were
commodity-backed money—backed by silver, as indicated by the words “Silver Certificate”
printed on the bill. Today, U.S. bills are backed by the Federal Reserve, but as fiat money.
(Credit: “The.Comedian”/Flickr Creative Commons)
As economies grew and became more global in nature, the use of commodity monies became
more cumbersome. Countries moved towards the use of fiat money. Fiat money has no intrinsic
value, but is declared by a government to be the legal tender of a country. The United States’
paper money, for example, carries the statement: “THIS NOTE IS LEGAL TENDER FOR ALL
DEBTS, PUBLIC AND PRIVATE.” In other words, by government decree, if you owe a debt,
then legally speaking, you can pay that debt with the U.S. currency, even though it is not backed
by a commodity. The only backing of our money is universal faith and trust that the currency has
value, and nothing more.

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Watch this video on the “History of Money.”

Key Concepts and Summary

Money is what people in a society regularly use when purchasing or selling goods and services.
If money were not available, people would need to barter with each other, meaning that each
person would need to identify others with whom they have a double coincidence of wants—that
is, each party has a specific good or service that the other desires. Money serves several
functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred
payment. There are two types of money: commodity money, which is an item used as money, but
which also has value from its use as something other than money; and fiat money, which has no
intrinsic value, but is declared by a government to be the legal tender of a country.
Self-Check Questions
1. In many casinos, a person buys chips to use for gambling. Within the walls of the casino,
these chips can often be used to buy food and drink or even a hotel room. Do chips in a
gambling casino serve all three functions of money?
2. Can you name some item that is a store of value, but does not serve the other functions of
money?

Review Questions
1. What are the four functions served by money?
2. How does the existence of money simplify the process of buying and selling?
3. What is the double-coincidence of wants?

Critical Thinking Questions

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1. The Bring it Home Feature discusses the use of cowrie shells as money. Although cowrie
shells are no longer used as money, do you think other forms of commodity monies are
possible? What role might technology play in our definition of money?
2. Imagine that you are a barber in a world without money. Explain why it would be tricky
to obtain groceries, clothing, and a place to live.

References
Hogendorn, Jan and Marion Johnson. The Shell Money of the Slave Trade. Cambridge University
Press, 2003. 6.
Glossary
barter
literally, trading one good or service for another, without using money
commodity money
an item that is used as money, but which also has value from its use as something other than
money
commodity-backed currencies
are dollar bills or other currencies with values backed up by gold or another commodity
double coincidence of wants
a situation in which two people each want some good or service that the other person can provide
fiat money
has no intrinsic value, but is declared by a government to be the legal tender of a country
medium of exchange
whatever is widely accepted as a method of payment
money
whatever serves society in four functions: as a medium of exchange, a store of value, a unit of
account, and a standard of deferred payment.
standard of deferred payment
money must also be acceptable to make purchases today that will be paid in the future

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store of value
something that serves as a way of preserving economic value that can be spent or consumed in
the future
unit of account
the common way in which market values are measured in an economy
Most people in the world use some form of money on a daily basis to buy or sell goods and
services, to pay or get paid, or to write or settle contracts. Money is central to the workings of a
modern economy. But despite its importance and widespread use, there is not universal
agreement on what money actually is. That is partly because what has constituted money has
varied over time and from place to place. This article provides an introduction to the role of
money in the modern economy. It does not assume any prior knowledge of economics before
reading. The article begins by explaining the concept of money and what makes it special. It then
sets out what counts as money in a modern economy such as the United Kingdom, where 97% of
the money held by the public is in the form of deposits with banks, rather than currency.(1) It
describes the different types of money, where they get their value from and how they are created.
A box briefly outlines some recent developments in payment technologies. A companion piece to
this Bulletin article, ‘Money creation in the modern economy’,(2) describes the process of
money creation in more detail, and discusses the role of monetary policy and the central bank in
that process. For expositional purposes this article concentrates on the United Kingdom, but the
issues discussed are equally relevant to most economies today. A short video explains some of
the key topics covered in this article.
What counts as money? Many different goods or assets have been used as money at some time or
in some place. Goods are things that are valued because they satisfy people’s needs or wants,
such as food, clothes or books. An asset, such as machinery, is something that is valuable
because it can be used to produce other goods or services. So which goods or assets should be
described as money? One common way of defining money is through the functions it performs.
This approach traditionally suggests that money should fulfil three important roles. The first role
of money is to be a store of value — something that is expected to retain its value in a reasonably
predictable way over time. Gold or silver that was mined hundreds of years ago would still be
valuable today. But perishable food would quickly become worthless as it goes bad. So gold or
silver are good stores of value, but perishable food much less so. Money’s second role is to be a
unit of account — the thing that goods and services are priced in terms of, for example on
menus, contracts or price labels. In modern economies the unit of account is usually a currency,
for example, the pound in the United Kingdom, but it could be a type of good instead. In the
past, items would often be priced in terms of something very common, such as staple foods
(‘bushels of wheat’) or farm animals. Third, money must be a medium of exchange — something
that people hold because they plan to swap it for something else, rather than because they want

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the good itself. For example, in some prisoner of war camps during the Second World War,
cigarettes became the medium of exchange in the absence of money.(4) Even non-smokers
would have been willing to exchange things for cigarettes; not because they planned to smoke
the cigarettes, but because they would later be able to swap them for something that they did
want. These functions are all closely linked to each other. For example, an asset is less useful as
the medium of exchange if it will not be worth as much tomorrow — that is, if it is not a good
store of value. Indeed, in several countries where the traditional currency has become a poor
store of value due to very high rates of price inflation, or hyperinflation, foreign currencies have
come to be used as an alternative medium of exchange. For example, in the five years after the
end of the First World War, prices of goods in German marks doubled 38 times — meaning that
something that cost one mark in 1918 would have cost over 300 billion marks in 1923.(5) As a
result, some people in Germany at the time began to use other currencies to buy and sell things
instead. To make sure sterling does not lose its usefulness in exchange, one of the Bank of
England’s objectives is to safeguard the value of the currency. Although the medium of exchange
needs to be a good store of value, there are many good stores of value that are not good media of
exchange.(6) Houses, for example, tend to remain valuable over quite long periods of time, but
cannot be easily passed around as payment. Similarly, it is usually efficient for the medium of
exchange in the economy to also be the unit of account.(7) If UK shops priced items in US
dollars, while still accepting payment only in sterling, customers would have to know the
sterling-dollar exchange rate every time they wanted to buy something. This would take time and
effort on the part of the customers. So in most countries today shops price in terms of whatever
currency is the medium of exchange: pounds sterling in the United Kingdom.
Historically, the role of money as the medium of exchange has often been viewed as its most
important function by economists.(1) Adam Smith, one of the founding fathers of the discipline
of economics and the current portrait on the £20 note, saw money as an essential part of moving
from a subsistence economy, or autarky, to an exchange economy. In a subsistence economy,
everyone consumes only what they produce. For example, Robinson Crusoe, stranded alone on a
desert island, has no need for money as he just eats the berries he gathers and the animals he
hunts.(2) But it is more efficient for people to specialise in production, producing greater
amounts of one good than they need themselves and then trading with one another. If Robinson
Crusoe is a natural forager, for instance, then he could focus his effort on picking berries, while
his friend Man Friday, a skilled fisherman, could devote all of his time to fishing. The two could
then trade with one another and each consume more berries and fish than if each of them had
split his time between picking berries and catching fish.
Money is an IOU
While Robinson Crusoe and Man Friday could simply swap berries for fish — without using
money — the exchanges that people in the modern economy wish to carry out are far more
complicated. Large numbers of people are involved.(4) And — crucially — the timing of these

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exchanges is not typically coincident. Just as people do not always want to consume the same
type of goods they have produced themselves, they do not always want to consume them at the
same time that they produce them. Robinson Crusoe may gather a large amount of berries during
summer, when they are in season, while Man Friday may not catch many fish until autumn. In
the modern economy, young people want to borrow to buy houses; older people to save for
retirement; and workers prefer to spend their monthly wage gradually over the month, rather than
all on payday. These patterns of demand mean some people wish to borrow and others wish to
hold claims — or IOUs — to be repaid by someone else at a later point in time. Money in the
modern economy is just a special form of IOU, or in the language of economic accounts, a
financial asset. To understand money as a financial asset, it is helpful to first consider the wide
range of different types of asset that people hold (individually or as companies). Some of these
assets are shown in Figure 1. Non-financial assets such as capital (for example machinery), land
and houses are shown in light blue. Each non-financial asset can produce goods and services for
its owners. For instance, machinery and land can be used to make products or food; houses
provide people with the service of shelter and comfort; and gold can be made into forms that
people desire, such as jewellery. It is possible for some of these non-financial assets (or even the
goods that they produce) to serve some of the functions of money. When goods or assets that
would be valuable for other purposes are used as money, they are known as commodity money.
For instance, Adam Smith described how ‘iron was the common instrument of commerce among
the ancient Spartans’ and ‘copper among the ancient Romans’.(5) Many societies have also used
gold as commodity money. The use of commodities which are valuable in their own right as
money can help people to have confidence that they will be able to exchange them for other
goods in future. But since these commodities have other uses — in construction, say, or as
jewellery — there is a cost to using them as money.(6) So in the modern economy, money is
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Financial assets are simply claims on someone else in the economy — an IOU to a person,
company, bank or government. A financial asset can be created by owners of non-financial
assets. For example, a landowner might decide to lease some of his or her land to a farmer in
return for some of the future harvests. The landowner would have less land than before, but
would instead have a financial asset — a claim on future goods (food) produced by the farmer
using the asset (land). In reality, however, most financial assets are actually claims on other
financial assets. Most people considering buying a bond of a company (a type of IOU from the
company to the bondholder), such as a farm, would not want to be repaid with food. Instead,
contracts such as bonds usually state that the bondholder is owed a certain amount of money,
which the farm can get by selling its food.
Because financial assets are claims on someone else in the economy, they are also financial
liabilities — one person’s financial asset is always someone else’s debt. So the size of the
financial liabilities in a closed economy is equal to the size of the financial assets, as depicted in
Figure 1.(1) If a person takes out a mortgage, they acquire the obligation to pay their bank a sum
of money over time — a liability — and the bank acquires the right to receive those payments —
an asset of the same size.(2) Or if they own a company bond, they have an asset but the company
has an equally sized liability. In contrast, non-financial assets are not claims on anyone else. If
someone owns a house or some gold, there is no corresponding person indebted by that amount
— so there are no non-financial liabilities. If everyone in the economy were to pool all of their
assets and debts together as one, all of the financial assets and liabilities — including money —
would cancel out, leaving only the non-financial assets.
Why money is special In principle, there might be no need for a special financial asset such as
money to keep track of who is owed goods and services. Everyone in the economy could instead
create their own financial assets and liabilities by giving out IOUs every time they wanted to
purchase something, and then mark down in a ledger whether they were in debt or credit in IOUs
overall. Indeed, in medieval Europe merchants would often deal with one another by issuing
IOUs. And merchant houses would periodically settle their claims on one another at fairs, largely
by cancelling out debts.(3) But such systems rely on everyone being confident that everyone else
is completely trustworthy.(4) Otherwise, people would worry that some of the IOUs they were
holding might be from people who would not pay them back when they came to redeem them.
Even if they trusted everyone who they had lent to directly, they may worry that those people
held IOUs from untrustworthy people, and therefore would not be able to repay their own IOUs.
Money is a social institution that provides a solution to the problem of a lack of trust.(5) It is
useful in exchange because it is a special kind of IOU: in particular, money in the modern
economy is an IOU that everyone in the economy trusts. Because everyone trusts in money, they
are happy to accept it in exchange for goods and services — it can become universally
acceptable as the medium of exchange. Only certain types of IOU can obtain that status. For
example, if a type of IOU is not widely trusted to be repaid, it is less likely to be acceptable in

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exchange — and less like money. The next section of the article explains what types of IOU
function as money in the modern economy, and how those particular IOUs became trusted
enough to be universally acceptable in exchange.
Different types of money The previous section explained that although many goods or assets can
fulfil some of the functions of money, money today is a special type of IOU. To understand that
further, it is useful to consider some of the different types of money that circulate in a modern
economy — each type representing IOUs between different groups of people. All of these types
of money, along with various other commonly used terms related to money are set out in a
glossary (Table A) at the end of the article. For this article, the economy is split into three main
groups: the central bank (in the United Kingdom, the Bank of England); the commercial banks
(for example, high street banks such as Barclays and Lloyds); and the remaining private sector of
households and companies, hereon referred to as ‘consumers’.
Economic commentators and academics often pay close attention to the amount of ‘broad
money’ circulating in the economy. This can be thought of as the money that consumers have
available for transactions, and comprises: currency (banknotes and coin) — an IOU from the
central bank, mostly to consumers in the economy; and bank deposits — an IOU from
commercial banks to consumers.(6) Broad money is a useful concept because it measures the
amount of money held by those responsible for spending decisions in the economy —
households and companies. A box in the companion article explains what information different
measures of money can reveal about the economy.
A different definition of money, often called ‘base money’ or ‘central bank money’, comprises
IOUs from the central bank: this includes currency (an IOU to consumers) but also central bank
reserves, which are IOUs from the central bank to commercial banks. Base money is important
because it is by virtue of their position as the only issuer of base money that central banks can
implement monetary policy.(7) The companion article explains how the Bank of England varies
the interest rate paid on reserves to affect spending and inflation in the economy, along with the
amounts of the different types of money. Who owes who? Mapping out the IOUs Drawing a
balance sheet is a useful way to map out the IOUs of different people to each other.
As discussed previously, each IOU is a financial liability for one person, matched by a financial
asset for someone else. Then, for any individual, their balance sheet simply adds together, on one
side, all of their assets — their IOUs from other people and their non-financial assets; and on the
other, all of their liabilities (or debt) — their IOUs to other people.(1) You can add together the
individuals in each group to get a consolidated balance sheet, which shows the IOUs of that
group to the other groups in the economy.(2) Figure 2 shows a stylised balance sheet of assets
and liabilities for each of the three groups in the economy. The different types of money are each
shown in a different colour: currency in blue, bank deposits in red and central bank reserves in
green. Broad money is therefore represented by the sum of the red and the blue assets held by

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consumers, whereas base money is the sum of all of the blue and the green assets. (Note that the
balance sheets are not drawn to scale — in reality the amount of broad money is greater than the
amount of base money.)
Each type of money features on the balance sheets of at least two different groups, because each
is an asset of one group and a liability of another. There are also lots of other assets and liabilities
which do not fulfil the functions of money (everything except the lilac circles in Figure 1); some
of these are shown in white in Figure 2. For example, consumers hold loans such as mortgages,
which are liabilities of the consumer and assets of the consumer’s bank. The rest of this section
discusses each of the three types of money in more detail, explaining why it is valued and briefly
describing how it is created.(3) A box on page 9 briefly outlines some recent developments in
payment technologies and alternative currencies that have led to the creation of different
instruments that have some similarities with money.
What is it?
Currency is made up mostly of banknotes (around 94% of the total by value as of December
2013), most of which are an IOU from the Bank of England to the rest of the economy.(4)
Currency is mostly held by consumers, although commercial banks also hold small amounts in
order to meet deposit withdrawals. As stated in their inscription, banknotes are a ‘promise to pay’
the holder of the note, on demand, a specified sum (for example £5). This makes banknotes a
liability of the Bank of England and an asset of their holders, shown in blue on their balance
sheets in Figure 2.

When the Bank of England was founded in 1694, its first banknotes were convertible into gold.
The process of issuing ‘notes’ that were convertible into gold had started earlier than this, when
goldsmith-bankers began storing gold coins for customers. The goldsmiths would give out
receipts for the coins, and those receipts soon started to circulate as a kind of money.

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The Bank of England would exchange gold for its banknotes in a similar way — it stood ready to
swap its notes back into gold on demand. Other than a few short periods, that was how currency
worked for most of the next 250 years — the ‘gold standard’.(5) But the Bank permanently
abandoned offering gold in return for notes in 1931 so that Britain could better manage its
economy during the Great Depression, as discussed below. Since 1931, Bank of England money
has been fiat money. Fiat or ‘paper’ money is money that is not convertible to any other asset
(such as gold or other commodities).
Recent developments in payment technologies and alternative currencies
The recent past has seen a wave of innovation in payment technologies and alternative
currencies. This box briefly outlines some of these developments, focusing on how they relate to
the concept of money discussed in the main article. Overall, while they perform — to a varying
extent — some of the functions of money, at present they are not typically accepted as a medium
of exchange to the same extent that currency, central bank reserves or bank deposits are. One set
of innovations allows households and businesses to convert bank deposits into other, purely
electronic forms of money (sometimes referred to as ‘e-money’) that can be used to carry out
transactions. These technologies aim to improve the process of making payments.
Examples include PayPal and Google Wallet. Just as it may be more convenient to carry out
transactions using bank deposits rather than banknotes, for some transactions it may also be more
convenient to use money in an e-money account rather than banknotes or bank deposits. These
forms of money have some similar features to bank deposits. For example, money in an e-money
account represents a store of value so long as the companies providing it are seen as trustworthy.
E-money can also be used as a medium of exchange with businesses (such as online sellers) or
individuals that accept it. However, it is still not as widely accepted as other media of exchange,
for instance, it is not generally accepted by high street shops. Transactions using these
technologies are also typically denominated in the existing unit of account (pounds sterling in the
United Kingdom).
Another set of innovations have served to introduce a new unit of account. These schemes aim to
encourage economic Because fiat money is accepted by everyone in the economy as the medium
of exchange, although the Bank of England is in debt to the holder of its money, that debt can
only be repaid in more fiat money. The Bank of England promises to honour its debt by
exchanging banknotes, including those no longer in use, for others of the same value forever. For
example, even after its withdrawal on 30 April 2014, the £50 note featuring Sir John Houblon
will still be swapped by the Bank for the newer £50 note, which features Matthew Boulton and
James Watt. Why do people use it? Fiat money offers advantages over linking money to gold
when it comes to managing the economy. With fiat money, changes in the demand for money by
the public can be matched by changes in the amount of money available to them. When the
amount of money is linked to a commodity, such as gold, this activity within a defined

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environment, and include local currencies, such as the Bristol, Brixton or Lewes Pounds in the
United Kingdom.
(1) Local currencies are discussed in detail in a previous Bulletin article (Naqvi and
Southgate (2013)). These forms of money can be obtained in exchange for
currency at fixed rates: for example, one pound sterling can be swapped for one
Bristol Pound. Local currency can then be exchanged for goods and services that
can be priced in their own unit of account — Brixton Pounds rather than pounds
sterling. As a result their use as a medium of exchange is intentionally limited. For
example, the Lewes Pound can only be used at participating retailers, which must
be located in the Lewes area. A further category of innovations is digital
currencies, such as Bitcoin, Litecoin and Ripple.
(2) The key difference between these and local currencies is that the exchange rate
between digital currencies and other currencies is not fixed. Digital currencies are
not at present widely used as a medium of exchange. Instead, their popularity
largely derives from their ability to serve as an asset class. As such they may have
more conceptual similarities to commodities, such as gold, than money. Digital
currencies also differ from the other technologies discussed so far in this box
because they can be created out of nothing, albeit at pre-determined rates. In
contrast, local currencies come into circulation only when exchanged for pounds
sterling. While the amount of money held in e-money accounts or local currencies
depends entirely on demand, the supply of digital currencies is typically limited
Because fiat money is accepted by everyone in the economy as the medium of exchange,
although the Bank of England is in debt to the holder of its money, that debt can only be repaid
in more fiat money. The Bank of England promises to honour its debt by exchanging banknotes,
including those no longer in use, for others of the same value forever. For example, even after its
withdrawal on 30 April 2014, the £50 note featuring Sir John Houblon will still be swapped by
the Bank for the newer £50 note, which features Matthew Boulton and James Watt. Why do
people use it? Fiat money offers advantages over linking money to gold when it comes to
managing the economy. With fiat money, changes in the demand for money by the public can be
matched by changes in the amount of money available to them. When the amount of money is
linked to a commodity, such as gold, thisplaces a limit on how much money there can be, since
there is a limit to how much gold can be mined. And that limit is often not appropriate for the
smooth functioning of the economy.(1) For example, abandoning the gold standard in 1931
allowed Britain to regain more control of the amount of money in the economy. The United
Kingdom was able to reduce the value of its currency relative to other countries still linking their
currency to gold (and this was accompanied by an increased amount of money in circulation),
which some economic historians argue helped Britain avoid facing as deep a recession as many
other countries around the world in the 1930s.

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Although there are advantages to using fiat money for the economy as a whole, these may not be
realised unless individuals decide they want to use it in exchange. And, if banknotes are not
directly convertible into a real good of some kind, what makes them universally acceptable in
exchange? One answer is that the trusted medium of exchange just emerges over time as a result
of a social or historical convention. There are many such conventions that emerge in society. For
example, motorists in the United Kingdom drive on the left-hand side of the road, and this
convention began when enough drivers became confident that most others would do the same.(1)
But equally the convention could have become driving on the right, as it did in many other
countries.
In the case of money, however, the state has generally played a role in its evolution.(2) To be
comfortable holding currency, people need to know that at some point someone would be
prepared to exchange those notes for a real good or service, which the state can help guarantee.
One way it can do this is to make sure that there will always be demand for the currency by
accepting it as tax payments. The government can also influence that demand somewhat by
deeming that currency represents ‘legal tender’.(3) Even if the state does underpin the use of
currency in this way, that by itself does not ensure that people will (or are legally bound to) use
it. They need to trust that their banknotes are valuable, which means that it is important that
banknotes are difficult to counterfeit.(4)
They also need to have faith that the value of their banknotes will remain broadly stable over
time if they are to hold them as a store of value and be able to use them as a medium of
exchange. This generally means the state must ensure a low and stable rate of inflation. Since
abandoning the gold standard in 1931, various other ways of keeping the value of money stable
have been tried, with differing degrees of success. For example, in the 1980s, policy aimed to
keep the rate at which the amount of broad money in the economy was growing stable over time.
(5) Since 1992, the Bank has had an inflation target for consumer prices. The inflation target
means that the Bank is committed to aiming to keep the value of money relatively stable in terms
of the number of goods and services it can buy. So instead of being confident that their banknotes
will be worth a certain amount of gold, people can expect that they will be worth a stable amount
of real products from one year to the next.
which are no longer fit to be used or are part of a series that has been withdrawn. These old notes
are then destroyed by the Bank. The demand for banknotes has also generally increased over
time. To meet this extra demand, the Bank also issues banknotes over and above those needed to
replace old banknotes.(6) The extra newly issued notes are bought by the commercial banks from
the Bank of England. The commercial banks pay for the new currency, a paper IOU of the Bank
of England, by swapping it for some of their other, electronic IOUs of the Bank — central bank
reserves. The size of their balance sheets in Figure 2 would be unchanged, but the split between
the green and blue components would be altered.

