Money - Wikipedia, the free encyclopedia http://en.wikipedia.

org/wiki/Money

Money
From Wikipedia, the free encyclopedia.

Money is any marketable good or token used by a society as a store of value, a medium of exchange, or a unit of account.
Money objects can meet some or all of these needs. Since the needs arise naturally, societies organically create a money
object when none exists. In other cases, a central authority creates a money object; this is more frequently the case in
modern societies with paper money.

Commodity money was the first form of money to emerge. Under a commodity money system, the object used as money
has inherent value. It is usually adopted to simplify transactions in a barter economy; thus it functions first as a medium of
exchange. It quickly begins functioning as a store of value, since holders of perishable goods can easily convert them into
durable money. In modern economies, commodity money has also been used as a unit of account. Gold-backed currency
notes are a common form of commodity money.

Fiat money is a relatively modern invention. A central authority creates a new money object that has minimal intrinsic
value. The public's use of the money exists only because the central authority mandates the money's acceptance under
penalty of law. In cases where the public loses faith in the fiat money, there is little a central authority can do to prevent
the adoption of other money objects by society.

Contents
1 Essential characteristics of money
2 Credit as money
3 Desirable features of money
4 Modern forms of money
5 Money and economics
6 History of money
6.1 Overview and etymology of the word
6.2 The emergence of money
6.3 Commodity money
6.4 Standardized coinage
6.5 Representative money
6.6 Fiat money
6.7 Credit money
7 Private currencies
8 Money supply
8.1 Growing the money supply
8.2 Shrinking the money supply (M3)
9 See also
10 External links

Essential characteristics of money

Money has the following three characteristics.

1. It must be a medium of exchange

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When an object is in demand primarily for its use in exchange -- for its ability to be used in trade to exchange for other
things -- then it has this property.

This characteristic allows money to be a standard of deferred payment, i.e., a tool for the payment of debt.

2. It must be a unit of account

When the value of a good is frequently used to measure or compare the value of other goods or where its value is used to
denominate debts then it is functioning as a unit of account.

A debt or an IOU can not serve as a unit of account because its value is specified by
comparison to some external reference value, some actual unit of account that may
be used for settlement.

For example, if in some culture people are inclined to measure the worth of things
with reference to goats then we would regard goats as the dominant unit of account
in that culture. For instance we may say that today a horse is worth 10 goats and a
good hut is worth 45 goats. We would also say that an IOU denominated in goats
would change value at much the same rate as real goats.
Money.
3. It must be a store of value

When an object is purchased primarily to store value for future trade then it is being used as a store of value. For example,
a sawmill might maintain an inventory of lumber that has market value. Likewise it might keep a cash box that has some
currency that holds market value. Both would represent a store of value because through trade they can be reliably
converted to other goods at some future date. Most non-perishable goods have this quality.

Many goods or tokens have some of the characteristics outlined above. However no good or token is money unless it can
satisfy all three criteria.

Credit as money
Credit is often loosely referred to as money. However credit only satisfies items one and three of the above "Essential
Characteristics of Money" criteria. Credit completely fails criterion number two. Hence to be strictly accurate credit is a
money substitute and not money proper.

This distinction between money and credit causes much confusion in discussions of monetary theory. In lay terms credit
and money are frequently used interchangeably. Even in economics credit is often referred to as money. For example bank
deposits are generally included in summations of the national broad money supply. However any detailed study of
monetary theory needs to recognize the proper distinction between money and credit.

The rest of this article frequently uses the term money in the looser sense of the word.

Desirable features of money

To function as money in a modern economy a good or token should possess a number of features:

It must have a stable value.

It must be difficult to counterfeit.
It must be easily divisible and transportable.
It must be fungible. That is, one artifact of the token or good must be equivalent to another.

Modern forms of money

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When using money anonymously, the most common methods are cash (either coin or banknotes) and stored-value cards.

