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Money is anthing that is generally accepted as payment for goods and services and repayment of debts. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value, and occasionally, a standard of deferred payment.
Types of money[edit | edit source]
Money is an abstraction, idea or concept, the confidence upon which rests the value of the physical banknote or coins that are carried and traded. Currently, most modern monetary systems are based on fiat money. However, for most of history, almost all money was commodity money, such as gold and silver coins. As economies developed, commodity money was eventually replaced by representative money, such as the gold standard, as traders found the physical transportation of gold and silver burdensome. Fiat currencies gradually took over in the last hundred years, especially since the breakup of the Bretton Woods system in the early 1970s.
Commodity money[edit | edit source]
- Main article: Commodity money
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. Examples of commodities that have been used as mediums of exchange include gold, silver, copper, rice, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, etc. These items were sometimes used in a metric of perceived value in conjunction to one another, in various commodity valuation or Price System economies. Use of commodity money is similar to barter, but a commodity money provides a simple and automatic unit of account for the commodity which is being used as money. Although some gold coins such as the Krugerrand are considered legal tender, there is no record of their face value on either side of the coin. The rationale for this is that emphasis is laid on their direct link to the prevailing value of their fine gold content. American Eagles are imprinted with their gold content and legal tender face value.
Representative money[edit | edit source]
- Main article: Representative money
In 1875 economist William Stanley Jevons described what he called "representative money," i.e., money that consists of token coins, or other physical tokens such as certificates, that can be reliably exchanged for a fixed quantity of a commodity such as gold or silver. The value of representative money stands in direct and fixed relation to the commodity that backs it, while not itself being composed of that commodity.
Fiat money[edit | edit source]
- Main article: Fiat money
Fiat money or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order (fiat). Usually, the government declares the fiat currency (typically notes and coins from a central bank, such as the Federal Reserve System in the U.S.) to be legal tender, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private.
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).
As tokens, the fiat money the value of coins or paper money, depends on the psychology of confidence, as since coming off the gold standard, most countries do not have enough physical gold reserves to repay bearers if they all decided to cash in their money tokens at once. This being so the value of money is essentially a psychological issue.
See also[edit | edit source]
- Behavioral finance
- Cost containment
- Costs and cost analysis
- Equity (payment)
- Extrinsic value
- Monetary incentives
- Monetary rewards
- Professional fees
- Resource allocation
References[edit | edit source]
- Mishkin, Frederic S. (2007). The Economics of Money, Banking, and Financial Markets (Alternate Edition), Boston: Addison Wesley.
- What Is Money? By John N. Smithin  Retrieved July-17-09
- Mankiw, N. Gregory (2007). "2" Macroeconomics, 6th, 22–32, New York: Worth Publishers.
- T.H. Greco. Money: Understanding and Creating Alternatives to Legal Tender, White River Junction, Vt: Chelsea Green Publishing (2001). ISBN 1-890132-37-3
- Mises, Ludwig von. The Theory of Money and Credit, (Indianapolis, IN: Liberty Fund, Inc., 1981), trans. H. E. Batson. Available online here ; accessed 9 May 2007; Part One: The Nature of Money, Chapter 3: The Various Kinds of Money, Section 3: Commodity Money, Credit Money, and Fiat Money, Paragraph 25.
- http://www.randrefinery.com/products_krugerrands.htm Retrieved July-18-09
- http://www.usmint.gov/mint_programs/american_eagles/index.cfm?flash=no&action=American_Eagle_Gold Retrieved July-18-09
- Jevons, William Stanley (1875). "XVI: Representative Money" Money and the Mechanism of Exchange. URL accessed 2009-06-28.
- Deardorff, Prof. Alan V. (2008). Deardorff's Glossary of International Economics. Department of Economics, University of Michigan. URL accessed on 2008-07-12.
- Black, Henry Campbell (1910). "A Law Dictionary Containing Definitions Of The Terms And Phrases Of American And English Jurisprudence, Ancient And Modern", page 494. West Publishing Co. Black’s Law Dictionary defines the word "fiat" to mean "a short order or warrant of a Judge or magistrate directing some act to be done; an authority issuing from some competent source for the doing of some legal act"
- includeonly>Tom Bethell. "Crazy as a Gold Bug", 'New York', New York Media, 1980-02-04, p. 34. Retrieved July-18-09