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Bank deposits What are they? Currency only accounts for a very small amount of the money held
by people and firms in the economy. The rest consists of deposits with banks, as shown in Chart
1. For security reasons, consumers generally do not want to store all of their assets as physical
banknotes. Moreover, currency does not pay interest, making it less attractive to hold than other
assets, such as bank deposits, that do. For these reasons, consumers prefer to mostly hold an
alternative medium of exchange — bank deposits, shown in red in Figure 2. Bank deposits can
come in many different forms, for example current accounts or savings accounts held by
consumers or some types of bank bonds purchased by investors. In the modern economy these
tend to be recorded electronically. For simplicity, this article focuses on households’ and firms’
deposits with banks, as these most clearly function as money.
Why do people use them? When a consumer makes a deposit of his or her banknotes with a
bank, they are simply swapping a Bank of England IOU for a commercial bank IOU. The
commercial bank gets amount of currency is very small compared to the amount of bank
deposits. Far more important for the creation of bank deposits is the act of making new loans by
banks. When a bank makes a loan to one of its customers it simply credits the customer’s
account with a higher deposit balance. At that instant, new money is created. Banks can create
new money because bank deposits are just IOUs of the bank; banks’ ability to create IOUs is no
different to anyone else in the economy. When the bank makes a loan, the borrower has also
created an IOU of their own to the bank. The only difference is that for the reasons discussed
earlier, the bank’s IOU (the deposit) is widely accepted as a medium of exchange — it is money.
Commercial banks’ ability to create money is not without limit, though. The amount of money
they can create is influenced by a range of factors, not least the monetary, financial stability and
regulatory policies of the Bank of England. These limits, and the money creation process more
generally, are discussed in detail in the companion piece to this article.
Central bank reserves Commercial banks need to hold some currency to meet frequent deposit
withdrawals and other outflows. But to use physical banknotes to carry out the large volume of
transactions they do with each other would be extremely cumbersome. So banks are allowed to
hold a different type of IOU from the Bank of England, known as central bank reserves and
shown in green in Figure 2. Bank of England reserves are just an electronic record of the amount
owed by the central bank to each individual bank. Reserves are a useful medium of exchange for
banks, just as deposits are for households and companies. Indeed, reserves accounts at the central
bank can be thought of as playing a similar role for commercial banks as current accounts serve
for households or firms.
If one bank wants to make a payment to another — as they do every day, on a large scale, when
customers make transactions — they will tell the Bank of England who will then adjust their
reserves balances accordingly. The Bank of England also guarantees that any amount of reserves
can be swapped for currency should the commercial banks need it. For example, if lots of
households wanted to convert their deposits into banknotes, commercial banks could swap their

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reserves for currency to repay those households. As discussed earlier, as the issuer of currency,
the Bank of England can make sure there is always enough of it to meet such demand.
ROLE OF MONEY IN OUR ECONOMIC SYSTEM
Money is considered as the most important commodity in any person’s life. Money, in
itself is nothing. It is a shell, a metal coin or a piece of paper with historic image on it but the
value
that people place on it has nothing to do with its physical value.
Money has always been recognized as an essential tool in a specialized economic society.
Its value derives from being a medium of exchange that is widely acceptable for the payment of
goods and services, used as a unit of measurement and a storehouse for wealth.
Money allows people to trade goods and services and understand the prices of goods.
Overtime, it became a commodity that controls most aspects of the human existence, both for
good
and evil.

Development of Monetary System

A person couldn’t provide everything that he needs by himself, thus direct exchange of
goods and services emerged in primitive societies to aid their necessities before the use of money
facilitated the trade of these courses.
Barter System was the first stage of monetary development. It is a system of exchange in
which goods are swapped for goods, services for services, goods for services and services for
goods. The reciprocal exchange is usually bilateral but may be multilateral which results to the
complication and complexity of this system. This causes the society to look for another system of
acquiring goods and services.
Reasons for the Abandonment of Barter System:
1. It was difficult to look for that person who has the things you need and who also wants
the things you are offering for exchange.
For a barter to occur between two parties, there must be a mutual coincidence and

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both parties need to have what the other wants. But this scenario is problematic. For
example is a fisherman wants to exchange his fish for a rice, but found a farmer who
wants to exchange his rice for meat. So the fisherman looks for someone who wants
his fish and who has meat, so that he can make a preliminary trade with that person
before he can finally get his rice.
2. There is no common denominator to measure the value of goods and services sought
for exchange.
The lack of measure of value of all goods made it difficult to determine how much
should be exchanged. An example of this is even though food, rice, in particular, is a
primary need for Filipinos, five kabans of this (which costs 5,000 pesos if there is a
measure of value) doesn’t justify a trade for one smartphone (which costs 20,000 pesos
to manufacture).
3. Most of the goods traded have unequal values.
Some goods are indivisible and a barter of unequal goods are difficult. For instance,
if the price of a book is equal to the price of three shirts, then a person having one shirt
cannot swap it for a few chapters of the book.
4. It is time consuming, cumbersome and very in convenient for individuals to use the
barter system.

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It is laborious to transfer goods and services to one another.

5. It lacks generalized purchasing power.
Since barter is only possible to the extent of how much you are willing to give up
and the value of what you’ll get in return couldn’t be determined, the purchasing of the
goods and services you have cannot be established.

Evolution of Money
People search for ways to make transactions easier and they found that certain items made
it easier to manage business. Certain goods like spices, leather, rice or the community’s main
product are considered as commodity money.
After the commodity money, people use precious metals such as gold, silver and copper.
This evolution posed one problem, it is that metals were very heavy to carry and hard to conceal
so the goldsmiths helped develop the use of money by accepting gold bullions for safe-keeping
and converted these gold into coins or he would just issue receipts representing the gold deposits.
These receipts became a negotiable instrument because it was a bearer instrument and later,
the goldsmiths found out that not all depositors withdraw their gold at the same time so some
receipts were sold to people who needed funds. These receipts were interest bearing. Originally,
a
goldsmith was being paid a storage fee for the gold but when people came to realize that the
goldsmiths was making a money out of gold deposited, they required him to share with them a
part
of the interest he earned. And this is how banking started.
Today, the sole power of issuing notes and coins lay on the government of a country. In
the Philippines, the security mint is manage by the Bangko Sentral ng Pilipinas.

Significance of Money
Money is nothing more than a medium of exchange. People exchange goods and services
for money in return. It’s the goods and services which the people really want and not money. But

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it is impossible to attain and satisfy these wants without money so it’s this instance that gives
money a great importance.
The existence of money helps the consumer to maximise his satisfaction by easily spending
his given money income on various goods in such way that these marginal utilities goods are
proportional to their prices. Parallel to this, the producer of goods could easily decide levels of
output which maximises his profits by equating marginal cost with marginal revenue.
Another significance of money is that it contributes to the increase in savings of the
economy. This increase leads to the increase in investment which determines economic growth
of
the country.
Money has become a very important moving factor in our modern society. Without money,
the modern economic life based on the complex division of labour or specialization which has
added so greatly to productivity of the economy will not be possible.
There are also negative effects of money. The excessive desire for wealth or money can
cloud moral judgment. In the case of some businessmen and manufacturers, this extreme
aspiration
for money income sometimes induces them to sacrifice the quality of the products.
The pursuit of money can also become a compulsive behaviour and may cause a sense of
moral entitlement. Money prices and money incomes become a measure for judging people and
things that causes the tendency of the society to become too materialistic and results to the
depletion of our natural resources.

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Functions of Money
1. As a medium of exchange
The most important function of money is a medium of exchange to facilitate
transactions. It is used to intermediate the exchange of goods and services and it avoids the
inefficiencies of the barter system such as the dependence on the occurrence of a
coincidence of wants.
2. As a standard to measure the value of goods and services (A unit of account)
Money provides a common measure of the value of goods and services being
exchanged. The monetary unit of the country is used as a standard of value.
3. As a store of value
Money can be kept for future use though it may not be the best store of value because
it depreciates with inflation. However, it is more liquid than most other stores of value
because it is readily accepted as a medium of exchange.
4. As a means of deferred payment
Money enables people to buy goods on credit. Goods and services can be obtained at
the present time in exchange for a promise to pay at a future date.

Attributes of Good Money

1. General Acceptability
Good money should be acceptable to everybody in a specific territory. It refers to the
willingness of people to accept the money in exchange of goods and services. It is the very
essence of the money and the most important attribute of money, readily acceptable in all
types of transactions. In our society the widely accepted money are:
You should be able to buy something with it, and you should be able to accept it if you
sell something. That is why money is considered as most liquid of all assets.
2. Stability of Value
Before a particular kind of money becomes acceptable, it must first have a stable value.

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The purchasing power of money should not change abruptly. If ever there will be changes,
such change should be gradual.
Money must have a stable value because it serve as a standard for measuring the value
of other things.
3. Portability
This refers to the quality of money being easily carried from place to place. It is
important that the material used as money should conform with this characteristics.
The commodity fit to be used as money must be such it can be easily and economically
transported from one place to another.
4. Cognizability
The money circulating within a country can be easily distinguished from other kinds of
money. A fake bill can be recognized from a genuine bill.
As a medium of exchange, money has to be continually handed about and it will cause
great inconvenience if every person receiving it has to scrutinize, weigh, and test it, that’s
why it should have a certain distinct marks which nobody can mistake.
A method of determining the fake bill from a genuine one is through security design in
the network which is only known to experts who are authorized by the Central Bank.

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5. Divisibility
The material used as money must be capable of being divided into smaller
denominations without impairing or destroying the value of the whole. The aggregate value
of the money after division should be exactly the same as before.
The small units of money are needed for making small payments.
 A hundred peso bill can buy exactly the same as five(5) twenty peso bill
 A thousand peso bill can be divided as two(2) five hundred peso bill, ten(10)
hundred peso bill or twenty (20) fifty peso bill.
6. Homogeneity
The material used as money should not only be capable of being divided into equal
parts or smaller units, but that such equal parts should have equal weight and fineness, and
must be made of the same material and possess equal value.
The material used as money must be of the same quality; otherwise it will lack general
acceptability. The size, weight, texture of the currency notes are kept same so that everyone
accepts it in confidence
7. Elasticity
This characteristic refers to the volume of money being capable of manipulation by
monetary authorities. Money supply can easily be increased or decreased depending upon
the needs of our economy.
The supply of money should always be elastic, meaning it should respond to changes
in general needs of economy.
8. Durability
This characteristics enables money to withstand wear and tear. The paper money used
by almost all countries of the world is made of a special kind of paper, which has extra
strength to withstand usage. It does not easily decompose, deteriorate, degrade or otherwise
change form.
Three main forms of money:

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 Paper money and coins – last a longtime, even if they are damaged new versions
can be easily printed.
 Bank Deposits – money is an electronic medium, hence cannot suffer physical
damage.
The Philippine paper currency is made up of 80% cotton and 20% abaca.

Kinds of Money
1. Commodity Money
This is the type of money that has a commodity value or a value of its own. In order
for it to circulate, the commodity value should equal its money value.
Simplest kind of money which is used in barter system where the valuable resources
fulfill the functions of money. Whether any commodity is used or the exchange purposes,
the commodity becomes equivalent to money and is called commodity money.
Disadvantage:

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They tend to have distinct borders. If you have a large amount of grain that you
want to trade for a new a cow, for example you would have to find someone who
wanted to take that grain. If every single other person you knew had no use for a grain,
then you wouldn’t be able to make a trade.
2. Credit Money
This is the credit instrument that is widely acceptable in payment for goods and services
and in the settlement of existing debts and obligations.
The three types of credit money are:
 Representative Paper Money
It is backed up by 100% gold or silver reserves. The money circulates in a
country adopting the full gold or silver standard.
It represents a claim on commodity and it can redeem for that commodity at a
bank. It is a token or paper money that can be exchanged for a fixed quantity of
commodity.
 Fiduciary Paper Money
It is backed up by partial gold or silver reserve. The kind of money circulated
in the Philippines when the country adopted the gold exchange standard.
It originated as a paper certificate that was a promise to pay a certain amount of
gold or silver to the bearer. From the Latin word “fiducia” which means confidence
or trust.
 Bank Notes
This refers to the promise of a bank to pay the bearer or holder of the note a
sum certain in standard money upon demand or upon the presentation of the note.
3. Fiat Money
This is the kind of paper money issued by a government edict or decree. It is most often
issued during a war whereby the occupying country circulates a kind of paper money whose
money value has no relationship at all with its intrinsic value.

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Fiat money means “command in sovereign”, it does not have any intrinsic value and
cannot be converted into valuable resources. A government order determines its value. It
means that only government can make it a legal instrument for any transaction.

4. Legal Tender Money

This is the kind of money that circulates because of its legal tender power. By legal
tender we mean that the debtor is authorized by law to offer it in payment of his debt or
meet his financial obligation. The national currency is legal tender in practically every
country.

Coinage
It is the process of making uniform coins from metals and stamping them with a specific
design as a guarantee of its weight and fineness and the integrity of the country it represents.

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The coin is the product of coinage. It is defined as a mass of metal cast in some convenient
shape with a definite weight and fineness, which is guaranteed by the government and has a
particular design and denomination intended as money.
Fineness is defined as the ratio of pure gold and silver to the total weight of the coin. The
value of the Philippine peso in 1934 was 12.9 grains of gold 9/10 of which is pure gold and 1/10
of which is alloy. But now, mint is a place or a factory where coins are manufactured or minted.
It
is usually operated by the government.
The actual manufacture of coins is done at the mint. The metals are cast into bars or
sometimes called ingots. The ingots are made into strips with thickness of the desired coins.
Blank
coins are punched out of the strips of metal.
After being punched out, the coins are rolled to produce their raised edge, which is called
upset rim. This is done under heavy pressure. Finally, the design is stamped in the blank coins.
The silver coins have grooves or reeding on their edges so it will be evident if any part of the
coin
has been shaved off.
Coins are made of metal alloys rather than pure metal so as to give them durability. The
silver peso issued by the treasury in 1934 contained 80% silver and 20% alloy. Denominations
from 10 centavos to 50 centavos contain 75% silver and 25% alloy.
The intrinsic value of the metal in the coin is less than the face value of the coin or the
value assigned to the coin.

Kinds of Coinage
1. Gratuitous Coinage or Free Coinage
It is a system whereby money metals or metals may be brought to the government mint
and converted into standard money without any charge or any expense for minting except
for the delay involved in the process.

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2. Brassage
A kind of coinage where the fee charged by the government to mint metals into coins
is just sufficient to cover the cost.
3. Seignorage
A kind of coinage where the fee charged by the government is more than the cost of
minting so here, the government earns a profit.
4. Limited Coinage
It is a system adopted by a country whereby the government converts metals into coins
only at its option hence creating a limited coinage. Limited coinage is done only by
governments account. Under this method public is not allowed to offer bullion for being
converted into coins.
Such coins normally bear a heavy seignorage charge, which means that their face value
is considerably greater than the value of the metal they contain.

Detecting Counterfeited Bills

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Paper currencies are quite difficult to counterfeit as security features have been
incorporated in to design. The best way of determining if a bill is counterfeited or not is by
comparing it to a bill known to be genuine.

These are some of the security features present in Philippine peso bills:
1. Embossed Prints: The embossed or raised print nature of the ink deposition combined with
the quality of cotton-based paper gives the traditional banknote a unique tactile effect that
makes it the first and most important line of defence against counterfeiting.
2. Asymmetrical Serial Number: Alphanumeric characters at the lower left and upper right
corners of the note bearing one or two prefix letters and six to seven digits, with font
increasing in size and thickness.
3. Security Fibers: Visible red and blue fibers embedded on the paper and randomly scattered
on the face and back of the note.
4. Watermark: Shadow image of the portrait with the highlighted denominational value that
is particularly seen against the light from either side of the blank space of the note.
5. See-through Mark: The pre-Hispanic script (Baybayin) at the lower right corner of the face
of the note slightly above the value panel. This is seen in complete form only when the
note is viewed against the light. This script means “PILIPINO”.
6. Concealed Value: The denominational value superimposed at the smaller version portrait
at the upper left portion of the note. This becomes clearly visible when the note is rotated
45 degrees and slightly tilted.
7. Security Thread (Embedded or Windowed): Embedded thread that runs vertically across
the width of 20- and 50- piso notes when viewed against the light. Also, stitch-like metallic
thread on the 100-, 200-, 500-, and 1000- piso notes which changes color from red to green
and bears cleartext of “BSP” and the denominational value on the obverse and “BSP” on
the reverse, both in repeated series.
8. Optically Variable Device (OVD) Patch: Found only in 500- and 1000- piso notes, this

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patch is a reflective foil, bearing the image of the Blue-naped parrot for 500-piso/ clam
with the South Sea pearl for 1000-piso, changes color from red to green when note is
rotated 90 degrees.
9. Optically Variable Ink: Found only in the 1000-piso note, this embossed denominational
value at the lower right corner of the note changes color from green to blue when viewed
at different angles.

Coins
Genuine coins show an even flow of metallic grains. The details of the profile, the
seal of the Republic of the Philippines, letterings and numerals are of high relief, that they
can be readily felt distinctly by running the fingers on these features. The beadings
composed of tiny stars on the ABL series and dots on the Pilipino series are regular and
the reedings are deep and even.

Most counterfeit coins feel greasy and appear slimy. The letterings and numerals
are low and worn out due to lack of sharpness and show signs of filling. The beadings look
as irregular and elongated depressions and are not as sharp and prominent as in the genuine.

Role of Money in Economic Development of The Developing Countries –

Generally it is believed that the economic development of a country depends on the growth of
real factors like capital accumulation, technological progress and increase in the quality and
skills of the labour force. This type of view doesn’t express the role of money adequately in the
process of economic development. It is said and mostly believed that money is a mere veil and
intrinsically unimportant. What matters is the real goods and productive factors which money
buys. But in the modern time this extreme view is not believed. Now in the modern economic
time money is an important factor, without it the present complex economic system is
impossible.
Money serves as a standard of value, store of value, standard for deferred payments and most
importantly it serves as a medium of exchange.