When using money substitutes in such a way as to leave a financial record of the transaction, the most common methods
are checks, debit cards, credit cards, and digital cash.

Money and economics

Money is one of the most central topics studied in economics and forms its most cogent link to finance.

The amount of money in an economy directly affects inflation and interest rates and hence has profound effects. A
monetary crisis can have very significant economic effects, particularly if it leads to monetary failure and the adoption of
a much less efficient barter economy. This happened in Russia (for instance) during the 1990s.

Modern economics also faces a difficulty in deciding what exactly 'is' money. See money supply.

There have been many historical arguments 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. These arguments are covered in financial capital
which is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized
tender.

History of money
Overview and etymology of the word

Money itself must be a scarce good. Many items have been used as money, from naturally scarce precious metals and
conch shells through cigarettes to entirely artificial money such as banknotes.

Modern money (and most ancient money too) is essentially a token -- an abstraction. Paper currency is perhaps the most
common type of physical money today. However, goods such as gold or silver retain many of the essential properties of
money.

The origin of the word "money" comes from the Latin word "moneta", which comes from the temple of Hera the Moneta
where the Roman money came from, in the early days of Rome.

In Greek language, "Hera Mone tas" means the lonely Hera ("Mone tas" in Doric Greek, "Mone tes" in Ionic dialect).
Zeus, once upon a time, punished Hera and tied her with a golden chain between earth and sky. Hera, because she was
alone between sky and earth tied with gold, was called moneres or mone (µόνη) which means lonely, and this is where the
word money comes from. Hera, with the help of Hephaestus, broke the golden chain and released herself. It is said that all
gold found on earth (which forms approximately a single cube 20 m a side) originates from the fragments of this golden
chain, which fall from the sky and became human's mone(y).

Maybe due to this fable, gold was used in ancient Greece only in temples, graves and jewels and there is not any ancient
Greek golden coin, until the days around 390 BC, when the Greek king Philip II of Macedon coined golden coins. The
first golden coins in history were coined by Lydian king Croesus , around 560 BC. The first Greek coins were made
initially of copper, then of iron and this is because copper and iron were powerful materials used to make weapons.
Pheidon king of Argos, around 700 BC, changed the coins from iron to a rather useless and ornamental metal, silver, and,
according to Aristotle, dedicated some of the remaining iron coins (which were actually iron sticks) to the temple of
Hera[1] (http://www.metrum.org/money/heraion.htm) . King Pheidon coined the silver coins at Aegina, at the temple of
the goddess of wisdom and war Athena the Aphaia (the vanisher), and engraved the coins with a Chelone, which is used
until nowdays as a symbol of capitalism. Chelone coins[2] (http://www.snible.org/coins/hn/aegina.html) were the first
medium of exchange that was not backed by a real value good. They were widely accepted and used as the international
medium of exchange until the days of Peloponnesian_War, when the Athenian Drachma replace them. According other
fables, inventors of money were Demodike(or Hermodike) of Kyme (the wife of Midas), Lykos (son of Pandion II and
ancestor of the Lycians) and Erichthonius, the Lydians or the Naxians.

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The word money in Greek language is not µόνη (money), it is νόµισµα (nomisma or numisma) which derives from the
word νοµίζω (nomizo=putative,I think so,I suppose so) and from the word νόµος (nomos=law). So numisma gives the
exact meaning and definition of mone(y). It is something we think it has value, or something that someone convinced us it
has, but in reality it has not. Also, in case we are not convinced that mone(y) has value and we do not recognize the
mone(y) maker authority, mone(y) is also something that we are enforced by law to use it as the unique medium of
exchange in trades. In case an individual or a community refuses to accept mone(y) as the unique medium of exchange,
then the powerful mone(y) maker authority, using violence and the taxes procedure, steals the real value goods
(home,food,transport,energy) that the individual or the community owns. Thats why many individuals or communities
hide their goods from mone(y)-maker authorities. The crime of hiding goods from a mone(y)-maker authority is called tax
evasion.

One of the words for money in the Hebrew language is mammon. Mammon does have more than one meaning depending
on its linguistic and etymological contexts. The Hebrew and Christian Bible gives the word mammon a broader context in
terms of its socioeconomic,cultural,and theological usages. Mammon, a word of Aramaic origin, means "riches", but has
an unclear etymology; scholars have suggested connections with a word meaning "entrusted", or with the Hebrew word
"matmon", meaning "treasure". It is also used in Hebrew as a word for "money" - ‫ממון‬. The Greek word for "Mammon",
mamonas, occurs in the Sermon on the Mount (Matthew vi 24) and in the parable of the Unjust Steward (Luke xvi 9-13).
The Authorised Version keeps the Syriac word. Wycliffe uses "richessis". Other scholars derive Mammon from
Phoenician "mommon", benefit. An interesting notice is that if you consider the word mammon(as) (µαµωνᾶς) as a Greek
word and as a composite one (the majority of Greek words are composites), then the two parts "mam-mon(as)" could be
explained (in Greek doric) as "lonely mother", which reminds Hera's myth mentioned above. Other explanations could be
mamm(means "mother" or "food")-onas(means "a place where you can find mamm"), also mam(means "mother" or
"food")-m(means "with")-on(means "being")-as(with Circumflex, means "owner or seller").

" He who has an ear, let him hear what the Spirit says to the churches. To him who overcomes, I will give some of the
hidden manna. I will also give him a white vote with a new name written on it, known only to him who receives it."(Book
of Revelation 2:17). According to the Book of Revelation, the mark of the beast seems to be a form of money. "And he
causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their
foreheads: And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his
name.Here is wisdom. Let him that hath understanding vote the number of the beast: for it is the number of a man; and
his(its) number is Six hundred threescore and six." (Book of Revelation 13:16-13:18)

The emergence of money

The use of proto-money may date back to at least 75,000 B.P.,

when shell necklaces were made in Blombos Cave in South
Africa. These necklaces would have provided the basic attributes
needed of early money. In cultures where metal working was
unknown, shell or ivory jewelry were the most divisible, easily
storable and transportable, scarce, and hard to counterfeit objects
that could be made. It is highly unlikely that there were formal
markets in 75,000 B.P. (any more than there are in recently
observed hunter-gatherer cultures). Nevertheless, proto-money
would have been useful in reducing the costs of less frequent
transactions that were crucial to hunter-gatherer cultures,
especially bride purchase, splitting property upon death, tribute,
Shells of the pea-sized snail Nassarius kraussianus.
and intertribal trade in hunting ground rights (“starvation Blombos Cave, South Africa, 75,000 B.P. Wear marks
insurance”) and implements. In the absence of a medium of indicate the shells were strung on a necklace.
exchange, all of these transactions suffer from the basic problem
of barter -- they require an improbable coincidence of wants or
events.

In cultures of any era that lack money, barter and some system of in-kind "credit" or "gift exchange" would be the only
ways to exchange goods. Bartering has several problems, most notably timing constraints. If you wish to trade fruit for

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wheat, you can only do this when the fruit and wheat are both available at the same time and place. That may be a very
brief time, or it may be never. With an intermediate commodity (whether it be shells, rum, gold, etc.) you can sell your
fruit when it is ripe and take the intermediate commodity. You can then use the intermediate commodity to buy wheat
when the wheat harvest comes in. Thus the use of money makes all commodities become more liquid.

Where trade is common, barter systems usually lead quite rapidly to the emergence of several key goods with monetary
properties. In the early British colony of New South Wales in Australia, rum emerged quite soon after settlement as the
most monetary of goods. When a nation is without a fiat currency system it is quite common for the fiat currency of a
neighbouring nation to emerge as the dominant monetary good. In some prisons where conventional money is prohibited
it is quite common for goods such as cigarettes to take on a monetary quality. Gold has emerged naturally from the world
of barter again and again to take on a monetary function. It should be noted that the emergence of monetary goods is not
dependent on central authority or government. It is a quite natural market phenomenon.