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A monetary economy is an economy in which goods are sold for money and money is used to
buy goods.
1. Money promotes Productivity and Economic Growth –
Barter system was full of problems such as double coincidence of wants, lack of standard unit of
account, impossibility of subdivision of goods etc. which were the hurdle in specialization or
division of labour and were keeping the economy from growing. Division of labour or
specialization increases the productivity which in turn promotes the economic growth. Money
made the specialization possible which increases the productivity and promotes the economic
growth.
2. Money promotes Savings and Investment –
In the barter system, the goods which were not consumed were the savings as well as investment,
means, investment and savings were the same, which made investment depends on the savings.
But in the modern economy this is not the case, money made the investment independent of the
savings. In the modern economy individuals or households saves the money and the firms invests
the money in capital goods, so, now investment is different from savings. In a monetary
economy, investment can be greater than the savings, which is possible because the government
or Central Bank of a country can print money and increase its supply in the economy. Which
further leads to more employment, more output, more income, more consumption, more saving
and more investment. And this accelerates the economic development.
3. Money Invested in Quick Yielding Projects –
It is mostly believed that any increase in money supply in the developing countries would lead to
the rise in prices or cause inflation in the economy. But this is not always true. A reasonable or
required amount of newly printed or created money helps the development of the economy by
increasing the level of investment. In developing countries a lot of natural and human resources
lie unutilized or underutilized which can be used for productive purposes. If the newly created
money is used for investment in projects such as flood control, land reclamation, irrigation works
and cottage industries which yields quick returns, then the problem of inflation will not be there.
These projects will increase the production of essential consumer goods in the short run and will
prevent the rise in the prices.
4. Money and Inflationary Financing of Economic Development –
According to Lewis, In an economy marked by scarcity of capital and abundance of labour and
idle natural resources, creation of credit or bank money would lead to the increase in capital
accumulation in the same way as does a more respectable source, that is, savings out of profits.
According to him, capital formation resulting from a net increase in the money supply would be
accompanied by rise in prices. But it will be for a short time. When the modern sector expands
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by more capital formation and surplus labour employed in it is paid out of the created money, the
immediate effect would be rise in prices. When the purchasing power in the hands of workers
immediately increases, the output of the consumer goods remains constant for a time. But when
the newly formed capital created by credit money is put to use, the output of consumer goods
also increases. So, after a time lag output of consumer goods catches up with the increased
purchasing power and the prices would start going down.
5. Monetization and Economic Growth –
It is well known that the most underdeveloped countries have a large non-monetized sector
where production is for the purpose of subsistence only. To break this subsistence nature of the
economy activity and promote economic growth, its monetization is required. Money helps the
subsistence sector to connect with the modern sector, this connection helps the subsistence sector
to expand its output. To obtain the products of the modern industrial sector the people engaged in
the subsistence sector will make efforts to raise their output. So, a surplus of output over their
self-consumption will be generated, which will break the subsistence nature. This is supported by
the history, during the colonial period, the monetization of the peasant sector led to the expansion
in exports in exchange for the imported industrial products.
The monetization of the subsistence sector also helps in raising the volume of savings.
Monetization will connect the subsistence sector with the financial institutions, this provides the
opportunities of earning more income through interest on saving and this also raises the
propensity to save of the people in the subsistence sector.
What Is Money and How Does It Drive the Economy?
By Amanda Reaume
Published August 1, 2023 • 4 Min Read
Money plays many roles, and it’s important to understand what money can do beyond everyday
purchases. Money plays an important role in Canadians’ day-to-day lives and helps keep the
economy running smoothly. But money is so much more than that.
Before currency existed in Canada, people relied on a barter system to get what they needed in
exchange for the goods and services offered by another. Many of Canada’s indigenous groups
had well-established barter systems, so effective that European settlers adopted the bartering
approach when they first arrived. However, as the population of Canada began to grow, and trade
expanded, a new system was needed, and the Canadian Dollar was adopted in 1858.
Money now acts as a store of value to facilitate the daily transactions Canadians make to obtain
the items they want or need. Without money, securing goods and services would be tougher.
Money serves three main functions:

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 Store of value: Money is considered a “store of value.” It can be tucked away or placed
into savings and holds value when it’s withdrawn and exchanged for goods or services.
Store of value is an important function, as it helps facilitate trade today and in the future.
 Medium of exchange: As a medium of exchange, money acts as an intermediary between
what one person has and what another person wants. The barter system has limitations as
it requires the perfect alignment of two people, each wanting what the other person has to
offer simultaneously. With money as the medium of exchange, daily transactions are
completed with greater ease and simplicity.
 Unit of accounting: Because money is used as a medium of exchange for goods and
services, it has the ability to track the current price of goods and services over time. For
example, in inflationary times, the loaf of bread an individual once purchased for two
dollars may now cost three dollars. The toonie is still just a toonie, but how much it can
purchase has declined, and the new market value — the unit of accounting — for that
loaf of bread is easily understood.
How does money impact the economy?
 Jobs and wages: Most Canadians receive money their job in the form of income. The
money they receive is then spent on essential items such as housing, healthcare and food,
as well as on non-essential goods and services as they desire. Every time a dollar changes
hands, whether to buy a home, groceries or a vacation, it impacts the economy. It
supports and provides money for other individuals and businesses. The flow of cash is
one element helping drive the economy.
 Savings and investments: As Canadians receive their pay and their essential expenses
have been covered, money remaining is often kept in the bank or invested in businesses
through the stock market. Investing and saving can help an individual’s money grow, but
also can help companies grow and expand through investment.
 Spending patterns: As individuals accumulate more money through earnings or savings,
their purchasing power increases. This allows greater freedom and choice. Individuals
tend to borrow more when low interest rates increase their purchasing power. This can
impact consumption patterns, which then impacts manufacturing sectors.
 Government and taxes: The government collects money through various sources such as
income taxes on individual’s wages earned and goods and services, to name a few. Taxes
are an important source of revenue for the Canadian government. They are used to
provide Canadians with services such as healthcare, education, and basic infrastructure
such as highways and maintaining safety and order within the communities.

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While the barter system was once an effective method to enable trade between parties, which laid
the foundation for commerce in Canada, money is now the prevailing medium of exchange for
commerce in the modern world.
Money plays many roles, and it’s important to understand what money can do beyond everyday
purchases. Money plays an important role in Canadians’ day-to-day lives and helps keep the
economy running smoothly. But money is so much more than that.
Before currency existed in Canada, people relied on a barter system to get what they needed in
exchange for the goods and services offered by another. Many of Canada’s indigenous groups
had well-established barter systems, so effective that European settlers adopted the bartering
approach when they first arrived. However, as the population of Canada began to grow, and trade
expanded, a new system was needed, and the Canadian Dollar was adopted in 1858.
Money now acts as a store of value to facilitate the daily transactions Canadians make to obtain
the items they want or need. Without money, securing goods and services would be tougher.
Money serves three main functions:
 Store of value: Money is considered a “store of value.” It can be tucked away or placed
into savings and holds value when it’s withdrawn and exchanged for goods or services.
Store of value is an important function, as it helps facilitate trade today and in the future.
 Medium of exchange: As a medium of exchange, money acts as an intermediary between
what one person has and what another person wants. The barter system has limitations as
it requires the perfect alignment of two people, each wanting what the other person has to
offer simultaneously. With money as the medium of exchange, daily transactions are
completed with greater ease and simplicity.
 Unit of accounting: Because money is used as a medium of exchange for goods and
services, it has the ability to track the current price of goods and services over time. For
example, in inflationary times, the loaf of bread an individual once purchased for two
dollars may now cost three dollars. The toonie is still just a toonie, but how much it can
purchase has declined, and the new market value — the unit of accounting — for that
loaf of bread is easily understood.
How does money impact the economy?
 Jobs and wages: Most Canadians receive money their job in the form of income. The
money they receive is then spent on essential items such as housing, healthcare and food,
as well as on non-essential goods and services as they desire. Every time a dollar changes
hands, whether to buy a home, groceries or a vacation, it impacts the economy. It
supports and provides money for other individuals and businesses. The flow of cash is
one element helping drive the economy.
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 Savings and investments: As Canadians receive their pay and their essential expenses
have been covered, money remaining is often kept in the bank or invested in businesses
through the stock market. Investing and saving can help an individual’s money grow, but
also can help companies grow and expand through investment.
 Spending patterns: As individuals accumulate more money through earnings or savings,
their purchasing power increases. This allows greater freedom and choice. Individuals
tend to borrow more when low interest rates increase their purchasing power. This can
impact consumption patterns, which then impacts manufacturing sectors.
 Government and taxes: The government collects money through various sources such as
income taxes on individual’s wages earned and goods and services, to name a few. Taxes
are an important source of revenue for the Canadian government. They are used to
provide Canadians with services such as healthcare, education, and basic infrastructure
such as highways and maintaining safety and order within the communities.
While the barter system was once an effective method to enable trade between parties, which laid
the foundation for commerce in Canada, money is now the prevailing medium of exchange for
commerce in the modern world.

money, a commodity accepted by general consent as a medium of economic exchange. It is the

medium in which prices and values are expressed; as currency, it circulates anonymously from
person to person and country to country, thus facilitating trade, and it is the principal measure of
wealth.
(Read Britannica’s biography of this author, Nobelist Milton Friedman.)
The subject of money has fascinated people from the time of Aristotle to the present day. The
piece of paper labeled 1 dollar, 10 euros, 100 yuan, or 1,000 yen is little different, as paper, from
a piece of the same size torn from a newspaper or magazine, yet it will enable its bearer to
command some measure of food, drink, clothing, and the remaining goods of life while the other
is fit only to light the fire. Whence the difference? The easy answer, and the right one, is that
modern money is a social contrivance. People accept money as such because they know that
others will. This common knowledge makes the pieces of paper valuable because everyone
thinks they are, and everyone thinks they are because in his or her experience money has always
been accepted in exchange for valuable goods, assets, or services. At bottom money is, then, a
social convention, but a convention of uncommon strength that people will abide by even under
extreme provocation. The strength of the convention is, of course, what enables governments
to profit by inflating (increasing the quantity of) the currency. But it is not indestructible. When
great increases occur in the quantity of these pieces of paper—as they have during and after wars
—money may be seen to be, after all, no more than pieces of paper. If the social arrangement that

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sustains money as a medium of exchange breaks down, people will then seek substitutes—like
the cigarettes and cognac that for a time served as the medium of exchange in Germany
after World War II. New money may substitute for old under less extreme conditions. In many
countries with a history of high inflation, such as Argentina, Israel, or Russia, prices may be
quoted in a different currency, such as the U.S. dollar, because the dollar has more stable value
than the local currency. Furthermore, the country’s residents accept the dollar as a medium of
exchange because it is well-known and offers more stable purchasing power than local money.
Functions of money
The basic function of money is to enable buying to be separated from selling, thus permitting
trade to take place without the so-called double coincidence of barter. In principle, credit could
perform this function, but, before extending credit, the seller would want to know about the
prospects of repayment. That requires much more information about the buyer and imposes costs
of information and verification that the use of money avoids.
If a person has something to sell and wants something else in return, the use of money avoids the
need to search for someone able and willing to make the desired exchange of items. The person
can sell the surplus item for general purchasing power—that is, “money”—to anyone who wants
to buy it and then use the proceeds to buy the desired item from anyone who wants to sell it.
The importance of this function of money is dramatically illustrated by the experience
of Germany just after World War II, when paper money was rendered largely useless because
of price controls that were enforced effectively by the American, French, and British armies of
occupation. Money rapidly lost its value. People were unwilling to exchange real goods for
Germany’s depreciating currency. They resorted to barter or to other inefficient money
substitutes (such as cigarettes). Price controls reduced incentives to produce. The country’s
economic output fell by half. Later the German “economic miracle” that took root just after 1948
reflected, in part, a currency reform instituted by the occupation authorities that replaced
depreciating money with money of stable value. At the same time, the reform eliminated all price
controls, thereby permitting a money economy to replace a barter economy.
These examples have shown the “medium of exchange” function of money. Separation of the act
of sale from the act of purchase requires the existence of something that will be generally
accepted in payment. But there must also be something that can serve as a temporary store of
purchasing power, in which the seller holds the proceeds in the interim between the sale and the
subsequent purchase or from which the buyer can extract the general purchasing power with
which to pay for what is bought. This is called the “asset” function of money.
Varieties of money
Anything can serve as money that habit or social convention and successful experience endow
with the quality of general acceptability, and a variety of items have so served—from

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the wampum (beads made from shells) of American Indians, to cowries (brightly coloured shells)
in India, to whales’ teeth among the Fijians, to tobacco among early colonists in North America,
to large stone disks on the Pacific island of Yap, to cigarettes in post-World War II Germany and
in prisons the world over. In fact, the wide use of cattle as money in primitive times survives in
the word pecuniary, which comes from the Latin pecus, meaning cattle. The development of
money has been marked by repeated innovations in the objects used as money.
Metallic money
Metals have been used as money throughout history. As Aristotle observed, the various
necessities of life are not easily carried about; hence people agreed to employ in their dealings
with each other something that was intrinsically useful and easily applicable to the purposes of
life—for example, iron, silver, and the like. The value of the metal was at first measured by
weight, but in time governments or sovereigns put a stamp upon it to avoid the trouble of
weighing it and to make the value known at sight.
The use of metal for money can be traced back to Babylon more than 2000 years bc, but
standardization and certification in the form of coinage did not occur except perhaps in isolated
instances until the 7th century bc. Historians generally ascribe the first use of coined money
to Croesus, king of Lydia, a state in Anatolia. The earliest coins were made of electrum, a natural
mixture of gold and silver, and were crude, bean-shaped ingots bearing a primitive
punch mark certifying to either weight or fineness or both.
The use of coins enabled payment to be by “tale,” or count, rather than weight, greatly
facilitating commerce. But this in turn encouraged “clipping” (shaving off tiny slivers from the
sides or edges of coins) and “sweating” (shaking a bunch of coins together in a leather bag and
collecting the dust that was thereby knocked off) in the hope of passing on the lighter coin at
its face value. The resulting economic situation was described by Gresham’s law (that “bad
money drives out good” when there is a fixed rate of exchange between them): heavy, good coins
were held for their metallic value, while light coins were passed on to others. In time the coins
became lighter and lighter and prices higher and higher. As a means of correcting this problem,
payment by weight would be resumed for large transactions, and there would be pressure for
recoinage. These particular defects were largely ended by the “milling” of coins (making
serrations around the circumference of a coin), which began in the late 17th century.
A more serious problem occurred when the sovereign would attempt to benefit from the
monopoly of coinage. In this respect, Greek and Roman experience offers an interesting
contrast. Solon, on taking office in Athens in 594 bc, did institute a partial debasement of
the currency. For the next four centuries (until the absorption of Greece into the Roman Empire)
the Athenian drachma had an almost constant silver content (67 grains of fine silver until
Alexander, 65 grains thereafter) and became the standard coin of trade in Greece and in much of

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Asia and Europe as well. Even after the Roman conquest of the Mediterranean peninsula in
roughly the 2nd century bc, the drachma continued to be minted and widely used.
The Roman experience was very different. Not long after the silver denarius, patterned after the
Greek drachma, was introduced about 212 bc, the prior copper coinage (aes, or libra) began to
be debased until, by the onset of the empire, its weight had been reduced from 1 pound (about
450 grams) to half an ounce (about 15 grams). By contrast the silver denarius and the
gold aureus (introduced about 87 bc) suffered only minor debasement until the time
of Nero (ad 54), when almost continuous tampering with the coinage began. The metal content of
the gold and silver coins was reduced, while the proportion of alloy was increased to three-
fourths or more of its weight. Debasement in Rome (as ever since) used the state’s profit from
money creation to cover its inability or unwillingness to finance its expenditures through explicit
taxes. But the debasement in turn raised prices, worsened Rome’s economic situation, and
contributed to the collapse of the empire.
Paper money
Experience had shown that carrying large quantities of gold, silver, or other metals proved
inconvenient and risked loss or theft. The first use of paper money occurred in China more than
1,000 years ago. By the late 18th and early 19th centuries paper money and banknotes had spread
to other parts of the world. The bulk of the money in use came to consist not of actual gold or
silver but of fiduciary money—promises to pay specified amounts of gold and silver. These
promises were initially issued by individuals or companies as banknotes or as the transferable
book entries that came to be called deposits. Although deposits and banknotes began as claims to
gold or silver on deposit at a bank or with a merchant, this later changed. Knowing that everyone
would not claim his or her balance at once, the banker (or merchant) could issue more claims to
the gold and silver than the amount held in safekeeping. Bankers could then invest the difference
or lend it at interest. In periods of distress, however, when borrowers did not repay their loans or
in case of overissue, the banks could fail.
Gradually, governments assumed a supervisory role. They specified legal tender, defining the
type of payment that legally discharged a debt when offered to the creditor and that could be
used to pay taxes. Governments also set the weight and metallic composition of coins. Later they
replaced fiduciary paper money—promises to pay in gold or silver—with fiat paper money—that
is, notes that are issued on the “fiat” of the sovereign government, are specified to be so many
dollars, pounds, or yen, etc., and are legal tender but are not promises to pay something else.
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Learn about good debt and bad debt.

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Encyclopædia Britannica, Inc.

The first large-scale issue of paper money in a Western country occurred in France in the early
18th century. Subsequently, the French Revolutionary government issued assignats from 1789 to
1796. Similarly, the American colonies and later the Continental Congress issued bills
of credit that could be used in making payments. Yet these and other early experiments gave fiat
money a deservedly bad name. The money was overissued, and prices rose drastically until the
money became worthless or was redeemed in metallic money (or promises to pay metallic
money) at a small fraction of its initial value.
Subsequent issues of fiat money in the major countries during the 19th century were temporary
departures from a metallic standard. In Great Britain, for example, the government suspended
payment of gold for all outstanding banknotes during the Napoleonic Wars (1797–1815). To
finance the war, the government issued fiat paper money. Prices in Great Britain doubled as a
result, and gold coin and bullion became more expensive in terms of paper. To restore the gold
standard at the former gold price, the government deflated the price level by reducing the
quantity of money. In 1821 Great Britain restored the gold standard. Similarly, during
the American Civil War the U.S. government suspended convertibility of Union currency
(greenbacks) into specie (gold or silver coin), and resumption did not occur until 1879
(see specie payment). At its peak in 1864, the greenback price of gold, nominally equivalent to
$100, reached more than $250.
Episodes of this kind, which were repeated in many countries, convinced the public
that war brings inflation and that the aftermath of war brings deflation and depression. This
sequence is not inevitable. It reflected 19th-century experience under metallic money standards.
Typically, wars required increased government spending and budget deficits. Governments
suspended the metallic (gold) standard and financed their deficits by borrowing
and printing paper money. Prices rose.
Throughout history, the price of gold would be far above its prewar value when wartime
spending and inflation ended. To restore the metallic standard to the prewar price of gold in
paper money, prices quoted in paper money had to fall. The alternative was to accept the
increased price of gold in paper money by devaluing the currency (that is, reducing money’s
purchasing power). After World War I, the British and the United States governments forced
prices to fall, but many other countries devalued their currencies against gold. After World War
II, all major countries accepted the higher wartime price level, and most devalued their
currencies to avoid deflation and depression.
The widespread use of paper money brought other problems. Since the cost of producing paper
money is far lower than its exchange value, forgery is common (it cost about 4 cents to produce
one piece of U.S. paper currency in 1999). Later the development of copying machines
necessitated changes in paper and the use of metallic strips and other devices to make forgery

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more difficult. In addition, the use of machines to identify, count, or change currency increased
the need for tests to identify genuine currency.
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Surprising scientific facts about paper money.

© American Chemical Society (A Britannica Publishing Partner)
Standards of value
In the Middle Ages, when money consisted primarily of coins, silver and gold coins circulated
simultaneously. As governments came increasingly to take over the coinage and especially as
fiduciary money was introduced, they specified their nominal (face value) monetary units in
terms of fixed weights of either silver or gold. Some adopted a national bimetallic standard, with
fixed weights for both gold and silver based on their relative values on a given date—for
example, 15 ounces of silver equal 1 ounce of gold (see bimetallism). As the prices changed, the
phenomenon associated with Gresham’s law assured that the bimetallic standard degenerated
into a monometallic standard. If, for example, the quantity of silver designated as the monetary
equivalent of 1 ounce of gold (15 to 1) was less than the quantity that could be purchased in
the market for 1 ounce of gold (say 16 to 1), no one would bring gold to be coined. Holders of
gold could instead profit by buying silver in the market, receiving 16 ounces for each ounce of
gold; they would then take 15 ounces of silver to the mint to be coined and accept payment in
gold.
Continuing this profitable exchange drained gold from the mint, leaving the mint with silver
coinage. In this example silver, the cheaper metal in the market, “drove out” gold and became the
standard. This happened in most of the countries of Europe, so that by the early 19th century all
were effectively on a silver standard. In Britain, on the other hand, the ratio established in the
18th century on the advice of Sir Isaac Newton, then serving as master of the mint, overvalued
gold and therefore led to an effective gold standard. In the United States a ratio of 15 ounces of
silver to 1 ounce of gold was set in 1792. This ratio overvalued silver, so silver became the
standard. Then in 1834 the ratio was altered to 16 to 1, which overvalued gold, so gold again
became the standard.
The gold standard
The great gold discoveries in California and Australia in the 1840s and ’50s produced a
temporary decline in the value of gold in terms of silver. This price change, plus the dominance
of Britain in international finance, led to a widespread shift from a silver standard to a gold
standard. Germany adopted gold as its standard in 1871–73, the Latin Monetary Union (France,
Italy, Belgium, Switzerland) did so in 1873–74, and the Scandinavian Union (Denmark, Norway,
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and Sweden) and the Netherlands followed in 1875–76. By the final decades of the century,
silver remained dominant only in the Far East (China, in particular). Elsewhere the gold standard
reigned. (See also Free Silver Movement.)
The early 20th century was the great era of the international gold standard. Gold coins circulated
in most of the world; paper money, whether issued by private banks or by governments, was
convertible on demand into gold coins or gold bullion at an official price (with perhaps the
addition of a small fee), while bank deposits were convertible into either gold coin or
paper currency that was itself convertible into gold. In a few countries a minor variant prevailed
—the so-called gold exchange standard, under which a country’s reserves included not only gold
but also currencies of other countries that were convertible into gold. Currencies were exchanged
at a fixed price into the currency of another country (usually the British pound sterling) that was
itself convertible into gold.
The prevalence of the gold standard meant that there was, in effect, a single world money called
by different names in different countries. A U.S. dollar, for example, was defined as 23.22 grains
of pure gold (25.8 grains of gold 9/10 fine). A British pound sterling was defined as 113.00
grains of pure gold (123.274 grains of gold 11/12 fine). Accordingly, 1 British pound equaled
4.8665 U.S. dollars (113.00/23.22) at the official parity. The actual exchange rate could deviate
from this value only by an amount that corresponded to the cost of shipping gold. If the price of
the pound sterling in terms of dollars greatly exceeded this parity price in the foreign exchange
market, someone in New York City who had a debt to pay in London might find that, rather than
buying the needed pounds on the market, it was cheaper to get gold for dollars at a bank or from
the U.S. subtreasury, ship the gold to London, and get pounds for the gold from the Bank of
England. The potential for such an exchange set an upper limit to the exchange rate. Similarly,
the cost of shipping gold from Britain to the United States set a lower limit. These limits were
known as the gold points.
Under such an international gold standard, the quantity of money in each country was
determined by an adjustment process known as the price-specie-flow adjustment mechanism.
This process, analyzed by 18th- and 19th-century economists such as David Hume, John Stuart
Mill, and Henry Thornton, occurred as follows: a rise in a particular country’s quantity of money
would tend to raise prices in that country relative to prices in other countries. This rise in prices
would consequently discourage exports while encouraging imports. The decreased supply of
foreign currency (from the sale of fewer exports) plus the increased demand for foreign currency
(to pay for imports) would tend to raise the price of foreign currency in terms of domestic
currency. As soon as this price hit the upper gold point, gold would be shipped out of the country
to other countries. The decline in the amount of gold would produce in turn a reduction in the
total amount of money, because banks and government institutions, seeing their gold reserves
decline, would want to protect themselves against further demands by reducing the claims
against gold that were outstanding. This would tend to lower prices at home. The influx of gold

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abroad would have the opposite effect, increasing the quantity of money there and raising prices.
These adjustments would continue until the gold flow ceased or was reversed.
Precisely the same mechanism operates within a unified currency area. That mechanism
determines how much money there is in Illinois compared with how much there is in other U.S.
states or how much there is in Wales compared with how much there is in other parts of the
United Kingdom. Because the gold standard was so prevalent in the early 20th century, most of
the commercial world operated as a unified currency area. One advantage of such widespread
adherence to the gold standard was its ability to limit a national government’s power to engage in
irresponsible monetary expansion. This was also its great disadvantage. In an era of big
government and of full-employment policies, a real gold standard would tie the hands of
governments in one of the most important areas of policy—that of monetary policy.
The decline of gold
World War I effectively ended the real international gold standard. Most belligerent nations
suspended the free convertibility of gold. The United States, even after its entry into the war,
maintained convertibility but embargoed gold exports. For a few years after the end of the war,
most countries had inconvertible national paper standards—inconvertible in that paper money
was not convertible into gold or silver. The exchange rate between any two currencies was
a market rate that fluctuated from time to time. This was regarded as a temporary phenomenon,
like the British suspension of gold payments during the Napoleonic era or the U.S. suspension
during the Civil War greenback period (see Greenback movement). The great aim was a
restoration of the prewar gold standard. Since price levels had increased in all countries during
the war, countries had to choose deflation or devaluation to restore the gold standard. This effort
dominated monetary developments during the 1920s.
Britain, still a major financial power, chose deflation. Winston Churchill, chancellor of the
Exchequer in 1925, decided to follow prevailing financial opinion and adopt the prewar parity
(i.e., to define a pound sterling once again as equal to 123.274 grains of gold 11/12 fine). This
produced exchange rates that, at the existing prices in Britain, overvalued the pound and so
tended to produce gold outflows, especially after France chose devaluation and returned to gold
in 1928 at a parity that undervalued the franc. By 1929 the important currencies of the world, and
most of the less important ones, were again linked to gold.
The gold standard that was restored, however, was a far cry from the prewar gold standard. The
establishment of the Federal Reserve System in the United States in 1913 introduced an
additional link in the international specie-flow mechanism. That mechanism no longer operated
automatically. It operated only if the Federal Reserve chose to let it do so, and the Federal
Reserve did not so choose; to prevent domestic prices from rising, it offset the effect on the
quantity of money resulting from an increase in gold. (In effect it “sterilized” the monetary
effect.)

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France made a similar choice. With the franc undervalued, gold flowed to France. The French
government sold the foreign exchange for gold, draining gold from Britain and other gold
standard countries. The two countries receiving gold, the United States and France, did not
permit gold inflows to raise their price levels. Countries that lost gold had to deflate. Thus, the
gold exchange standard forced deflation and unemployment on much of the world economy. By
the summer of 1929, recessions were under way in Great Britain and Germany. In August the
United States joined the recession that became the Great Depression.
In 1931 Japan and Great Britain left the gold standard, followed by the Scandinavian countries
and many of the countries in the British Empire, including Canada. The United States followed
in 1933, restoring a fixed—but higher—dollar price for gold, $35 an ounce in January 1934, but
barring U.S. citizens from owning gold. France, Switzerland, Italy, and Belgium left the gold
standard in 1936. Although it was not clear at the time, that was the end of the gold standard.
The Bretton Woods system
During World War II, Great Britain and the United States outlined the postwar monetary system.
Their plan, approved by more than 40 countries at the Bretton Woods Conference in July 1944,
aimed to correct the perceived deficiencies of the interwar gold exchange standard. These
included the volatility of floating exchange rates, the inflexibility of fixed exchange rates, and
reliance on an adjustment mechanism for countries with payment surpluses or deficits; these
problems were often resolved by recession and deflation in deficit countries coupled
with expansion and inflation in surplus countries. The agreement that resulted from the
conference led to the creation of the International Monetary Fund (IMF), which countries joined
by paying a subscription. Members agreed to maintain a system of fixed but adjustable exchange
rates. Countries with payment deficits could borrow from the fund, while those with surpluses
would lend. If deficits or surpluses persisted, the agreement provided for changes in exchange
rates. The IMF began operations in 1947, with the U.S. dollar serving as the fund’s
reserve currency and the price of gold fixed at $35 per ounce. The U.S. agreed to maintain that
price by buying or selling gold.
Postwar recovery, low inflation, growth of trade and payments, and the buildup of international
reserves in industrial countries permitted the new system to come into full operation at the end of
1958. Although a vestigial tie to gold remained with the gold price staying at $35 per ounce, the
Bretton Woods system essentially put the market economies of the world on a dollar standard—
in other words, the U.S. dollar served as the world’s principal currency, and countries held most
of their reserves in interest-bearing dollar securities.
The dollar became the most widely used currency in international trade, even in trade between
countries other than the United States. It was the unit in which countries expressed their
exchange rate. Countries maintained their “official” exchange rates by buying and selling U.S.
dollars and held dollars as their primary reserve currency for that purpose. The existence of a

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dollar standard did not prevent other countries from changing their exchange rates, just as the
gold standard did not prevent other currencies from “devaluing” or “appreciating” in terms of
gold. In time, however, the fixed price of gold became increasingly difficult for the United States
to maintain. Many countries devalued or revalued their currencies, including major economic
powers such as the United Kingdom (in 1967), Germany, and France (both in 1969). Yet in
practice the United States was not free to determine its own exchange rate or its balance of
payments position. Monetary expansion in the United States provided reserves for other
countries; monetary contraction absorbed reserves. Central banks could convert dollars into gold,
and they did, especially in the early years. As the stock of dollars held by central banks outside
the United States rose and the U.S. gold stock dwindled, the United States could not honour its
commitment to convert gold into dollars at the fixed rate of $35 per ounce. The Bretton Woods
system of fixed exchange rates appeared doomed. Governments and central banks tried for years
to find a way to extend its life, but they could not agree on a solution. The end came on Aug. 15,
1971, when Pres. Richard M. Nixon announced that the United States would no longer sell gold.
After Bretton Woods
This breakdown of the fixed exchange rate system ended each country’s obligation to maintain a
fixed price for its currency against gold or other currencies. Under Bretton Woods, countries had
bought when the exchange rate fell and sold when it rose; now national currencies floated,
meaning that the exchange rate rose or fell with market demand. If the exchange rate
appreciated, buyers received fewer units of domestic money in exchange for a unit of their own
currency. Purchasers of domestic goods and assets then faced higher prices. Conversely, if the
currency depreciated, domestic goods and assets became cheaper for foreigners. Countries that
were heavily dependent on foreign trade disliked the frequent changes in price and costs under
the new floating rates. Governments or their central banks often intervened to slow nominal
(market) exchange rate changes. Historically, however, these interventions have been effective
only against temporary changes.
In the long run, a country’s exchange rate depends on such fundamental factors as
relative productivity growth, opportunities for investment, the public’s willingness to save, and
monetary and fiscal policies. These fundamental factors are at work whether the country has a
fixed or a floating exchange rate and whether the authorities intervene to adjust the exchange rate
or slow its changes. As long as markets for goods, services, assets, and foreign exchange remain
open, the country must adjust.
The principal difference between fixed and floating exchange rates is how the country adjusts.
With fixed exchange rates, adjustment occurs mainly by changing costs and prices of the myriad
commodities that a country produces and consumes. Under floating exchange rates, the
adjustment occurs mainly by changing the nominal exchange rate. For example, if
Brazil’s monetary policy increases Brazilian inflation, domestic prices of shoes, cocoa, and

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almost everything else will rise. With a fixed exchange rate, the price rise deters exports and
purchases by foreigners. Demand shifts from Brazil to other countries, lowering demand and
reducing payments for Brazilian products. This decreases Brazil’s money stock. The reduction in
money and the fall in demand slow the Brazilian economy, thereby reducing Brazilian prices.
With a floating exchange rate, however, the adjustment comes about by reducing the demand for
Brazilian currency and depreciating the exchange rate, thereby reducing the prices paid by
foreigners.
Adjustment comes in many other ways. In this hypothetical example, Brazilians may decide to
invest more abroad, or foreigners may decide to invest less in Brazil. The long-run outcome will
be the same, however, because buyers and sellers do not care about the nominal exchange rate
(the official rate set by national governments under a fixed exchange rate or set by the market
under floating rates). What matters is the so-called real exchange rate—the nominal exchange
rate adjusted by prices at home and abroad. The buyer of Brazilian shoes in England cares only
about the cost of the shoes in local currency—that is, British pounds. The Brazilian price of
shoes is multiplied by the exchange rate to get the U.K. price. Under floating exchange rates, the
exchange rate adjusts to keep a country’s commodities competitive on the world market.
After the Bretton Woods system ended in 1973, most countries allowed their currencies to float,
but this situation soon changed. Generally, small countries with relatively large trade sectors
disliked floating rates. They wanted to avoid the often transitory but sometimes large changes in
prices and costs arising in the foreign exchange market. Many of the smaller Asian economies,
along with countries in Central America and the Caribbean, fixed their exchange rates to the
U.S. dollar. Countries such as the Netherlands and Austria, both of which traded heavily
with West Germany, soon fixed their exchange rates to the German mark. These countries ceased
conducting independent central bank policy, so that when the Bundesbank or the U.S. Federal
Reserve changed interest rates, countries that fixed their exchange rate to the mark or the dollar
changed their interest rates as well.
A country on a fixed exchange rate sacrifices independent monetary policy. In some cases this
may be a necessary sacrifice, because a small country that is open to external trade has little
scope for independent monetary policy. It cannot influence most of the prices at which its
citizens buy and sell. If its central bank or government inflates, its currency depreciates to bring
its domestic prices back to equivalent world market levels. Even a large country cannot maintain
an independent monetary policy if its exchange rate is fixed and its capital market remains open
to inflows and outflows. Given the reduced reliance on capital controls, many countries
abandoned fixed exchange rates in the 1980s as a means of preserving some power over
domestic monetary policy. This trend reversed somewhat toward the end of the 20th century.
Large economies such as those of the United States, Japan, and Great Britain continued to float
their currencies, as did Switzerland and Canada—both relatively small economies that have

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preferred to retain some influence over domestic monetary conditions. Hong Kong made the
opposite choice. Although it was a British colony at the time and later a part of China, it chose to
fix its exchange rate to the U.S. dollar. The method it revived was a 19th-century system known
as a currency board. In such a case there is no central bank and the exchange rate is fixed. Local
banks increase the number of Hong Kong dollars only when they receive additional U.S. dollars,
and they reduce the stock of Hong Kong dollars when U.S. dollar holdings decline. Hong Kong’s
experience with its currency board encouraged a few, mainly small countries to follow its lead.
Some stepped even further away from autonomous policy by adopting the U.S. dollar as their
domestic currency. The most notable change of this general type was the decision by most of the
continental European countries to surrender their local currencies in exchange for a new common
currency, the euro.
The euro
Western European countries have traditionally done much of their trading with each other. Soon
after the breakdown of the Bretton Woods system, some of these countries experimented with
fixed exchange rates within their group. Before 1997, however, all such attempts had failed
within a few years of their inception. Inter-European trade continued to expand under the aegis
of the European Community (EC). Growth of trade fostered European economic integration and
encouraged steps toward political integration in addition to the free exchange of goods, labour,
and finance. In 1991, 12 of the 15 nations signing the Treaty on European Union (the Maastricht
Treaty) had agreed to a decade of adjustment toward a single currency. The treaty took effect in
1993. Exchange rates were fixed “permanently and irrevocably” for the participating countries
(tellingly, the treaty did not provide for a country’s withdrawal from the system). In 1995 the
new currency was named the “euro.”

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Map indicating which members of the European Union use the euro as their national currency.
The Greek Cypriot sector of Cyprus (not shown) also has adopted the euro.
Encyclopædia Britannica, Inc.

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Euros, the currency of the European Union.

© MistikaS—E+/Getty Images
The European Central Bank (ECB) was established in 1998 in Frankfurt, Germany, with a
mandate from member governments to maintain price stability. Each member country receives a
seat on the board of the ECB. In part because Germany sacrificed its dominant role in European
monetary policy, the new arrangements provided increased opportunity for smaller countries
such as the Netherlands, Belgium, and Austria to determine policy. However, 3 of the then 15
member states of the European Union (EU)—Denmark, Sweden, and the United Kingdom—
decided either to remain outside or to delay entry into monetary union.
The new system began operation on Jan. 1, 1999. For its first three years the euro functioned as a
unit of account but not a medium of exchange. During this transition period the values of debts,
assets, and prices of goods and services were expressed in euros as well as in the local currency.
In January 2002, euro notes and coins began circulating, replacing national currencies such as the
French franc, German mark, or Italian lira. The euro floated against all nonmember currencies.
Modern monetary systems

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Domestic monetary systems are today very much alike in all the major countries of the world.
They have three levels: (1) the holders of money (the “public”), which comprise individuals,
businesses, and governmental units, (2) commercial banks (private or government-owned),
which borrow from the public, mainly by taking their deposits, and make loans to individuals,
firms, or governments, and (3) central banks, which have a monopoly on the issue of certain
types of money, serve as the bankers for the central government and the commercial banks, and
have the power to determine the quantity of money. The public holds its money in two ways: as
currency (including coin) and as bank deposits.
Currency
In most countries the bulk of the currency consists of notes issued by the central bank. In the
United Kingdom these are Bank of England notes; in the United States, Federal Reserve notes;
and so on. It is hard to say precisely what “issued by the central bank” means. In the United
States, for example, the currency bears the words “Federal Reserve Note,” but these notes are not
obligations of the Federal Reserve banks in any meaningful sense. The holder who presents them
to a Federal Reserve bank has no right to anything except other pieces of paper adding up to the
same face value. The situation is much the same in most other countries. The other major item of
currency held by the public is coin. In almost all countries this is token coin, whose worth as
metal is much less than its face value.
In countries with a history of high inflation, the public may choose to use foreign currency as a
medium of exchange and a standard of value. The U.S. dollar has been chosen most often for
these purposes, and, although other currencies have had lower average inflation rates than the
dollar in the years since World War II, the dollar compensates by having lower costs of
information and recognition than any other currency. Societies agree on the use of dollars not by
a formal decision but from knowledge that others recognize the dollar and accept it as a means
of payment. At the turn of the 21st century, estimates suggested that as much as two-thirds of all
dollars in circulation were found outside the United States. Dollars could be found in use in
Russia, Argentina, and many other Latin American and Asian countries.
Bank deposits
In addition to currency, bank deposits are counted as part of the money holdings of the public. In
the 19th century most economists regarded only currency and coin, including gold and other
metals, as “money.” They treated deposits as claims to money. As deposits became more and
more widely held and as a larger fraction of transactions were made by check, economists started
to include not the checks but the deposits they transferred as money on a par with currency and
coin.
The definition of money has been the subject of much dispute. The chief point at issue is which
categories of bank deposits can be called “money” and which should be regarded as “near

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money” (liquid assets that can be converted to cash). Everyone includes currency. Many
economists include as money only deposits transferable by check (demand deposits)—in the
United States the sum of currency and checking deposits is known as M1. Other economists
include nonchecking deposits, such as “time deposits” in commercial banks. In the United States,
the addition of these deposits to M1 represents a measure of the money supply known as M2.
Still other economists include deposits in other financial institutions, such as savings banks,
savings and loan associations, and so on.
The term deposits is highly misleading. It connotes something deposited for safekeeping, like
currency in a safe-deposit box. Bank deposits are not like that. When one brings currency to a
bank for deposit, the bank does not put the currency in a vault and keep it there. It may put a
small fraction of the currency in the vault as reserves, but it will lend most of it to someone else
or will buy an investment such as a bond or some other security. As part of the inducement to
depositors to lend it money, a bank provides facilities for transferring demand deposits from one
person to another by check.
The deposits of commercial banks are assets of their holders but are liabilities of the banks. The
assets of the banks consist of “reserves” (currency plus deposits at other banks, including the
central bank) and “earning assets” (loans plus investments in the form of bonds and other
securities). The banks’ reserves are only a small fraction of the aggregate (total) deposits. Early
in the history of banking, each bank determined its own level of reserves by judging the
likelihood of demands for withdrawals of deposits. Now reserve amounts are determined through
government regulation.
The growth of deposits enabled the total quantity of money (including deposits) to be larger than
the total sum available to be held as reserves. A bank that received, say, $100 in gold might add
25 percent of that sum, or $25, to its reserves and lend out $75. But the recipient of the $75 loan
would spend it. Some of those who received gold this way would hold it as gold, but others
would deposit it in a bank. For example, if two-thirds was redeposited, on average, some bank or
banks would find $50 added to deposits and to reserves. The receiving bank would repeat the
process, adding $12.50 (25 percent of $50) to its reserves and lending out $37.50. When this
process worked itself out fully, total deposits would have increased by $200, bank reserves
would have increased by $50, and $50 of the initial $100 deposited would have been retained as
“currency outside banks.” There would be $150 more money in total than before (deposits up by
$200, currency outside banks down by $50). Although no individual bank created money, the
system as a whole did. This multiple expansion process lies at the heart of the modern monetary
system.
Credit and money

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Centuries of innovation have changed the ways in which the public conducts transactions. Credit
cards, debit cards, and automatic transfers are among the many innovations that emerged in the
years after World War II.
Credit and debit cards
A credit card is not money. It provides an efficient way to obtain credit through a bank or
financial institution. It is efficient because it obviates the seller’s need to know about the credit
standing and repayment habits of the borrower. For a fee that each subscribing merchant agrees
to pay, the bank issues the credit card, makes a loan to the buyer, and pays the merchant
promptly. The buyer then has a debt that he or she settles by making payment to the credit card
company. Instead of carrying more money, or making credit arrangements with many merchants,
the buyer makes a single payment for purchases from many merchants. The balance can be paid
in full, usually on a monthly basis, or the buyer can pay a fraction of the total debt, with interest
charged on the remaining balance.
Before credit cards existed, a buyer could arrange a loan at a bank. The bank would then credit
the buyer’s deposit account, allowing the buyer to pay for his or her purchases by writing checks.
Under this arrangement the merchant bore more of the costs of collecting payment and the costs
of acquiring information about the buyer’s credit standing. With credit cards, the issuing
company, often a bank, bears many of these costs, passing some of the expenses along to
merchants through the usage fee.
A debit card differs from a credit card in the way the debt is paid. The issuing bank deducts the
payment from the customer’s account at the time of purchase. The bank’s loan is paid
immediately, but the merchant receives payment in the same way as with the use of a credit card.
Risk to the lending institution is reduced because the electronic transmission of information
permits the bank to refuse payment if the buyer’s deposit balance is insufficient.
Electronic money
Items used as money in modern financial systems possess various attributes that reduce costs or
increase convenience. Units of money are readily divisible, easily transported and transferred,
and recognized instantly. Legal tender status guarantees final settlement. Currency protects
anonymity, avoids record keeping, and permits lower costs of payment. But currency can be lost,
stolen, or forged, so it is used most often for relatively small transactions or where anonymity is
valued.
Information processing reduces costs of transfer, record keeping, and the acquisition of
information. “Electronic money” is the name given to several different ways in which the public
and financial and nonfinancial firms use electronic transfers as part of the payments system.
Since most of these transfers do not introduce a new medium of exchange (i.e., money),
electronic transfer is a more appropriate name than electronic money. (See also e-commerce.)