Commodity money

The first instances of money were objects which were useful for their intrinsic value. This
was known as commodity money and included any commonly-available commodity that
has intrinsic value; historical examples include pigs, rare seashells, whale's teeth, and
(often) cattle. In medieval Iraq, bread was used as an early form of currency.

Spices have been used as commodity money for long. Definite indications are available that
both black and white pepper have been used as commodity money for hundreds of years
before Christ, as also several centuries thereafter. Being a valuable commodity, pepper has
naturally been used as payment. Attila the Hun reportedly demanded 3,000 pounds in
weight of pepper in 408 AD as part of a ransom for the city of Rome. In the Middle Ages,
there was a French saying, 'As dear as pepper'. In England, rent could be paid in pounds of
pepper, and so a symbolic minimal amount is known as a "peppercorn rent".

Even in the industrialised world, in the absence of other types of money, people have Precious metals have been a
occasionally used commodities such as tobacco as money. This last happened on a wide common form of money,
such as this gold from
scale after World War II when cigarettes became used unofficially in Europe, in parallel Sveriges Riksbank.
with other currencies, for a short time.

Another example of "commodity money" is shell money in the Solomon Islands. Shells are
painstakingly chipped into rough circles, filed down, and threaded onto large necklaces, which are then used during
marriage proposals; for instance, a father may charge twenty shell money necklaces for his daughter's hand in marriage.

One interesting example of commodity money is the huge limestone coins from the Micronesian island of Yap, quarried at
great peril from a source several hundred miles away. The value of the coin was determined by its size — the largest of
which could range from nine to twelve feet in diameter and weigh several tons. Displaying a large coin, often outside
one's home, was a considerable status symbol and source of prestige in that society. (Due to the great inconvenience,
islanders would often trade only promises of ownership of an individual coin instead of actually moving it. In some cases,
coins which had been lost at sea were still used for exchange in this way. These agreements could be thought of as a kind
of representative money, described below.)

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Once a commodity becomes used as money, it takes on a value that is often a bit
different from what the commodity is intrinsically worth or useful for. Being able to use
something as money in a society adds an extra use to it, and so adds value to it. This
extra use is a convention of society, and how extensive the use of money is within the
society will affect the value of the monetary commodity. So although commodity money
is real, it should not be seen as having a fixed value in absolute terms. Its value is still
socially determined to a large extent. A prime example is gold, which has been valued
differently by many different societies, but perhaps none valued it more than those who
An 8-foot "coin" from the used it as money. Fluctuations in the value of commodity money can be strongly
village of Gachpar, on Yap. influenced by supply and demand whether current or predicted (if a local gold mine is
about to run out of ore, the relative market value of gold may go up in anticipation of a
shortage).

Money can be anything that the parties agree is tradable, but the usability of a particular sort of money varies widely.
Desirable features of a good basis for money include being able to be stored for long periods of time, dense so it can be
carried around easily, and difficult to find on its own so that it is actually worth something. Again, supply and demand
play a key role in determining value.

Metals like gold and silver have been used as commodity money for thousands of years, being in the form of metal dust,
nuggets, rings, bracelets and assorted pieces. Eventually the Lydians began coining gold and silver around 560 BC.

Gold and silver are both quite soft metals, and coins minted from the pure metals suffer from wear or deformation in daily
use. Fortunately these metals are also easily alloyed with a less expensive metal, frequently copper, in order to improve
the durability of the resulting coins. Typically alloys of coinage metals, such as sterling silver or 22 carat (92%) gold, are
used to make coins more durable. These are alloys of 90% or more precious metal as alloys of less than 90% do not
improve hardness or durability very much, and so are typically considered to be on the slippery slope into monetary
debasement.