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Four very different types of transfer can be distinguished. First, depositors can use electronic
funds transfers (EFTs) to withdraw currency from their accounts using automated teller
machines (ATMs). In this way an ATM withdrawal works like a debit card. ATMs also allow
users to deposit checks into their accounts or repay bank loans. While they do not replace the
assets used as money, ATMs make money more readily available and more convenient to use by
accepting transactions even when banks are closed, be it on weekends or holidays or at any time
of the day. ATMs also overcome geographic and national boundaries by allowing travelers to
conduct transactions in many parts of the world.
The second form of EFT, “smart cards” (also known as stored-value cards), contain a computer
chip that can make and receive payments while recording each new balance on the card. Users
purchase the smart card (usually with currency or deposits) and can use it in place of currency.
The issuer of the smart card holds the balance (float) and thus earns interest that may pay for
maintaining the system. Most often the cards have a single purpose or use, such as making
telephone calls, paying parking meters, or riding urban transit systems. They retain some of the
anonymity of currency, but they are not “generally accepted” as a means of payment beyond
their dedicated purpose. There has been considerable speculation that smart cards would replace
currency and bring in the “cashless society,” but there are obstacles, the primary one being that
the maintenance of a generalized transfer system is more costly than using the government’s
currency. Either producers must find a way to record and transfer balances from many users to
many payees, or users must purchase many special-purpose cards.
The automated clearinghouse (ACH) is the third alternative means of making deposits and
paying bills. ACH networks transfer existing deposit balances, avoid the use of checks, and
speed payments and settlement. In addition, many large payments (such as those to settle
securities or foreign exchange transactions between financial institutions) are made through
electronic transfer systems that “net” (determine a balance of) the total payments and receipts;
they then transfer central bank reserves or clearinghouse deposits to fund the net settlement.
Some transactions between creditors and debtors give rise to claims against commodities or
financial assets. These may at first be barter transactions that are not settled promptly by paying
conventional money. Such transactions economize on cash balances and increase the velocity, or
rate of turnover, of money.
As technologies for individual users developed, banks permitted depositors to pay their bills by
transferring funds from their account to the creditor’s account. This fourth type of electronic
funds transfer reduces costs by eliminating paper checks.
Central banking
Modern banking systems hold fractional reserves against deposits. If many depositors choose to
withdraw their deposits as currency, the size of the banking system shrinks. A run on the bank—a
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to run out of reserves and force their closure. Bank panics of this kind occurred many times.
After 1866 in Great Britain, but not until 1934 in the United States, did governments learn to use
the central bank (or some other government institution) to prevent bank runs.
The Bank of England was the first modern central bank, serving as the model for many others,
such as the Bank of Japan, the Bank of France, and the U.S. Federal Reserve. It was established
as a private bank in 1694 but by the mid-19th century had become largely an agency of the
government. In 1946 the U.K. government nationalized the Bank of England. The Bank of
France was established as a governmental institution by Napoleon in 1800. In the United States,
the 12 Federal Reserve banks, together with the Board of Governors in Washington, D.C.,
constitute the Federal Reserve System. The reserve banks are technically owned by their member
commercial banks, but this is a pure formality. Member banks get only a fixed annual percentage
dividend on their stock and have no real power over the bank’s policy decisions. For all intents
and purposes, the Federal Reserve is an independent governmental agency.
The notes issued by a central bank (or other governmental agency) plus deposits at the central
bank are called the “monetary base.” When held as bank reserves, each dollar, pound,
or euro becomes the base for several dollars, pounds, or euros of commercial bank loans and
deposits. Earlier in the history of money, the size of the monetary base was limited by the
amount of gold or silver owned. Today there is no longer a formal limit to the amount of notes
and deposits that a central bank may have as liabilities.
The way in which a central bank increases or decreases the monetary base is, typically, by
making loans (discounting) or by buying and selling government securities (open-market
operations) or foreign assets. If, for example, the Federal Reserve System purchases $1 million
of government securities, it pays for these securities by drawing a check on itself, thereby adding
$1 million to its assets and $1 million to its liabilities. The seller can take the check to a Federal
Reserve bank, which will exchange it for $1 million in Federal Reserve notes. Or the seller may
deposit the check at a commercial bank, and the bank may in turn present it to a Federal Reserve
bank. The latter “pays” the check by making an entry on its books increasing that bank’s deposits
by $1 million. The commercial bank may, in turn, transfer this sum to a borrower, who again will
convert it into Federal Reserve notes or deposit it.
The important point is that these bookkeeping operations simply record a process whereby the
central bank has created, out of thin air as it were, additional base money (currency held by the
public plus sums deposited with a reserve bank)—the direct counterpart of printing Federal
Reserve notes. Similarly, if the central bank sells government securities, it decreases base money.
(See also monetary policy.)
The total quantity of money at any time depends on several factors, including the stock of base
money, the public’s preference regarding the relative amounts of money it wishes to hold as
currency and as deposits, and the preferences of banks regarding the ratio they wish to maintain

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between their reserves and their deposits. (The reserve ratio is, of course, dominated by legal
reserve requirements, where they exist.) Banks hold treasury bills and other short-term assets to
provide additional liquidity, but they also hold some reserves in the form of currency so that they
may cash checks or pay withdrawals from their ATMs.
On a much broader scale, it follows that a central bank can vary the total face value of money by
controlling the amount of the monetary base and by other less important means. The major
problem of modern monetary policy centres on how a central bank should use this power.
Money has an “internal” and “external” price. The internal price is the price level of domestic
goods and services. The external price is the nominal, or market, exchange rate. The principal
responsibility of a modern central bank differs according to the choice of monetary standard. If
the country has a fixed exchange rate, the central bank buys or sells foreign exchange on demand
to maintain stability in the rate. When sales by the central bank are too brisk, the growth of the
monetary base decreases, the quantity of money and credit declines, and interest rates increase.
The rise in interest rates attracts foreign investors and deters local investors from investing
abroad. Also, the increase in interest rates slows domestic expansion and reduces upward
pressure on domestic prices. On the other hand, when the central bank’s purchases are too brisk,
money growth increases and interest rates fall, thereby inducing domestic expansion and
stimulating an increase in prices.
If a country has a floating exchange rate, it must choose a policy to go with the floating rate. At
times in the past, many countries expected their central bank to pursue several different
objectives. Eventually, countries recognized that this was an error because it focused the central
bank on short-term goals at the expense of longer-term price stability. After high inflation in
Europe and the United States in the 1970s and the hyperinflation (inflation exceeding 50 percent)
in Latin America and Israel in the 1980s, many central banks and governments recognized an old
truth: the main objective of a central bank under floating rates should be to stabilize domestic
price levels, thereby maintaining the internal value of money.
Increased awareness of this primary responsibility led to lower rates of inflation in the 1980s and
’90s, although central banks continued to be concerned about employment and recession in
addition to price stability. Several adopted rules or procedures to control money growth by
adjusting interest rates in response to both inflation and deviations in output from the long-term
growth rate. Following the examples of New Zealand and Great Britain, several countries
adopted inflation targets, typically based on time frames of one or two years, and then adjusted
policy to reach these targets. Under the Maastricht Treaty of the European Union, the European
Central Bank has a mandate to maintain price stability. The ECB has interpreted this mandate to
mean inflation of 2 percent or less.
Monetary theory

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The relation between money and what it will buy has always been a central issue of monetary
theory. Crucial to understanding this matter is the distinction economists make between face (or
nominal) values and real values—that is, between official values stated in current dollars, pesos,
pounds, yen, euros, and so on and the same quantities adjusted by the price level. The latter is a
“real” value, meaning the real quantity of goods, services, and assets that money will buy. This
can also be understood as the real purchasing power of the money stock.
The demand for money
Economists have generally held that the level of prices is determined mainly by the quantity of
money. But precisely how the quantity of money affects the level of prices and what the effects
are of changes in the quantity of money have been conceptualized in different ways at different
times. There are two principal issues to consider. First, what determines the demand for money
(the amount of money that the public willingly holds)? And second, how do changes in the stock
of money affect the price level and other nominal values?
A government or its central bank determines the nominal quantity of money that circulates and is
held, but the public determines money’s real value. If the central bank provides more money than
the public wants to hold, the public spends the excess on goods, services, or assets. While the
additional spending cannot reduce the nominal money stock, this spending will bid up the prices
of nonmoney objects, because too much money is chasing the limited stock of goods and assets.
The subsequent rise in prices will lower the real value of the money stock until the public
possesses the real value it desires to hold in the aggregate. Conversely, if the central bank
provides less money than the public desires to hold, spending slows. Prices fall, thereby raising
the quantity of real balances.
The amount of desired real balances for a country (that is, the real value of money within a
country) is not a fixed number. It depends on the opportunity cost of holding money, the direct
return earned when holding money, and income or wealth. A short-term interest rate is the usual
measure of the opportunity cost of holding money, but money holders participate in many
different markets, so other relative prices may affect real money
holdings. Inflation increases market interest rates and thus raises the opportunity cost of holding
money. In countries experiencing rapid inflation, the real value of the money stock shrinks
because people choose to hold less of their wealth in this form. If inflation is brought to a halt,
however, the opportunity cost of holding money will drop, and real balances will rise.
Inflation has a particularly strong effect on the demand for money because currency pays no
interest, and checking deposits typically receive little or no interest return. (Most of the direct
return to money balances takes the form of transaction services and convenience.) As the
opposite of inflation, deflation raises the return on money that is held by giving each nominal
unit greater command over goods and assets. Consumer spending will thus decrease as people
hold onto their money in expectation of lower prices in the future. Other phenomena affecting

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the amount of money that people willingly hold include income, wealth, and some measure of
transactions volume. Increases in the real value of these measures will be followed by increases
in the amount of real balances.
Transmission of monetary changes
Quantity theory of money
From the very earliest systematic work on economics, observers have noted a relationship
between the stock of money and the price level. Often the relation was one of proportionality, as,
for example, when the price level rose in direct proportion to an increase in money. By the
middle of the 18th century, systematic observers such as John Locke recognized that changes in
money affect the output of real goods and services, but they also found that this effect vanishes
once prices adjust fully to the change in money.
An early formulation of this insight was expressed in the quantity theory of money, which hinges
on the distinction between the nominal (face) and real values, or quantity, of money. The nominal
quantity is expressed in whatever units are used to designate money—talents, shekels, pounds,
pesos, euros, dollars, yen, and so on. The real quantity, by comparison, is expressed in terms of
the volume of goods and services that the money will purchase. According to the quantity theory
of money, what ultimately matters to holders of money is the real rather than the nominal
quantity of money. If this is so, then—no matter what factors may determine the nominal
quantity of money—it is the holders of money who determine the real quantity and, in the
process, also determine the price level.
An illustration of the quantity theory
In the following example, the quantity of money in existence in a hypothetical community is $1
million, and the total income of the community is $10 million per year. On average, each
member of the community holds an amount of money equal in value to one-tenth of a year’s
income, or to 5.2 weeks’ income. Put differently, the income velocity of circulation is equal to 10
per year; that is, each $1 on average is paid out 10 times a year. (For the sake of simplicity there
are no business enterprises in this example; the members of the community buy and sell services
from and to one another.)
Now assume, in the case of this example, that the quantity of money in this community is
somehow doubled, but in such a way that no one expects the quantity to change again. All
members of the community regard themselves as better off. Each now has 10.4 weeks’ income in
the form of cash instead of the previous 5.2 weeks’. If everyone were to hold onto the extra cash,
nothing further would happen. But experience dictates that people will try to spend it to reduce
the amount of wealth held as money. Because this is an example of a closed community, one
person’s expenditure, however, becomes another person’s income. All the people together cannot
spend more than all the people receive. The attempt of each to do so is bound to be frustrated. In

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the attempt to spend more than they receive, people will simultaneously try to buy more of
various services from each other and to sell less. To induce others to sell, they will offer higher
prices; to induce others not to buy, they will ask higher prices. Whether the quantity sold goes up
or down depends on whether the attempt to buy more is stronger or weaker than the attempt to
sell less. But in either case total spending is sure to go up and so are total income and prices paid.
When income has doubled, to $20 million, the amount of money in existence will again be equal
in value to 5.2 weeks’ income. The community will have succeeded in reducing its real cash
balances to their former level, not by reducing nominal balances but by raising prices and the
money value of incomes. The process of adjustment may not be smooth—spending may go too
far and leave people with real balances that are too small, requiring a subsequent fall in the price
level—but the final position will tend toward a doubling of prices, and the previous real flows of
services will be resumed with no one any better off than before the new money was distributed.
This simple example embodies three of the most basic principles of monetary theory: (1) the
central distinction between the nominal and the real quantity of money (because to each
individual separately—in this hypothetical example and in the real world—it looks as if income
is outside personal control, but each individual can determine how much cash to hold); (2) the
equally crucial contrast between the alternatives open to the individual and to the community as
a whole (because for the community as a whole, the total amount of cash is fixed, but the
community is able to determine the size of its income in dollars); and (3) the importance of
attempts (that is to say, the collective attempt) of people to spend more than they receive, even
though doomed to frustration, because this ultimately raises total nominal expenditures and
receipts.
Characteristics of monetary changes
These principles were the building blocks for ideas about the transmission of monetary changes
that developed beginning in the 18th century. Some of the main propositions relating to the
transmission of monetary changes are:
1. The growth rate of the quantity of money is consistently, though not precisely, related to
the growth rate of nominal income. That is, if the quantity of money grows rapidly, so
will nominal income, and vice versa. Although the velocity of circulation is not constant,
it is relatively predictable.
2. This relation is not obvious, mainly because it takes time for changes in monetary growth
to affect income.
3. On the average, a change in the rate of monetary growth produces a change in the rate of
growth of nominal income six to nine months later. But this is an average.
4. If the rate of monetary growth is reduced, then about six to nine months later the rate of
growth of nominal income and also of physical output will decline, but the rate of

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increase in price will be affected very little. There will be downward pressure on prices
only as a gap emerges between actual and potential output.
5. The effect on prices comes on the average about a year after the effect on nominal
income and output, so that the total delay between a change in monetary growth and a
change in the rate of inflation averages roughly two years.
6. The above relationships are variable. There is many a slip between the monetary change
and the income change.
7. Monetary changes affect output only in the short run—though “short run” may mean
three to five years. In the longer run the rate of monetary growth affects only prices.
What happens to output in the long run depends on such “real” factors as the enterprise,
ingenuity, and industry of the people; the extent of thrift; the structure of industry and
government; the rule of law; the relations among nations; and so on.
8. It follows that inflation—a sustained increase in the rate of price change—cannot occur
without a more rapid increase in the quantity of money than in output. There are, of
course, many possible reasons for monetary growth—from gold discoveries to the
manner in which government spending is financed and even the manner in which private
spending is financed. The price level may rise or fall for other reasons, too, such as
changes in productivity. These produce one-time changes, however—not sustained rates
of change.
9. Government spending may or may not be inflationary. It will be inflationary if it is
financed by creating money—that is, by printing currency or creating bank deposits—and
if the resultant rate of monetary growth exceeds the rate of growth of output. If it is
financed by taxes or by borrowing from the public, the main effect is that the government
spends the funds instead of someone else.
10. One of the most difficult things to explain is the way in which a change in the quantity of
money affects income. Generally, the initial effect is not on income at all but on the prices
of existing assets (bonds, equities, houses, and other physical capital). An increased rate
of monetary growth raises the amount of cash people (or businesses) have relative to
other assets. The holders of the excess cash will try to correct this imbalance by buying
other assets. But one person’s spending is another’s receipts. All the people together
cannot change the amount of cash all hold—only the monetary authorities can do that.
Their attempts will tend, however, to raise the prices of assets and to reduce interest rates.
These changes will in turn encourage spending to produce new assets. Thus the initial
effect on balance sheets is translated into an effect on income and spending. In this
connection many economists emphasize such assets as durable consumer goods and other

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real property, and they regard market interest rates as only a small part of the whole
complex of relevant rates.
11. One important feature of this mechanism is that a change in monetary growth affects
interest rates in one direction at the outset and in the opposite direction later on. More
rapid monetary growth at first tends to lower interest rates. But later on, as it raises
spending and stimulates price inflation, it also produces a rise in the demand for loans
that will tend to raise nominal interest rates. Taking the opposite case, a slower rate of
monetary growth at first raises interest rates, but later on, as it reduces spending and price
inflation, it lowers interest rates. This inconsistent relation between the quantity of money
and interest rates explains why interest rates are often a misleading guide to monetary
policy.
12. These propositions clearly imply that monetary policy is important and that what is most
important about monetary policy is its effect on the quantity of money, not on bank credit
or total credit or interest rates. Wide swings in the rate of change of the quantity of money
are evidently destabilizing and should be avoided. Beyond this, different economists draw
different conclusions. Some conclude that the monetary authorities should make
deliberate changes in the rate of monetary growth in order to offset other forces making
for instability; these changes should be gradual and small and make allowance for the
lags involved. Others maintain that not enough is known about the relations between
changes in the quantity of money and in prices and output to assure that a discretionary
monetary policy will do good rather than harm. They believe that a wiser policy would be
simply to have the quantity of money grow at a steady rate over time. Most central banks
now set a short-term interest rate target and adjust it frequently. Some also set an inflation
target to be achieved over several years, and they adjust the interest rate to keep inflation
near the target.
13. Countries that choose to control domestic prices must allow their exchange rates to float.
The central bank or monetary authority cannot control both interest rates and
money stock or both money and the exchange rate. It must choose one of the three.
14. If the central bank fixes the exchange rate and permits capital to flow in and out freely, it
leaves control of money to external forces and must accept the rate of inflation consistent
with its exchange rate.
Conclusion
No other subject in economics has been studied longer or more intensively than the subject of
money. The result is a vast amount of documented experience and a well-developed body of
theoretical analysis. The extent to which the students of monetary problems agree in their basic
conclusions is concealed by the tendency of laypersons to exaggerate their differences. But even

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among professional economists there remain important disagreements, centring mainly on

empirical judgments about the stability and form of some of the relations between money and
other economic phenomena.
Milton FriedmanAllan H. Meltzer
References
Works on various aspects of monetary history include Phillip Cagan, “The Monetary Dynamics
of Hyperinflation,” in Milton Friedman (ed.), Studies in the Quantity Theory of Money (1956,
reissued 1973); Paul Einzig, Primitive Money in Its Ethnological, Historical, and Economic
Aspects, 2nd ed. rev. (1966); Albert E. Feavearyear, The Pound Sterling: A History of English
Money, 2nd ed. (1963); Milton Friedman and Anna Jacobson Schwartz, A Monetary History of
the United States, 1867–1960 (1963, reissued 1993), and Monetary Trends in the United States
and the United Kingdom (1982); and Allan H. Meltzer, A History of the Federal Reserve, 1 vol.
(2002– ).
Useful readings in monetary theory, of varying levels of difficulty, include John Maynard
Keynes, A Treatise on Money, 2 vol. (1930, reprinted 1976); Don Patinkin, Money, Interest, and
Prices: An Integration of Monetary and Value Theory, 2nd ed. (1989); Dennis Holme
Robertson, Money, new ed. (1959, reissued 1966); Karl Brunner and Allan H. Meltzer, Money
and the Economy: Issues in Monetary Analysis (1993, reissued 1997); Jacob Viner, Studies in the
Theory of International Trade (1937, reissued 1975); Michael D. Bordo and Anna Jacobson
Schwartz (eds.), A Retrospective on the Classical Gold Standard, 1821–1931 (1984); David E.W.
Laidler, The Demand for Money: Theories and Evidence, 4th ed. (1993); Bennett
T. McCallum, Monetary Economics: Theory and Policy (1989); and Irving Fisher, The
Purchasing Power of Money, new ed. (1931, reissued 1997), a classic work on the velocity of
money.

1.The Role of Money in the Economy[Original Blog]

Role in In the Money
Money is often described as the lifeblood of the modern economy, and for good reason. Its role
in the financial system is multifaceted and critical. In the broader context of "Financial market
Volatility and the neutrality of Money," understanding the significance of money in the economy
is pivotal. Money serves as a medium of exchange, a unit of account, a store of value, and even
as a standard of deferred payment. However, it's essential to note that the concept of money and
its role in the economy is not without debate. Economists and experts from different schools of
thought hold diverse perspectives on how money impacts the financial markets and
economic stability.

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Let's delve deeper into the role of money in the economy, considering various viewpoints:
1. Medium of Exchange:
Money's primary role is as a medium of exchange. It simplifies trade by eliminating the need
for barter systems. For example, imagine a world where there was no money, and you had to
exchange goods directly. If you were a baker and wanted to buy a bicycle, you'd need to find a
bicycle seller who wanted bread – a highly inefficient process.
2. Unit of Account:
Money provides a standard unit for measuring the value of goods and services. It allows
individuals and businesses to compare prices, assess profits, and plan for the future. For instance,
when you see a price tag in a store, it's an example of money serving as a unit of account.
3. Store of Value:
Money also functions as a store of value, preserving your purchasing power over time. This is
especially important in a world where the value of other assets, like real estate or stocks, can
fluctuate. Consider the stability of a savings account; the money you deposit today will generally
retain its value over time.
4. Standard of Deferred Payment:
Money enables us to make agreements that involve future payments. Loans, mortgages, and
bonds all rely on the concept of money as a standard of deferred payment. If you borrow money
today, you agree to repay it with interest in the future, and this is possible due to the stability and
acceptance of money.
5. Monetary Policy:
Central banks play a pivotal role in influencing the money supply and interest rates. By
adjusting these variables, they can impact economic stability. For instance, during times of
recession, central banks may lower interest rates to encourage borrowing and
spending, stimulating economic growth.
6. Neutrality of Money:
The concept of neutrality of money is closely related to financial market volatility. Neutrality
suggests that changes in the money supply do not impact real economic variables in the long run.
Instead, they primarily affect nominal variables like prices. However, there's ongoing
debate about the extent to which this concept holds true in practice.
7. Inflation and Deflation:

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Money supply can significantly influence inflation or deflation. An increase in the money supply,
when not matched by an increase in the production of goods and services, can lead to inflation.
Conversely, a decrease in the money supply can lead to deflation, affecting the value of assets
and investments.
8. Digital Currencies:
The rise of digital currencies, such as Bitcoin and central bank digital currencies (CBDCs), has
added a new dimension to the role of money in the economy. These digital assets have the
potential to change how we transact, save, and invest, with some proponents seeing them as the
future of money.
Understanding the multifaceted role of money in the economy is crucial for comprehending
the dynamics of financial markets and economic stability. It is a subject that continues to evolve,
with technological advancements and shifting economic landscapes reshaping our understanding
of money's place in the modern world.
The Role of Money in the Economy - Financial Market Volatility and the Neutrality of Money
update

2.The Role of Money in the Economy[Original Blog]

Role in In the Money
Money is an essential component of any economy. It serves as a medium of exchange, a unit of
account, and a store of value. Without money, transactions would be challenging, and the barter
system would be the only way to exchange goods and services. The use of money has played a
significant role in the development of modern economies. The role of money in the economy is
vast, and it affects every aspect of our lives, from the prices we pay for goods and services to the
level of employment in the economy.
1. Money and the Circular Flow of Income: Money plays a crucial role in the circular flow of
income. The circular flow of income is a model that shows how money flows through an
economy. It involves the flow of money from households to firms and back to households. The
circular flow of income is essential because it shows how money is used to create output and
income. Without money, the circular flow of income would not exist, and the economy would be
severely impacted.
2. money and the Price level: Money also plays a critical role in determining the price level in an
economy. The price level is the average level of prices in an economy. The amount of money in
circulation affects the price level. If there is too much money in circulation, prices will rise, and

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if there is too little money, prices will fall. The central bank plays a crucial role in managing the
money supply to maintain price stability.
3. Money and interest rates: Interest rates are the cost of borrowing money. money plays a
critical role in determining interest rates. The level of interest rates affects the decisions of
households and firms to spend or save money. higher interest rates tend to discourage spending
and encourage saving, while lower interest rates tend to encourage spending and discourage
saving.
4. Money and Economic Growth: Money also plays a critical role in promoting economic
growth. The availability of money and credit provides firms with the resources they need to
invest in new technologies and expand their operations. This, in turn, creates jobs and increases
the level of output in the economy.
5. The Best Option: The best option is to maintain a stable level of money in the economy. This
means that the central bank should manage the money supply to maintain price stability and
promote economic growth. If there is too much money in circulation, the central bank should
take steps to reduce the money supply, and if there is too little money, the central bank should
take steps to increase the money supply.
The role of money in the economy is vast, and it affects every aspect of our lives. Money plays a
crucial role in the circular flow of income, determining the price level, interest rates,
and promoting economic growth. The best option is to maintain a stable level of money in the
economy, which will help to maintain economic stability and promote growth. Understanding the
role of money in the economy is essential for policymakers and individuals to make informed
decisions about their economic activities.
The Role of Money in the Economy - Neutrality of Money and Inflation: Maintaining Economic
Stability