Standardized coinage

It was the discovery of the touchstone that paved the way for metal-based
commodity money and coinage. Any soft metal can be tested for purity on a
touchstone, allowing one to quickly calculate the total content of a particular metal
in a lump. Gold is a soft metal, which is also hard to come by, dense, and storable.
For these reasons gold as a money spread very quickly from Asia Minor where it
first gained wide use, to the entire world.

Using such a system still required several steps and some math. The touchstone
allowed you to estimate the amount of gold in an alloy, which was then multiplied
by the weight to find the amount of gold alone in a lump.

To make this process easier, the concept of standard coinage was introduced. Coins A Roman denarius, a standardized
were pre-weighed and pre-alloyed, so as long as you were aware of the origin of silver coin.
the coin, no use of the touchstone was required. Coins were typically minted by
governments in a carefully protected process, and then stamped with an emblem
that guaranteed the weight and value of the metal. It was however extremely common for governments to assert that the
value of such money lay in its emblem and to subsequently debase the currency by lowering the content of valuable metal.

Although gold and silver were commonly used to mint coins, other metals could be used. Ancient Sparta minted coins
from iron to discourage its citizens from engaging in foreign trade. In the early seventeenth century Sweden lacked more
precious metal and so produced "plate money," which were large slabs of copper approximately 50cm or more in length
and width, appropriately stamped with indications of their value.

Metal based coins had the advantage of carrying their value within the coins themselves — they induced on the other hand
manipulations: the clipping of coins in attempts to get and recycle the precious metal. The bigger problem was the simple

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co-existence of gold, silver and copper coins in Europe's nations. English and Spanish traders valued gold coins at a
higher rate of silver coins than their neighbours would do, with the effect that the English gold-based guinea coin began to
rise against the English silver based crown in the 1670s and 1680s and with the consequence that silver was ultimately
pulled out of England for dubious amounts of gold coming into the country at a rate no other European nation would
share. The effect was worsened with Asian traders not sharing the European appreciation of gold altogether — gold left
Asia and silver left Europe in quantities European observers like
[http://www.pierre-marteau.com/currency/ed/newton-1717-09-25.html; Isaac Newton, Master of the Royal Mint observed
with uneasiness].

Stability came into the system with national Banks guaranteeing to change money into gold at a promised rate, it did,
however, not come easily. The Bank of England risked a national financial catastrophe in the 1730s when customers
demanded their money to be changed into gold in a moment of crisis. Eventually London's merchants saved the bank and
the nation with financial guarantees.

See also: Roman currency, coinage metal, for conversions of the European coins before the introduction of paper money:
The Marteau Early 18th-Century Currency Converter (http://www.pierre-marteau.com/currency/converter.html) .

Representative money

The system of commodity money in many instances evolved into

a system of representative money. In this system, the material that
constitutes the money itself had very little intrinsic value, but
none the less such money achieves significant market value
through being scarce as an artifact.

Paper currency and non-precious coinage was backed by a

government or bank's promise to redeem it for a given weight of
precious metal, such as silver. This is the origin of the term An example of representative money, this 1896 note
"British Pound" for instance; it was a unit of money backed by a could be exchanged for five US Dollars worth of silver.
Tower pound of sterling silver - hence the currency Pound
Sterling.

For much of the nineteenth and twentieth centuries, many currencies were based on representative money through the use
of the gold standard.

Fiat money

Fiat money refers to money that is not backed by reserves of another commodity. The
money itself is given value by government fiat (Latin for "let it be done") or decree,
enforcing legal tender laws, previously known as "forced tender", whereby debtors are
legally relieved of the debt if they (offer to) pay it off in the government's money. By law
the refusal of "legal tender" money in favor of some other form of payment is illegal, and
has at times in history (Rome under Diocletian, and post-revolutionary France during the
collapse of the assignats) invoked the death penalty.