3.The Role of Money in the Economy[Original Blog]

Role in In the Money
Money plays a crucial role in the economy. It is a medium of exchange that
facilitates transactions between buyers and sellers. It is also a unit of account that measures the
value of goods and services. Money serves as a store of value, enabling people to save for future
use. The importance of money in the economy cannot be overstated, as it affects all aspects
of economic activity.
1. The Functions of Money

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Money performs three primary functions in the economy: a medium of exchange, a unit of
account, and a store of value. As a medium of exchange, money facilitates transactions between
buyers and sellers. Without money, people would have to rely on barter, which would be
inefficient and cumbersome. Money also serves as a unit of account, providing a common
measure of the value of goods and services. Finally, money is a store of value, allowing people to
save for future use. By serving these functions, money enhances the efficiency of the economy.
2. The Quantity Theory of Money
The Quantity Theory of Money states that the price level in an economy is directly proportional
to the amount of money in circulation. This theory is based on the assumption that the velocity of
money (the rate at which money changes hands) and the level of output (the amount of goods
and services produced) are constant. According to the Quantity Theory of Money, if the money
supply increases, prices will rise, and if the money supply decreases, prices will fall. This theory
has been the subject of much debate among economists, with some arguing that it
oversimplifies the complex interactions between money, prices, and output.
3. The Neutrality of Money
The concept of the neutrality of money suggests that changes in the money supply have no real
effect on the economy in the long run. Proponents of this theory argue that changes in the money
supply merely lead to changes in the price level, with no impact on output or employment.
However, critics of the neutrality of money argue that changes in the money supply can have real
effects on the economy, particularly in the short run. For example, an increase in the money
supply may lead to increased spending and investment, which can stimulate economic growth.
4. The role of the Central bank
The central bank plays a crucial role in the economy by controlling the money supply and
regulating the banking system. The central bank sets interest rates, which influence the behavior
of banks, businesses, and consumers. By adjusting the money supply and interest rates,
the central bank can influence economic activity and inflation. The central bank also acts as a
lender of last resort, providing liquidity to banks during times of financial crisis. However, the
central bank's actions are not always without controversy, and there is ongoing debate about the
appropriate role of central banks in the economy.
5. The Debate Over Monetary Policy
Monetary policy refers to the actions taken by the central bank to influence the economy. There
is ongoing debate among economists about the appropriate approach to monetary policy. Some
argue that the central bank should focus on achieving a stable price level, while others advocate
for a more flexible approach that takes into account other factors, such as employment and
economic growth. Additionally, there is debate about the appropriate tools of monetary policy,

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with some arguing that interest rate adjustments are sufficient, while others advocate for more
unconventional measures, such as quantitative easing.
Money plays a critical role in the economy, serving as a medium of exchange, a unit of account,
and a store of value. The Quantity Theory of Money and the concept of the neutrality of money
provide different perspectives on the relationship between money and the economy. The central
bank plays a crucial role in regulating the money supply and influencing economic activity.
Finally, there is ongoing debate among economists about the appropriate approach to monetary
policy
The Role of Money in the Economy - Neutrality of Money and the Quantity Theory Equation

4.The Role of Money in the Economy[Original Blog]

Role in In the Money
Money plays a crucial role in the economy, and its importance cannot be overstated. It is a
medium of exchange that allows for transactions to take place between individuals, businesses,
and nations. Money also serves as a store of value, allowing people to save and invest for the
future. Its impact on the economy is far-reaching, and the way it is managed can have significant
implications for economic growth, inflation, and employment. James Tobin's Monetary Theory is
a comprehensive analysis of the role of money in the economy, and it provides insights into the
complex relationship between money and economic activity. In this section, we will explore the
role of money in the economy and its impact on various aspects of economic activity.
1. money and economic growth: Money is an essential component of economic growth, as it
allows for investment and innovation. When businesses have access to capital, they can invest in
new technology, expand their operations, and create jobs. This, in turn, leads to
increased economic growth and prosperity. However, too much money in the economy can lead
to inflation, which can have a negative impact on economic growth.
2. Money and inflation: Inflation is the rate at which the general level of prices for goods and
services is rising and, subsequently, purchasing power is falling. Money plays a critical role in
inflation, as the amount of money in circulation can impact the price of goods and services.
When too much money is in circulation, prices tend to rise, leading to inflation. Conversely,
when there is not enough money in circulation, prices tend to fall, leading to deflation. Central
banks and governments play a crucial role in managing the money supply to control inflation and
maintain price stability.
3. Money and employment: Money also plays a critical role in employment, as it allows
businesses to pay wages and salaries to their employees. When the economy is growing,
businesses tend to hire more workers, leading to increased employment. However, when the
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economy is in a recession, businesses tend to lay off workers, leading to higher unemployment
rates. Central banks and governments can use monetary policy to stimulate economic growth and
employment by increasing the money supply and lowering interest rates.
The role of money in the economy is complex and multifaceted. It impacts economic growth,
inflation, employment, and many other aspects of economic activity. James Tobin's Monetary
Theory provides valuable insights into the relationship between money and economic activity,
and understanding this relationship is crucial for policymakers, businesses, and individuals alike.
The Role of Money in the Economy - Unraveling the Mysteries of Money: James Tobin's
Monetary Theory

5.The role of money in the economy[Original Blog]

Role in In the Money
Money plays a fundamental role in the economy, serving as a medium of exchange, a unit of
account, and a store of value. It enables us to trade goods and services and facilitates economic
growth and development. The role of money in the economy has evolved over time, and with the
advent of digital currencies, it is important to consider how this role may change in the future.
1. Medium of exchange
Money functions as a medium of exchange, allowing us to trade goods and services without the
need for bartering. This role is essential to the functioning of the economy, as it enables
specialization and division of labor. digital currencies like bitcoin have the potential to disrupt
this role by enabling peer-to-peer transactions without the need for intermediaries like banks.
However, the volatility of digital currencies and their lack of widespread acceptance as a means
of payment limit their potential as a medium of exchange.
2. Unit of account
Money also serves as a unit of account, allowing us to measure the value of goods and services
in a standardized way. This role is important in facilitating economic calculation and decision-
making. Digital currencies have yet to achieve widespread acceptance as a unit of account, as
their value is highly volatile and subject to speculation.
3. Store of value
Finally, money serves as a store of value, allowing us to save and transfer purchasing power over
time. This role is important in facilitating investment and economic growth. Traditional
currencies like the US dollar and the euro have historically been seen as a reliable store of value,
but their value can be eroded by inflation. Digital currencies like Bitcoin have the potential to

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serve as a store of value, but their volatility and lack of backing by a central authority limit their
potential in this regard.
4. Centralized vs. Decentralized control
One of the key differences between traditional currencies and digital currencies is the question of
control. Traditional currencies are controlled by central banks, which have the power to influence
the money supply and interest rates. Digital currencies, on the other hand, are decentralized
and do not have a central authority controlling their issuance or value. This decentralization has
the potential to make digital currencies more resilient to political and economic shocks, but it
also makes them more susceptible to manipulation and fraud.
5. The future of money
As digital currencies continue to gain popularity and acceptance, it is important to consider their
potential impact on the role of money in the economy. While digital currencies have yet to
achieve widespread acceptance as a medium of exchange, their potential to disrupt traditional
payment systems cannot be ignored. The question of whether digital currencies will ultimately
replace traditional currencies as a store of value remains to be seen, but their potential to serve as
a hedge against inflation and financial instability is undeniable.
The role of money in the economy is multifaceted, serving as a medium of exchange, a unit of
account, and a store of value. Digital currencies like Bitcoin have the potential to disrupt
traditional payment systems and serve as a hedge against inflation and financial instability, but
their volatility and lack of widespread acceptance limit their potential as a replacement for
traditional currencies. As we continue to navigate the age of digital currency, it will be important
to consider how these new forms of money may impact the economy and our daily lives.
The role of money in the economy - Neutrality of Money in the Age of Digital Currency

6.The Role of Money Center Banks in Asset Management[Original Blog]

Role in In the Money

Role of Money Center

Money Center Banks

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Role of Money Center Banks

Banks and Asset Management

Money center banks have been playing a crucial role in asset management for quite some time
now. These banks are responsible for managing large amounts of money, providing investment
advice, and offering a wide range of financial products and services to their clients. Money
center banks are known for their expertise in handling complex financial transactions, which
makes them an ideal choice for asset management.
1. Investment Management Services
One of the most important roles of money center banks in asset management is providing
investment management services. These services include managing portfolios, selecting
investment products, and providing investment advice. Money center banks have access to a
wide range of investment products, including stocks, bonds, mutual funds, and exchange-traded
funds (ETFs). They use their expertise to create customized investment portfolios that meet the
unique needs of their clients.
2. wealth Management services
Money center banks also provide wealth management services to their clients. These services
include managing wealth, estate planning, tax planning, and retirement planning. Money center
banks work closely with their clients to understand their financial goals and develop a
comprehensive plan to achieve them.
3. risk Management services
Another important role of money center banks in asset management is providing risk
management services. These services include managing risk, hedging against market volatility,
and protecting against losses. Money center banks use their expertise to help their clients manage
risk and protect their investments.
4. Securities Trading Services
Money center banks also provide securities trading services to their clients. These services
include buying and selling securities on behalf of their clients. Money center banks have access
to a wide range of securities markets, including stock exchanges, bond markets, and commodity
markets.
5. Custody Services

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Money center banks also provide custody services to their clients. These services include holding
securities and other assets on behalf of their clients. Money center banks ensure that their clients'
assets are safe and secure, and provide regular reports on the status of their assets.
When it comes to asset management, there are several options available to investors. Investors
can choose to manage their own assets, work with a financial advisor, or work with a money
center bank. While each option has its own advantages and disadvantages, working with a
money center bank is often the best option for investors with complex financial needs.
Money center banks have the expertise, resources, and experience to manage large amounts of
money and provide customized solutions to their clients. They offer a wide range of financial
products and services, including investment management, wealth management, risk
management, securities trading, and custody services. Money center banks work closely with
their clients to understand their financial goals and develop a comprehensive plan to achieve
them.
Money center banks play a critical role in asset management. They provide a wide range of
financial products and services to their clients, including investment management, wealth
management, risk management, securities trading, and custody services. Money center
banks have the expertise, resources, and experience to manage large amounts of money and
provide customized solutions to their clients. If you are an investor with complex financial needs,
working with a money center bank may be the best option for you.
The Role of Money Center Banks in Asset Management - Asset Management: Growing Wealth
with Money Center Banks

7.The Role of Money Center Banks in Asset Management[Original Blog]

Role in In the Money

Role of Money Center

Money Center Banks

Role of Money Center Banks

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Banks and Asset Management

Money center banks are known for their ability to manage large sums of money and provide
various financial services to corporate and institutional clients. One of the key areas in which
money center banks excel is asset management. Asset management involves managing
investments on behalf of clients, including portfolio management, risk management,
and investment strategies. In this section, we will explore the role of money center banks in asset
management and how they provide value to their clients.
1. Investment Expertise:
Money center banks have a wealth of investment expertise and research capabilities, which they
use to provide investment advice and manage portfolios for their clients. They employ teams of
analysts and investment professionals who specialize in different asset classes and have access to
extensive research resources. This expertise allows them to provide customized investment
solutions that are tailored to the specific needs of their clients.
2. Global Reach:
Money center banks have a global reach, with offices and operations in multiple countries. This
allows them to provide investment solutions that are diversified across different regions and asset
classes. They also have the ability to manage currency risk and provide access to investments
that may not be available to smaller investment firms.
3. Technology:
Money center banks invest heavily in technology, which enables them to provide more efficient
and effective asset management services. They use sophisticated portfolio management systems
that allow them to monitor and analyze investments in real-time. They also use data analytics
and machine learning to identify investment opportunities and manage risk.
4. Risk Management:
Money center banks are known for their ability to manage risk. They employ risk management
professionals who use sophisticated models and analysis to identify and manage risk in
investment portfolios. They also have access to a wide range of risk management tools, such
as derivatives and hedging strategies, which they can use to manage risk on behalf of their
clients.
5. Investment Products:
Money center banks offer a wide range of investment products, including mutual
funds, exchange-traded funds (ETFs), and alternative investments. They also have the ability to
create customized investment products that are tailored to the specific needs of their clients. This

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allows their clients to access a diverse range of investment opportunities and to build portfolios
that are well-diversified and aligned with their investment objectives.
Money center banks play a critical role in asset management, providing their clients with
investment expertise, global reach, technology, risk management, and a wide range of investment
products. They are well-positioned to provide customized investment solutions that are tailored to
the specific needs of their clients. While there are other options available for asset management,
money center banks offer a unique set of advantages that make them a compelling choice
for many institutional and corporate clients.
The Role of Money Center Banks in Asset Management - How Money Center Banks Excel in
Asset Management Services

8.The Role of Money Illusion in Asset Pricing[Original Blog]

Role in In the Money
One of the hidden pitfalls of asset pricing is the role of money illusion. Money illusion is the
tendency of investors to think of their wealth and returns in nominal terms, without adjusting for
inflation. This can lead to systematic errors in asset valuation, as investors may overestimate or
underestimate the real value of future cash flows. In this section, we will explore how money
illusion affects asset pricing from different perspectives, and what are the implications for
investors and policymakers.
Some of the points that we will discuss are:
1. Theoretical models of money illusion in asset pricing. There are several models that
incorporate money illusion as a factor that influences asset prices. For example, [Modigliani and
Cohn (1979)](https://www.investopedia.com/terms/m/money_illusion.asp) argue that investors
use historical nominal returns as a proxy for expected real returns, and thus overvalue stocks
when inflation is high and undervalue them when inflation is low. [Fisher and Statman (2006)]
(https://corporatefinanceinstitute.com/resources/economics/money-illusion/) propose a
behavioral model that assumes that investors suffer from framing effects, loss aversion, and
mental accounting, and thus react differently to nominal and real changes in wealth. [Bacchetta
et al. (2009)](https://www.academia.edu/105068779/Money_Illusion_in_Asset_Pricing) develop
a model that shows that money illusion can generate excess volatility and predictability in stock
returns, as well as deviations from the law of one price across countries.
2. Empirical evidence of money illusion in asset pricing. There are also several studies that
provide empirical support for the existence and impact of money illusion in asset pricing. For
example, [Shiller (1997)](https://www.cambridge.org/core/journals/journal-of-financial-and-
quantitative-analysis/article/abs/stock-market-mispricing-money-illusion-or-resale-option/
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1A8EEB3DAB2070AAC55F8615CF0657CB) finds that stock prices are positively correlated

with inflation expectations, which implies that investors do not fully adjust for inflation.
[Campbell and Vuolteenaho (2004)] decompose stock returns into cash flow news and discount
rate news, and find that money illusion affects the latter more than the former. [Ritter (2005)]
documents that nominal stock returns are lower in countries with higher inflation, which
suggests that investors require a higher real return to invest in those markets.
3. Implications of money illusion in asset pricing. The presence and effects of money illusion
in asset pricing have important implications for investors and policymakers. For investors,
money illusion implies that they should be aware of the inflation-adjusted value of their assets
and returns, and not be misled by nominal changes. For policymakers, money illusion implies
that they should consider the impact of inflation and monetary policy on asset prices and
financial stability, and not rely on the rationality and efficiency of financial markets.
The Role of Money Illusion in Asset Pricing - Asset Pricing and Money Illusion: The Hidden
Pitfalls

9.The Role of Money Order Issuers[Original Blog]

Role in In the Money
When it comes to financial transactions, money order issuers play an important role in
facilitating the transfer of funds. They are responsible for issuing money orders, which are
similar to checks but are prepaid and guaranteed by the issuer. Money order issuers can be banks,
credit unions, or other financial institutions, and they are regulated by both federal and state
laws. In this section, we will explore the role of money order issuers in more detail, including
their responsibilities, regulations, and the benefits of using money orders for financial
transactions.
Here are some important insights about the role of money order issuers:
1. Issuing Money Orders: The primary responsibility of money order issuers is to issue money
orders to customers who need to transfer funds. Money orders can be purchased for a fee, and
they can be used to make payments or send money to others. Money order issuers must ensure
that the funds are available before issuing the money order, and they must also verify the identity
of the purchaser to prevent fraud.
2. Regulatory Compliance: Money order issuers are subject to federal and state regulations that
govern their operations. These regulations are designed to protect consumers and prevent money
laundering and other financial crimes. Money order issuers must comply with these regulations,
which may include reporting requirements, record-keeping, and anti-money laundering
measures.
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3. Benefits of Money Orders: Money orders offer several benefits for consumers who need to
transfer funds. They are more secure than cash and can be used to make payments to individuals
or businesses that do not accept personal checks. Money orders are also convenient for people
who do not have bank accounts or who prefer not to use electronic payment methods.
4. Fees: Money order issuers charge a fee for issuing money orders, which can vary depending
on the amount of the money order and the issuer. For example, the United States Postal Service
charges a fee of $1.25 for money orders up to $500, while some banks may charge higher fees
for larger amounts.
Overall, money order issuers play an important role in facilitating financial transactions for
consumers. By issuing money orders, they provide a secure and convenient way for people to
transfer funds without the need for a bank account or electronic payment methods. While there
are fees associated with using money orders, they can be a cost-effective way to make payments
and send money to others.
The Role of Money Order Issuers - Behind the Scenes: Unveiling the Role of Money Order
Issuers update

10.The Role of Money Changers in the Black Market Currency Trade[Original Blog]
Role in In the Money

Black market

Market Currency
1. Money changers play a significant role in the black market currency trade, especially when it
comes to the Sudanese Pound. In a country where the official exchange rate does not accurately
reflect the economic realities on the ground, these individuals step in to bridge the gap between
the official and black market rates. While some argue that money changers are essential for the
functioning of the economy, others criticize their practices as contributing to inflation
and economic instability.
2. Money changers, also known as forex dealers or currency traders, operate in the informal
sector and provide a valuable service to individuals and businesses alike. They offer a convenient
avenue for exchanging foreign currencies at rates closer to the black market rate, enabling people
to access the currencies they need for international transactions or to hedge against inflation. For
instance, a Sudanese entrepreneur who wants to import goods may rely on money changers to

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obtain foreign currency at a more favorable rate, allowing them to remain competitive in
a challenging economic environment.
3. However, the presence of money changers in the black market currency trade also has its
downsides. Critics argue that their activities contribute to inflationary pressure, as the demand for
foreign currency exceeds its supply in the official market. This imbalance leads to an increase in
prices of imported goods, negatively impacting consumers' purchasing power and exacerbating
the economic challenges faced by the country. Additionally, the lack of regulation in the black
market currency trade creates opportunities for illegal activities and money laundering.
4. When considering the role of money changers in the black market currency trade, it is
essential to explore potential alternatives that could address the concerns raised by critics. One
option is to improve the transparency and efficiency of the official exchange market. By
narrowing the gap between official and black market rates, the incentive for individuals to turn to
money changers would diminish. This could be accomplished through policies such as currency
devaluation or increasing the availability of foreign currency through exports or foreign
investments.
5. Another alternative worth considering is the introduction of licensed and regulated currency
exchange platforms. These platforms would provide a legal avenue for individuals and
businesses to exchange currencies at rates closer to the black market rate, without resorting
to illegal channels. By establishing regulations and oversight, the government can ensure that
these platforms operate transparently and contribute to the formal economy.
6. Ultimately, finding the best solution to the role of money changers in the black market
currency trade requires a comprehensive approach. It is crucial to balance the need for access
to foreign currency with measures that address the potential negative consequences, such as
inflation and illegal activities. By exploring alternatives and implementing appropriate policies,
Sudan can work towards a more stable and transparent currency exchange system that benefits
the economy as a whole.
The Role of Money Changers in the Black Market Currency Trade - Black Market Currency: The
Sudanese Pound's Underground Trade

11.The Role of Money Weighted Return in Investment Decision Making[Original Blog]

Role in In the Money

Weighted Return

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Money Weighted Return

When it comes to investment decision making, there are several factors that need to be taken into
account. One of the most important aspects of investment decision making is the calculation of
investment returns. Money-weighted return is an essential tool that investors use to calculate
the performance of their investment portfolio. It is a metric that measures the compound rate of
growth of the investment over time, taking into account the timing and size of cash flows into
and out of the portfolio. Money-weighted return is a key factor for investment decision making,
as it provides a measure of the overall returns generated by the portfolio, factoring in the
investor's buying and selling decisions over time.
Here are some key points to consider when analyzing the role of money-weighted return
in investment decision making:
1. Money-weighted return reflects the impact of an investor's timing and size of cash flows. It is
a more accurate measure of portfolio performance than time-weighted return, which only
considers the impact of investment returns on the portfolio, making it less relevant for investors
who frequently add or withdraw funds from their portfolio.
2. Money-weighted return allows investors to evaluate the performance of their portfolio over a
specific period, taking into account all the cash inflows and outflows that occurred during that
period. This helps investors to make informed decisions about their investment strategy, such as
whether to adjust their portfolio allocation or investment style.
3. Money-weighted return can be used to compare the performance of different investment
portfolios, providing investors with an objective measure of the performance of their
portfolio compared to others in the market.
For example, let's say an investor has invested $100,000 in a portfolio, which generates a 10%
return in the first year. However, the investor decides to withdraw $20,000 from the portfolio at
the end of the first year. In the second year, the portfolio generates a return of 15%. The money-
weighted return for the two-year period would be 10.91%, taking into account the impact of the
cash flow transaction. This measure is more accurate than the time-weighted return, which would
only reflect the average return of 12.5% for the two-year period, irrespective of the cash flow
transaction.
Overall, the role of money-weighted return in investment decision making cannot be overstated.
It is a crucial tool that investors use to evaluate the performance of their portfolio and
make informed investment decisions.
The Role of Money Weighted Return in Investment Decision Making - Boosting Investment
Gains: Analyzing the Role of Money Weighted Return

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12.The Role of Call Money Rate in Financial Risk Management[Original Blog]

Role of a Call

Call Money Rate

Rate on Financial

Risk Management
The financial landscape is constantly evolving, and with it comes the need for effective risk
management strategies. One crucial aspect of financial risk management is understanding the
role of call money rate. Call money rate refers to the interest rate charged on short-term loans
between banks or financial institutions. It plays a significant role in determining the cost of
borrowing and influences various aspects of financial risk management.
From the perspective of borrowers, call money rate directly impacts their cost of funds. When
call money rates are high, borrowing becomes more expensive, which can increase financial risk
for businesses and individuals alike. Higher borrowing costs may lead to reduced investment,
limited expansion opportunities, or even potential default on existing loans. On the other hand,
when call money rates are low, borrowing becomes more affordable, enabling businesses to
access capital at a lower cost and potentially reducing their financial risk.
Financial institutions also closely monitor call money rates as part of their risk management
practices. Fluctuations in call money rates can impact liquidity levels within the banking system.
When call money rates rise sharply, it may indicate a tightening of liquidity conditions, making it
more challenging for banks to meet their short-term funding requirements. This can result in
increased financial risk for banks as they may struggle to maintain adequate cash reserves or
fulfill their obligations.
To delve deeper into the role of call money rate in financial risk management, let's explore some
key insights:
1. Liquidity Risk: Call money rate serves as an indicator of liquidity conditions in the market.
Financial institutions carefully monitor these rates to assess the availability of funds and manage
liquidity risks effectively. For example, during periods of high call money rates, banks may adopt
conservative lending practices to ensure they have sufficient liquidity buffers to meet any
unexpected demands.

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2. Interest Rate Risk: Call money rate is influenced by broader interest rate movements in the
economy. Changes in call money rates can reflect shifts in monetary policy or market
expectations regarding future interest rate movements. Financial institutions need to consider
these fluctuations when managing interest rate risk in their portfolios. For instance, if call
money rates are expected to rise, banks may adjust their lending rates or restructure their
investment portfolios to mitigate potential losses.
3. Market Sentiment and Risk Appetite: Call money rates can also be influenced by market
sentiment and risk appetite. During periods of economic uncertainty or financial market
volatility, investors may seek safer assets, leading to increased demand for short-term loans and
driving up call money rates.
The Role of Call Money Rate in Financial Risk Management - Call Money Rate and Financial
Risk Management: Best Practices update

13.Analyzing the Role of Call Money Rate in Controlling Inflation[Original Blog]

Role of a Call

Call Money Rate

Controlling Inflation
In the realm of monetary policy, one key instrument that plays a crucial role in
maintaining economic stability is the call money rate. This interest rate, also known as the
overnight rate or the interbank lending rate, refers to the rate at which banks lend and borrow
funds from each other on a short-term basis. While it may seem like a technical aspect of the
financial system, the call money rate holds significant importance in controlling inflation
and ensuring overall economic stability.
From an economic perspective, inflation is a persistent increase in the general price
level of goods and services over time. It erodes purchasing power and can have detrimental
effects on an economy if left unchecked. Central banks around the world employ various tools to
manage inflation, and one such tool is adjusting the call money rate.
1. Monetary Policy Transmission: The call money rate serves as a benchmark for other interest
rates in the economy. When central banks raise or lower this rate, it influences borrowing costs
for commercial banks, which subsequently affects lending rates for businesses and consumers.

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By manipulating the call money rate, central banks can influence overall borrowing and spending
patterns in an economy, thereby impacting inflationary pressures.
2. controlling Money supply: The call money rate plays a vital role in regulating the money
supply within an economy. When central banks increase the call money rate, borrowing becomes
more expensive for commercial banks. Consequently, these banks may reduce their lending
activities, leading to a decrease in money supply growth. Conversely, lowering the call money
rate encourages borrowing and stimulates economic activity by increasing liquidity.
For example, let's consider a scenario where inflation is rising above the desired target. To curb
inflationary pressures, a central bank may decide to increase the call money rate. As a
result, commercial banks face higher borrowing costs and become more cautious about
extending loans to businesses and individuals. This reduction in credit availability slows down
spending and investment, ultimately dampening inflationary pressures.
3. exchange Rate stability: The call money rate also influences exchange rates, which have a
significant impact on import and export dynamics. When a country's call money rate is higher
than that of other countries, it attracts foreign investors seeking higher returns. This increased
demand for the domestic currency strengthens its value relative to other currencies, leading to an
appreciation. A stronger currency can help control inflation by reducing the cost of imported
goods and services.
Analyzing the Role of Call Money Rate in Controlling Inflation - Call Money Rate s Role in
Monetary Policy: Impact on Economic Stability update

14.Role of Call Money Rate in the Economy[Original Blog]

Role of a Call

Call Money Rate

Rate on the Economy

The call money rate is an important indicator of the overall liquidity situation in the economy. It
is the interest rate at which banks and other financial institutions lend and borrow money from
each other on a short-term basis, usually for a day or overnight. The call money market is a
market for very short-term funds, and the rate at which funds are lent and borrowed in this
market reflects the demand and supply of liquidity in the economy.

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1. Role of Call Money rate in Monetary policy

The call money rate is closely watched by central banks as an important indicator of the liquidity
situation in the economy. In India, the Reserve Bank of India (RBI) uses the call money rate as a
tool of monetary policy to achieve its policy objectives. The RBI uses the call money rate to
signal its stance on monetary policy, and adjusts it through open market operations (OMOs) to
inject or withdraw liquidity from the system. When the RBI wants to tighten monetary policy, it
raises the call money rate by selling government securities in the open market, thereby
reducing the supply of money in the system. Conversely, when it wants to ease monetary policy,
it lowers the call money rate by buying government securities, thereby increasing the supply of
money in the system.
2. Impact of Call Money Rate on Borrowing and Lending Rates
The call money rate has a direct impact on the borrowing and lending rates in the economy.
Banks and other financial institutions borrow funds at the call money rate, and lend them to their
customers at a higher rate. Therefore, any change in the call money rate is immediately reflected
in the lending rates of banks. When the call money rate rises, banks increase their lending rates
to maintain their profit margins. Conversely, when the call money rate falls, banks reduce their
lending rates to attract more customers.
3. Call Money rate and Stock market
The call money rate also has an indirect impact on the stock market. When the call money rate is
high, it becomes expensive for companies to borrow funds for their operations, which can lead to
a slowdown in economic activity and a decline in corporate earnings. This can negatively impact
the stock market, as investors may become wary of investing in stocks of companies that are
expected to report lower earnings. Conversely, when the call money rate is low, companies can
borrow funds at a lower cost, which can boost economic activity and corporate earnings, thereby
positively impacting the stock market.
4. Comparison of Call Money Rate and Repo Rate
The call money rate and the repo rate are both important indicators of the liquidity situation in
the economy, but they differ in their tenor and the parties involved. The call money market is a
market for very short-term funds, usually for a day or overnight, and involves lending and
borrowing between banks and other financial institutions. The repo market, on the other hand, is
a market for short-term funds, usually for a few days to a few weeks, and involves lending and
borrowing between banks and the central bank. The repo rate is set by the central bank and is
used as a tool of monetary policy to influence the liquidity situation in the economy. The call
money rate, on the other hand, is determined by the demand and supply of funds in the market.
5. Conclusion

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The call
Role of Call Money Rate in the Economy - Call Money Rate vs: Repo Rate: Deciphering the
Differences

15.The Role of Call Money Rate in Controlling Inflation[Original Blog]

Role of a Call

Call Money Rate

Controlling Inflation
The Call Money Rate (CMR) is the interest rate charged by banks on short-term loans to other
banks or financial institutions. It is a crucial tool for the central bank to control inflation. When
inflation is high, the central bank may increase the CMR to discourage borrowing,
which reduces the money supply and slows down the economy. On the other hand, when there
is a need to stimulate economic growth, the central bank may decrease the CMR to encourage
borrowing and increase the money supply. In this section, we will discuss the role of the CMR
in controlling inflation.
1. CMR and inflation
The CMR is a key factor in determining the cost of funds for banks and financial institutions.
When the CMR is high, the cost of borrowing increases, which reduces the amount of money
available for lending. This, in turn, reduces the demand for goods and services, leading to a
decrease in prices. Conversely, when the CMR is low, the cost of borrowing decreases, leading to
an increase in the amount of money available for lending. This increases the demand for goods
and services, leading to an increase in prices. Therefore, the CMR plays a crucial role
in controlling inflation.
2. The impact of CMR on different sectors
The CMR has a significant impact on various sectors of the economy. For instance, a high CMR
can lead to a decrease in demand for credit, which can slow down investment in the economy.
This, in turn, can lead to a decrease in economic growth. Moreover, a high CMR can increase the
cost of borrowing for businesses, leading to a decrease in profitability. This can result in a
decrease in production and employment, leading to a further decrease in economic growth.
3. The impact of CMR on consumers

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The CMR also has a significant impact on consumers. When the CMR is high, the cost of
borrowing increases, leading to a decrease in consumer spending. This can lead to a decrease in
demand for goods and services, leading to a decrease in prices. Conversely, when the CMR is
low, the cost of borrowing decreases, leading to an increase in consumer spending. This can lead
to an increase in demand for goods and services, leading to an increase in prices.
4. The effectiveness of CMR in controlling inflation
The effectiveness of the CMR in controlling inflation depends on various factors. For instance,
the impact of the CMR on inflation depends on the responsiveness of borrowers to changes in
interest rates. If borrowers are sensitive to changes in interest rates, then the CMR can be an
effective tool in controlling inflation. However, if borrowers are not sensitive to changes in
interest rates, then the impact of the CMR on inflation may be limited.
5. The best option for controlling inflation
There are various options available to the central bank for controlling inflation. The best option
depends on the prevailing economic conditions. For instance, if inflation is high, then the central
bank may increase the CMR to reduce the money supply and slow down the economy.
Conversely, if inflation is low, then the central bank may decrease the CMR to
stimulate economic growth. However, the central bank needs to be careful not to overreact to
changes in inflation, as this can lead to an unstable economy.
The CMR plays a crucial role in controlling inflation. It impacts various sectors of the economy
and consumers. The effectiveness of the CMR in controlling inflation depends on various factors,
such as the responsiveness of borrowers to changes in interest rates. The best option
for controlling inflation depends on the prevailing economic conditions. The central bank needs
to be careful not to overreact to changes in inflation, as this can lead to an unstable economy.
The Role of Call Money Rate in Controlling Inflation - Call Money Rate's Role in Monetary
Policy: Impact on Economic Stability

16.The Role of Money Center Banks in Capital Markets[Original Blog]

Role in In the Money

Role of Money Center

Money Center Banks

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Role of Money Center Banks

Banks on Capital
money center banks are financial institutions that play a crucial role in capital markets. These
banks are responsible for facilitating the flow of capital between investors and borrowers,
providing financing options for businesses, and managing risk in the financial system. In this
blog section, we will explore the role of money center banks in capital markets and discuss why
they are essential for unlocking opportunities for investors and businesses alike.
1. Providing liquidity to Capital markets
One of the primary roles of money center banks is to provide liquidity to capital markets.
Liquidity refers to the ease with which an asset can be bought or sold without affecting its
price. Money center banks act as intermediaries between investors and borrowers, providing a
platform for buying and selling securities. By doing so, these banks help to ensure that capital
markets remain liquid and efficient.
2. Facilitating Capital Raising
Money center banks also play a critical role in facilitating capital raising for businesses.
When companies need to raise capital, they can issue securities such as stocks and bonds. Money
center banks can act as underwriters for these securities, helping to market them to investors and
ensuring that the issuing company receives the necessary funding. This process is essential
for businesses looking to grow and expand, as it provides them with the capital they need to
invest in new projects and initiatives.
3. Managing risk in the Financial system
Another critical role of money center banks is to manage risk in the financial system. These
banks are responsible for assessing the creditworthiness of borrowers and managing the risks
associated with lending money. By doing so, they help to ensure that the financial system
remains stable and secure. Additionally, money center banks may engage in hedging strategies to
manage the risks associated with their own investments, reducing the potential impact of market
volatility.
4. Providing Investment Services
Money center banks also provide a range of investment services to their clients, including wealth
management, asset management, and investment banking. These services are designed to help
investors manage their portfolios and achieve their financial goals. For example, money center

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banks may offer investment advice, help clients diversify their portfolios, or provide access to
exclusive investment opportunities.
Overall, money center banks play a critical role in capital markets, providing liquidity,
facilitating capital raising, managing risk, and offering a range of investment services. Without
these banks, capital markets would be less efficient and less accessible to investors and
businesses alike. As such, it is essential that investors and businesses understand the role of
money center banks in capital markets and take advantage of the opportunities they provide.
The Role of Money Center Banks in Capital Markets - Capital Markets: Unlocking Opportunities
through Money Center Banks

17.The Role of Money Center Banks in Facilitating Capital Markets[Original Blog]

Role in In the Money

Role of Money Center

Money Center Banks

Role of Money Center Banks

Banks in Facilitating
Money center banks play a crucial role in facilitating capital markets around the world. These
banks act as intermediaries between borrowers and lenders, providing a range of financial
services that help to match investors with the capital they need to grow their businesses or invest
in new opportunities. In this section, we'll take a closer look at the role of money center banks in
facilitating capital markets and explore some of the key ways in which they help to drive
economic growth and prosperity.
1. Providing Liquidity: One of the key roles that money center banks play in capital markets is
providing liquidity to investors. By acting as intermediaries between buyers and sellers, these
banks help to ensure that there is always a ready market for securities and other financial
instruments. This helps to keep prices stable and ensures that investors can buy and sell assets
quickly and easily, which is essential for maintaining a healthy and vibrant capital market.

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2. Underwriting Securities: Another important role that money center banks play in capital
markets is underwriting securities. This involves helping companies to issue new stocks or bonds
by purchasing these securities and then selling them to investors. By underwriting these
securities, money center banks help to ensure that companies can raise capital quickly and
efficiently, which is essential for funding growth and expansion.
3. Providing market analysis: Money center banks also provide valuable market analysis to
investors, helping them to make informed investment decisions. This analysis may include
information on market trends, economic indicators, and other factors that can impact the
performance of various securities and financial instruments. By providing this information,
money center banks help investors to make smarter investment decisions, which can ultimately
lead to better returns and greater economic growth.
4. Offering investment Banking services: Money center banks also offer a range of investment
banking services to clients, including mergers and acquisitions, debt and equity financing, and
other strategic advisory services. By providing these services, these banks help to
facilitate economic growth and development by enabling companies to access the capital they
need to grow and expand.
5. Managing Risk: Finally, money center banks play a crucial role in managing risk in capital
markets. By providing a range of risk management services, including hedging and other
financial instruments, these banks help to ensure that investors can protect themselves against
losses and manage their exposure to various market risks. This is essential for maintaining
stability in capital markets and ensuring that investors can continue to invest with confidence.
Overall, the role of money center banks in facilitating capital markets is essential for driving
economic growth and prosperity around the world. By providing liquidity, underwriting
securities, offering market analysis, providing investment banking services, and managing risk,
these banks help to ensure that investors can access the capital they need to grow their businesses
and invest in new opportunities. As such, they are an essential component of the global financial
system, and their continued success is critical for the health and well-being of the global
economy.
The Role of Money Center Banks in Facilitating Capital Markets - Capital Markets: Unlocking
Opportunities through Money Center Banks

18.The Role of Money Center Banks in Trading Securities[Original Blog]

Role in In the Money

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Role of Money Center

Money Center Banks

Role of Money Center Banks

Trading and Securities

The Role of Money Center Banks in Trading Securities
Money center banks play a crucial role in trading securities as they act as intermediaries between
buyers and sellers. These banks provide liquidity to the market and help to ensure that securities
can be bought and sold efficiently. They also provide a range of services to market participants,
including underwriting, research, and trading.
1. Market Making
One of the primary roles of money center banks in trading securities is market making. Market
makers provide liquidity to the market by standing ready to buy or sell securities at any time.
Money center banks use their balance sheets to buy and hold securities, which allows them to
provide liquidity to the market. This means that when investors want to buy or sell securities,
there are always market makers available to facilitate the trades.
2. Underwriting
Money center banks also play a crucial role in underwriting securities. Underwriting involves
the process of raising capital for companies by issuing new securities. Money center banks act as
underwriters by helping companies to price and sell new securities. They also provide research
and analysis to help investors make informed decisions about whether to buy the new securities.
3. Trading
Money center banks also engage in trading securities on their own behalf. They use their
expertise and resources to identify opportunities to profit from trading securities. This can
include buying and selling stocks, bonds, and other securities. Money center
banks use sophisticated trading strategies and technology to execute trades quickly and
efficiently.
4. Risk Management

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Money center banks also play a crucial role in managing risk in the securities market. They use
their expertise to identify and manage risks associated with trading and underwriting securities.
This includes monitoring market conditions, managing credit risk, and ensuring compliance
with regulatory requirements. Money center banks also provide risk management services to
other market participants, such as hedge funds and institutional investors.
5. Examples
One example of a money center bank that plays a significant role in trading securities is
JPMorgan Chase. The bank has a large trading desk that engages in a wide range of trading
activities, including equities, fixed income, and currencies. JPMorgan Chase also
provides underwriting services to companies and has a large research team that provides analysis
and insights to investors.
Another example is Goldman Sachs, which is known for its expertise in trading
and underwriting securities. The bank has a large trading desk that engages in a wide range of
activities, including market making, proprietary trading, and risk management. Goldman Sachs
also provides underwriting services to companies and has a large research team that provides
insights and analysis to investors.
6. Conclusion
Overall, money center banks play a crucial role in trading securities. They provide liquidity to
the market, underwrite new securities, engage in trading activities, and manage risk. Money
center banks use their expertise and resources to help market participants buy and sell securities
efficiently. JPMorgan Chase and Goldman Sachs are two examples of money center banks that
play a significant role in trading securities.
The Role of Money Center Banks in Trading Securities - Capital Markets: Unlocking
Opportunities through Money Center Banks

19.The key role of money at call in maintaining smooth operations[Original Blog]

Key Role

Role in In the Money

Smooth operations

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1. Money at call, also known as call money or call loans, plays a crucial role in maintaining
smooth operations for businesses. This short-term financing option allows companies to access
funds quickly and efficiently, ensuring they have the necessary liquidity to meet their immediate
financial obligations. In this section, we will explore the key role of money at call in cash
flow management and discuss its benefits, tips for utilizing it effectively, and real-life case
studies.
2. Benefits of Money at Call:
A. Immediate access to funds: Money at call provides businesses with instant access to cash,
allowing them to address urgent financial needs or take advantage of unforeseen opportunities.
B. Flexibility: Unlike traditional loans with fixed repayment terms, money at call offers greater
flexibility in terms of repayment. Companies can repay the loan whenever they have surplus
funds, minimizing the burden of interest expenses.
C. Cost-effective: Money at call typically carries lower interest rates compared to other short-
term financing options, making it a cost-effective solution for managing cash flow.
3. Tips for Utilizing Money at Call Effectively:
A. Monitor cash flow regularly: To make the most of money at call, businesses should closely
monitor their cash flow to identify periods of surplus funds or potential shortfalls. This proactive
approach allows them to borrow or repay funds at the right time, optimizing their cash position.
B. Negotiate favorable terms: When entering into money at call agreements, it is essential to
negotiate favorable terms with lenders. This may include competitive interest rates, flexible
repayment schedules, or the ability to increase or decrease the loan amount as needed.
C. diversify funding sources: Relying solely on money at call for cash flow management may not
be ideal. Businesses should consider diversifying their funding sources to ensure they have
access to multiple financing options in case of emergencies or changes in market conditions.
4. Case Studies:
A. Case Study 1: Company XYZ, a manufacturing firm, faced a sudden increase in raw
material prices due to supply chain disruptions. By utilizing money at call, they were able to
secure additional funds quickly and negotiate better prices by paying upfront. This enabled them
to maintain smooth operations and meet customer demands without compromising profitability.
B. Case Study 2: Retailer ABC experienced a temporary cash shortage during the holiday season
due to delayed customer payments. They utilized money at call to bridge the gap and
ensure uninterrupted inventory replenishment. This allowed them to take advantage of the peak
sales period and maximize revenue.

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Money at call serves as a valuable tool for maintaining smooth operations by providing
businesses with immediate access to funds, flexibility in repayment, and cost-effective financing.
By following the suggested tips and learning from real-life case studies, companies can
effectively utilize money at call to manage their cash flow and seize opportunities for growth.
The key role of money at call in maintaining smooth operations - Cash flow management:
Utilizing Money at Call for Smooth Operations

20.The Role of Call Money in Central Bank Operations[Original Blog]

Role of a Call

Bank Operations

Central Bank Operations

Call money is a vital tool of central bank operations. It refers to the short-term borrowing and
lending of funds between banks. The rate of interest at which this lending and borrowing take
place is known as the call money rate. The call money market is a wholesale market, and its
operations have a direct impact on the monetary policy of the central bank. The central bank
has the power to regulate the money supply in the economy by adjusting the call money
rate. The call money market, therefore, plays a crucial role in the implementation of monetary
policy.
1. The Central Bank's Role: The central bank plays a significant role in the call money market. It
acts as a lender of last resort, providing funds to banks that cannot obtain funds from other
sources. The central bank also sets the call money rate, which is the benchmark rate for all short-
term interest rates in the economy. By setting the call money rate, the central bank can
influence the money supply in the economy.
2. Impact on Monetary Policy: The call money market has a direct impact on monetary policy.
The central bank uses the call money rate to signal its monetary policy stance. If the central bank
wants to tighten monetary policy, it raises the call money rate. This makes borrowing more
expensive for banks, which reduces the amount of money in circulation. If the central bank wants
to ease monetary policy, it lowers the call money rate. This makes borrowing cheaper for banks,
which increases the amount of money in circulation.
3. Effect on Economic Stability: The call money market also has an impact on economic
stability. A sudden increase in the call money rate can lead to a liquidity crisis in the banking

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system. Banks that cannot obtain funds from other sources may default on their obligations,
causing a ripple effect throughout the economy. The central bank must monitor the call money
market closely to ensure that it remains stable and does not pose a threat to the overall health of
the economy.
4. Examples: One example of the impact of the call money rate on the economy is the Indian
economy. In 2018, the Reserve Bank of India raised the call money rate in response to rising
inflation. This led to an increase in borrowing costs for banks, which reduced the amount of
money in circulation. The move was successful in curbing inflation, but it also led to a slowdown
in economic growth. Another example is the United States. In 2008, the Federal Reserve lowered
the call money rate to near-zero levels in response to the financial crisis. This helped to stimulate
economic growth by making borrowing cheaper for banks.
The call money market plays a crucial role in central bank operations and the implementation
of monetary policy. The central bank's ability to regulate the call money rate allows it
to influence the money supply in the economy, which has a direct impact on economic
growth and stability. It is essential for the central bank to monitor the call money market closely
to ensure that it remains stable and does not pose a threat to the overall health of the economy.

The Role of Call Money in Central Bank Operations - Central bank operations: Call Money and
its Impact on Monetary Policy

21.The Role of Money at Call in Monetary Policy Implementation[Original Blog]

Role in In the Money

Policy in Implementation

Monetary Policy and Implementation

1. The Role of money at Call in monetary Policy Implementation
Money at Call is a crucial tool utilized by central banks in the implementation of monetary
policy. It refers to short-term borrowing and lending arrangements between banks and the central
bank, typically for a period of one day. This section will delve into the importance of Money
at call in monetary policy implementation and shed light on its mechanics and implications.
2. Mechanism of Money at Call

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Money at Call operates through the central bank's open market operations, where it buys or sells
government securities to influence the level of money supply in the economy. When the central
bank buys securities, it injects money into the banking system, thereby increasing the supply of
money. Conversely, when the central bank sells securities, it absorbs money from the system,
reducing the money supply.
3. Liquidity management
Money at Call plays a vital role in managing liquidity in the banking system. Banks often face
daily liquidity fluctuations due to various factors such as customer withdrawals, loan
disbursements, and interbank transactions. Money at Call provides banks with a means to meet
their short-term liquidity needs by accessing funds from the central bank. This ensures that banks
can fulfill their payment obligations and maintain stability in the financial system.
4. Interest rate signaling
Another important aspect of Money at Call is its role in signaling the central bank's monetary
policy stance. The interest rate charged on Money at Call transactions serves as a benchmark for
short-term interest rates in the economy. By adjusting the rate at which it lends or borrows
money, the central bank can effectively signal its desired level of monetary tightening or easing.
For instance, a higher interest rate on Money at Call signifies a tighter monetary policy stance,
while a lower rate indicates a more accommodative approach.
5. controlling money supply
Money at Call enables the central bank to exercise control over the money supply in the
economy. By adjusting the amount of money it injects or absorbs through open market
operations, the central bank can influence the overall liquidity conditions. This, in turn, impacts
interest rates, inflation, and economic growth. For example, during periods of economic
expansion, the central bank may reduce the availability of money at call to curb excessive credit
growth and prevent overheating in the economy.
6. Case study: The Federal Reserve's use of Money at Call
The role of Money at Call in monetary policy implementation can be observed in the operations
of central banks worldwide. For instance, the U.S. Federal Reserve utilizes a similar tool called
the overnight reverse repurchase agreement (RRP) facility. This facility allows eligible
counterparties, such as money market funds, to lend funds to the federal Reserve overnight in
exchange for Treasury securities. By adjusting the interest rate offered on RRPs, the federal
Reserve can influence short-term interest rates and manage the money supply effectively.
7. Tips for understanding Money at call

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To comprehend the role of Money at Call in monetary policy implementation, it is essential to

stay informed about the central bank's open market operations and the prevailing interest rates.
Monitoring changes in short-term interest rates and their impact on the broader economy
can provide valuable insights into the central bank's monetary policy stance and its efforts to
manage liquidity and control money supply.
Money at Call plays a crucial role in the implementation of monetary policy. By managing
liquidity, signaling interest rate expectations, and controlling the money supply,
The Role of Money at Call in Monetary Policy Implementation - Central bank operations:
Money at Call and Monetary Policy Implementation

22.The Role of Money at Call in Collateralized Lending[Original Blog]

Role in In the Money

Collateralized Lending
1. The Importance of Money at Call in Collateralized Lending
Money at call plays a crucial role in collateralized lending, facilitating the smooth flow of funds
between borrowers and lenders. This type of lending involves the provision of loans backed by
collateral, which can include various assets such as real estate, securities, or even inventory.
However, without the availability of money at call, the entire process of collateralized
lending would be significantly hindered. In this section, we will explore the significance of
money at call and its impact on collateralized lending.
2. Ensuring Liquidity and Flexibility
One of the primary advantages of money at call in collateralized lending is the ability to ensure
liquidity and flexibility for both borrowers and lenders. Money at call refers to funds that are
readily available on demand or at short notice. In the context of collateralized lending, it allows
borrowers to access additional funds quickly when needed, providing them with greater
financial flexibility. Lenders, on the other hand, benefit from having immediate access to their
funds in case of default or unforeseen circumstances.
For example, let's consider a scenario where a business needs immediate financing to seize a
time-sensitive opportunity. By utilizing money at call, the borrower can tap into
their collateralized assets and secure the necessary funds promptly. This not only enables the
borrower to take advantage of the opportunity but also provides the lender with reassurance that
their funds are readily accessible.

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3. Mitigating Risk and Protecting Lenders

Money at call also serves as a risk mitigation tool for lenders in collateralized lending
transactions. By having funds readily available, lenders can protect themselves against
potential losses in case of default or non-payment by the borrower. If a borrower fails to repay
the loan, the lender can quickly liquidate the collateralized assets and recover their funds.
Consider a case study where a bank provides a mortgage loan to a borrower, with the property
being used as collateral. If the borrower defaults on the loan, the bank can exercise its right to
sell the property to recover the outstanding balance. Having money at call ensures that the bank
can swiftly initiate the foreclosure process and mitigate its potential losses.
4. Tips for Effective Utilization
To maximize the benefits of money at call in collateralized lending, both borrowers and lenders
should consider the following tips:
- Regularly review and update collateral valuations: Collateral values can fluctuate over time, so
it is essential to regularly reassess the value of the assets securing the loan. This ensures that the
money at call remains in line with the current market value.
- Maintain open communication: Establishing clear lines of communication between borrowers
and lenders is crucial in collateralized lending. Regular updates on the status of collateralized
assets and any potential issues can help mitigate risks and facilitate the smooth flow of funds.
- understand the terms and conditions: Both parties should thoroughly understand the terms and
conditions of the collateralized lending agreement, including the requirements for accessing
money at call. This ensures transparency and avoids any misunderstandings or disputes.
Money at call plays a vital role in collateralized lending by providing liquidity, flexibility,
The Role of Money at Call in Collateralized Lending - Collateralized lending: Secured
Transactions and Money at Call

23.Role of Money at Call in Corporate Financing[Original Blog]

Role in In the Money
1. Money at call, also known as call money or call loans, plays a crucial role in corporate
financing. It refers to short-term loans that are payable on demand. In the realm of commercial
paper and funding options for corporations, money at call offers flexibility and liquidity,
allowing businesses to meet their immediate financial needs efficiently. Let's delve deeper into
the various aspects and significance of money at call in corporate financing.

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2. Quick access to funds: One of the primary advantages of money at call is its ability to provide
companies with instant access to funds. In times of urgent financial requirements, such as
unexpected expenses or temporary cash flow gaps, corporations can rely on call money to bridge
the gap swiftly. For example, if a company needs to make an emergency payment to a supplier, it
can tap into its call money facility to meet the obligation promptly.
3. Cost-effective short-term financing: Money at call typically offers lower interest rates
compared to other short-term financing options, such as bank overdrafts or lines of credit. This
cost-effectiveness makes it an attractive choice for corporations seeking temporary funding
solutions. By utilizing money at call, companies can avoid high-interest charges and effectively
manage their short-term financial obligations.
4. Flexibility in repayment: Unlike traditional loans with fixed repayment terms, money at call
provides businesses with flexibility in repayment. Corporations can repay the loan at any time
without any penalties or additional charges. This feature allows companies to align
their repayment with their cash flow patterns, optimizing their financial management strategies.
For instance, if a company receives a large payment from a customer, it can use that inflow to
repay the money at call loan immediately, reducing interest costs.
5. Case study: Let's consider the case of XYZ Corporation, a manufacturing company that faced
an unexpected equipment breakdown, requiring immediate repairs. XYZ Corporation had most
of its funds tied up in long-term investments and couldn't access them quickly. However, by
utilizing its money at call facility, the company was able to secure the necessary funds promptly
and address the equipment issue without disrupting its operations. This case highlights how
money at call can be a valuable tool for corporations to tackle unforeseen financial
challenges efficiently.
6. Tips for effective utilization: To make the most of money at call facilities, corporations should
keep a few key tips in mind. Firstly, it's essential to maintain a good credit rating, as this
can influence the interest rates offered by lenders. Secondly, companies should carefully assess
their short-term financial needs and borrow only the required amount to avoid unnecessary
interest costs. Lastly, it's crucial to have a well-defined repayment plan in place to ensure timely
loan settlement.
7. Conclusion: Money at call serves as a vital component of corporate financing, offering quick
access to funds, cost-effectiveness, and flexibility in repayment. By leveraging this short-term
financing option effectively, businesses can enhance their financial agility and navigate
temporary cash flow challenges with ease.
Role of Money at Call in Corporate Financing - Commercial paper: Funding Options and Money
at Call for Corporations

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24.The Role of Money Market Mutual Funds in the Financial System[Original Blog]
Role in In the Money

Market Mutual

Money Market Mutual

Market Mutual Funds

Money Market Mutual Funds

Funds as Financial
Money market mutual funds (MMMFs) have long been a crucial part of the financial system,
serving as a low-risk investment option for investors seeking liquidity and stability. These
funds invest in short-term debt securities such as Treasury bills, commercial paper, and
certificates of deposit, and aim to maintain a stable net asset value (NAV) of $1 per share.
However, the financial crisis of 2008 exposed vulnerabilities in the MMMF industry, leading to
concerns about the potential for runs on these funds and the need for regulatory reform.
1. The importance of MMMFs in the financial system
MMMFs play a key role in providing investors with a safe and liquid investment option. They
are often used as a cash management tool by individuals, businesses, and institutional investors,
and are also used by banks and other financial institutions to manage their own cash holdings.
MMMFs are seen as a low-risk alternative to other investment options, such as stocks and bonds,
and are particularly attractive during times of economic uncertainty.
2. The vulnerabilities of MMMFs
The financial crisis of 2008 highlighted the vulnerabilities of MMMFs, particularly those that
invested in short-term debt issued by financial institutions. When Lehman Brothers filed for
bankruptcy in September 2008, the reserve Primary fund, a prominent MMMF, "broke the buck"
its NAV fell below $1 per share due to its exposure to Lehman debt. This sparked a run on the
fund, with investors withdrawing their funds en masse, and led to concerns about the stability
of the MMMF industry as a whole.

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3. Regulatory reform
In response to the vulnerabilities exposed by the financial crisis, the securities and Exchange
commission (SEC) implemented a series of regulatory reforms aimed at strengthening the
MMMF industry. These reforms included requirements for MMMFs to hold more liquid assets,
to impose fees and gates on withdrawals during times of stress, and to provide increased
disclosure about their holdings. While these reforms have helped to increase the stability of the
MMMF industry, some critics argue that they have not gone far enough to address the underlying
vulnerabilities.
4. Alternative investment options
While MMMFs are often seen as a safe and low-risk investment option, there are alternative
options available that may provide higher returns or greater diversification. For example, short-
term bond funds invest in a wider range of securities than MMMFs, including corporate debt
and mortgage-backed securities. However, these funds also carry greater risk, as they are not
required to maintain a stable NAV and their returns may fluctuate more than MMMFs. Another
option is high-yield savings accounts or money market accounts offered by banks, which may
offer higher interest rates than MMMFs while still providing FDIC insurance.
5. The best option
Ultimately, the best investment option will depend on an individual's specific needs and risk
tolerance. For investors seeking a low-risk, highly liquid investment option, MMMFs remain a
viable choice, particularly in light of the regulatory reforms implemented in recent years.
However, for those seeking higher returns or greater diversification, alternative options such as
short-term bond funds or high-yield savings accounts may be worth considering. It is important
for investors to carefully consider their options and to consult with a financial advisor
before making any investment decisions
The Role of Money Market Mutual Funds in the Financial System - Crapo Bill and Money
Market Mutual Funds: Addressing Investor Concerns

25.The Role of Money Mules in Cybercrime Networks[Original Blog]

Role in In the Money

Money Mules
2. The role of Money mules in Cybercrime Networks

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Cybercrime networks rely heavily on money mules to facilitate their illicit activities. Money
mules, also known as "money transfer agents," are individuals who are recruited or coerced into
transferring stolen funds on behalf of cybercriminals. These individuals often unknowingly
become part of a complex network that enables cybercriminals to launder money, evade
detection, and ultimately profit from their illegal activities. Understanding the role of money
mules is crucial in combating cybercrime and safeguarding individuals from becoming unwitting
accomplices.
From the perspective of cybercriminals, money mules serve as a vital link in the chain, helping to
obfuscate the origin and destination of illicit funds. By utilizing money mules, cybercriminals
can distance themselves from the illegal activity, making it harder for law enforcement agencies
to trace the money back to them. Additionally, money mules provide a layer of anonymity, as
they are often recruited through online job postings or social media platforms, making it difficult
to identify the masterminds behind the cybercrime network. This decentralized structure makes it
challenging for law enforcement to dismantle these networks and bring the perpetrators to
justice.
On the other hand, from the perspective of the money mules themselves, their involvement in
cybercrime networks can have severe consequences. Many money mules are unaware of the
criminal nature of the transactions they are facilitating, believing they are simply taking on a
legitimate job opportunity. However, once caught, they face significant legal repercussions,
including imprisonment and the tarnishing of their personal and professional reputations. It is
crucial for individuals to be educated about the tactics cybercriminals employ to recruit money
mules, ensuring they can identify and avoid falling victim to these schemes.
To gain a better understanding of the role money mules play in cybercrime networks, let's delve
into some key aspects:
1. Recruitment methods: Cybercriminals employ various strategies to recruit money mules,
including online job postings, social media platforms, and even direct personal contact. They
often target vulnerable individuals, such as those seeking employment or those in financial
distress. Education and awareness campaigns are essential to help individuals recognize
and avoid falling prey to these recruitment methods.
2. Money transfer techniques: Money mules are typically instructed to transfer funds using
various methods, including wire transfers, online payment platforms, or cryptocurrencies.
Cybercriminals exploit these different channels to move money quickly and discreetly across
borders, making it challenging for authorities to trace and recover the stolen funds.
3. Money mule profiles: Money mules can come from diverse backgrounds and demographics.
Some may be coerced into participating due to financial difficulties, while others may be enticed

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by promises of quick and easy money. Understanding the profiles of potential money mules can
aid in developing targeted prevention and intervention strategies.
4. Detection and prevention: Detecting and preventing money mule activity is a multi-faceted
challenge. Financial institutions play a crucial role in identifying suspicious transactions and
reporting them to the appropriate authorities. Collaboration between law enforcement agencies,
financial institutions, and technology experts is vital in developing effective strategies to disrupt
cybercrime networks and dismantle money mule operations.
Money mules are an integral part of cybercrime networks, enabling cybercriminals to launder
money and evade detection. By understanding the recruitment methods, money transfer
techniques, money mule profiles, and implementing effective detection and prevention strategies,
we can work towards dismantling these networks and protecting individuals from
becoming unwitting accomplices in cybercrime.
Property rights
Property rights are the ability to own and use resources (and anything made from those
resources). Property rights are like the rules of a game such as soccer or hide-and-seek. When
everyone knows the rules, and those rules are consistently enforced, people can focus on playing
their best and having fun.
Economic systems
An economic system is any system of allocating scarce resources. Economic systems answer
three basic questions: what will be produced, how will it be produced, and how will the output
society produces be distributed?
There are two extremes of how these questions get answered. In command economies, decisions
about both allocation of resources and allocation of production and consumption are decided by
the government. In market economies, there is private ownership of resources—established
though property rights—and the factors of production and consumption are all coordinated
through markets. In a market system, resources are allocated to their most productive use through
prices that are determined in markets. These prices act as a signal for buyers and sellers. Most
economies are mixed economies that lie between these two extremes.
In either system, a rational agent would allocate resources and production using marginal
analysis. In command economies, this is more difficult to do because without markets, prices fail
at being an effective signal.
Money: Meaning, Functions and Role Read this essay to learn about the meaning, functions and
role of money. Meaning of Money: Money has been defined differently by different economists.
Some, like F.A. Walker, define it in terms of its functions, while others like G.D.H. Cole, J.M.
Keynes, Seligman and D.H. Robertson lay stress on the „general acceptability‟ aspect of money.
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According to Prof. D.H. Robertson, “anything which is widely accepted in payment for goods or
in discharge of other kinds of business obligation, is called money.” Seligman defines money as
“one thing that possesses general acceptability.” Prof. Ely says: “Money is anything that passes
freely from hand to hand as a medium of exchange and is generally received in final discharge of
debts.” Prof. A. Walker says “Money is that money does.” But these definitions are defective
because they do not lay proper emphasis on all the essential functions of money. Prof.
Crowther‟s definition of money is considered better as it takes into account all the important
functions of money.
He defines money as “anything that is generally acceptable as a means of exchange (i.e., as a
means of setting debts) and at the same lime, acts as a measure and a store of value.” It is a fact
that although money was the first economic object to attract men‟s thoughtful attention…there is
at the present day not even an approximate agreement as to what ought to be designated by the
world…the business world makes use of the term in several senses; while amongst economists
there are almost as many different conceptions as there are writers on the subject.‟ Functions of
Money: Money is a matter of functions four, a medium, a measure, a standard, a store. Money in
a modern economy performs important functions which have been classified by Kinley as
follows: (a) Primary functions also called fundamental and original functions like the medium of
exchange and measure of value. (b) Secondary functions like standard of deferred payments,
store of value and transfer of value. (c) Contingent functions like distribution of income,
measurement and maximisation of utility etc.
Medium of exchange: Money serves as a medium of exchange and facilitates the buying and
selling of goods, thereby eliminating the need for double coincidence of wants as under barter. A
man who wants to sell wheat in exchange for rice can sell it for money and purchase rice.
Measure of value: Money has also removed the difficulty of barter system by serving as a
common measure of value. The values of various commodities are expressed in terms of money.
Money as a measure of value has made transactions simple and easy. It may be understood that
this function of money follows from the first basic function (medium of exchange). It is because
money is used as a medium to exchange goods, that each good gets a value in terms of money
(called price).
As such, money also serves as a unit of account. In India, the unit of account is the Rupee, in
USA, the Dollar; in USSR, the Rouble and the Yen in Japan. Store of Value: Classical
economists did not recognize the store of value function of money. Keynes laid stress on this
function of money. People store money to provide again the rainy day and to meet unforeseen
contingencies. According to Keynes, people also store money to take advantage of the changes in
the rate of interest. Money as a store preserves value through time and space. Money as a store of
value through time means the shifting of purchasing power from the present to the future and as
such it serves as an important link between the present and the future. Money in this case is
stored as a form of „asset‟. Money is an asset or a form of wealth because it is a claim. It is the

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most convenient way of laying claim to such goods and services as one wishes to buy. Thus,
rather than keeping their wealth in the form of non-liquid assets like houses, shares, etc., people
prefer to keep their wealth in the form of money. Money is the most liquid of all assets i.e.,
money can be readily exchanged for goods and services without any difficulty and the price of
money or its value is stable at least over a short period. In fact, all assets like bonds, saving
accounts, treasury bills, government securities, inventories and real estate do serve as stores of
value, but they differ in the degree of liquidity; money amongst these possesses highest degree of
liquidity and that is why people prefer it most as a store of value.

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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).

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 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
https://pressbooks-dev.oer.hawaii.edu/principlesofeconomics/chapter/27-1-defining-money-by-
its-functions/
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-in-the-
modern-economy-an-introduction.pdf
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%7B%22context%22%3A%22archive_view_restricted%22%2C%22page%22%3A%22read
%22%2C%22action%22%3A%22download%22%2C%22logged_in%22%3Atrue%2C
%22platform%22%3A%22web%22%7D
https://ecoaim.in/2020/05/27/role-of-money-in-economic-development/
https://www.rbcroyalbank.com/en-ca/my-money-matters/money-academy/economics-101/
economics-for-beginners/what-is-money-and-how-does-it-drive-the-economy/

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https://www.rbcroyalbank.com/en-ca/my-money-matters/money-academy/economics-101/
economics-for-beginners/what-is-money-and-how-does-it-drive-the-economy/
https://www.britannica.com/money/how-to-invest-with-little-money
https://fastercapital.com/topics/the-role-of-money-in-the-economy.html
https://www.khanacademy.org/economics-finance-domain/microeconomics/basic-economic-
concepts-gen-micro/economic-systems/a/economic-systems-the-role-of-incentives-and-the-
circular-flow-model

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