Governments through history have often switched to forms of fiat money in times of need
such as war, sometimes by suspending the service they provided of exchanging their money
An example of fiat money
for gold, and other times by simply printing the money that they needed. When is the new, international
governments produce money more rapidly than economic growth, the money supply currency, the Euro. Its
overtakes economic value. Therefore, the excess money eventually dilutes the market value introduction changed the
of all money issued. This is called inflation. See open market operations. face of money, superseding
many of the world's oldest
In 1971 the US finally switched to fiat money indefinitely. At this point in time many of currencies.
the economically developed countries' currencies were fixed to the US dollar (see Bretton
Woods Conference), and so this single step meant that much of the western world's

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currencies became fiat money based.

Following the first Gulf War the president of Iraq, Saddam Hussein, repealed the existing Iraqi fiat currency and replaced
it with a new currency. However, the old currency continued to be used in the politically isolated Kurdish regions of Iraq.
Despite having no backing by a commodity and with no central authority mandating its use or defending its value it
continued to circulate within this Kurdish region. It became known as the Swiss Dinar. This currency remained relatively
strong and stable for over a decade. It was formally replaced following the second Gulf War.

Credit money

Credit money often exists in parallel with other money such as fiat money or commodity money, and from the user's point
of view is indistinguishable from it. Most of the western world's money is credit money derived from national fiat money
currencies.

Strictly speaking a debt is not money, primarily because debt can not act as a unit of account. All debts are denominated
in units of something external to the debt. Hence credit money is not strictly money at all. However, credit money
certainly acts as a money substitute when it comes to the other functions of money (medium of exchange and store of
value). As such the existence of credit money may dampen demand for the real money and in so doing alter the dynamics
of money's market value.

When paper money is merely an IOU for something such as gold, then the paper itself is not a unit of account but merely a
convenient medium of exchange. Under a rigid gold-standard with convertibility, paper currency is merely a debt
instrument. However, when paper money floats, its value is not defined by reference to an external unit of account. It is no
longer a debt instrument but rather it becomes purely monetary and its value is a product of the dynamics of supply and
demand. Typically a central bank forces supply and the private sector forces demand. See open market operations.

Credit money tends to arise as a byproduct of lending and borrowing money. The following example illustrates this.

Imagine you have deposited some gold coins in a bank vault. The bank might lend the coins to a second person based on a
promise to pay equivalent coins back with a few extra at a time in the future. The second person can in the meantime use
the coins normally as money. But you still own the coins, and you also could still use them - you could transfer their
ownership to another person to pay for something you have bought by telling the bank to transfer them from your account
to the other person's account. You might do this by writing a check. So in this simple example there are two people using
the same coins as money at the same time. It's as if new money has been created by the act of lending. Taking it another
step, if the second person spends the coins at a shop, and they end up being deposited back into the bank by the
shopkeeper, the bank can lend them again. Now you and the shopkeeper can use the coins in the same way, by writing
checks or the equivalent in this example, and whoever borrows the coins a second time can use the coins directly as
money. So there are three people with financial use of the coins. This can go on with many people ending up
simultaneously using the same coins financially, but for each extra user there is a promise to pay equivalent coins back.
These arrangements where many people use the same money simultaneously are in many respects the same as if there was
extra money. The extra money that there appears to be is known as credit money. It is in regulating the amount of money a
bank can lend that the controlling authority can set the money supply and change monetary policy. The credible promises
to repay in a reasonable time give the extra money its value. It tends to exist in parallel with another form of money such
as fiat money or commodity money, wherever banking-style loans are used, and occurs as a by-product of lending. It
could occur without banks, but banks provide a degree of stability to the whole process by taking and evaluating the risk
involved in each loan.

During the Crusades in Europe, precious goods would be entrusted to the Catholic Church's Knights Templar, who
effectively created a system of modern credit accounts. Over time this system grew into the credit money that we know
today, where banks create money by approving loans - although the risk and reserve policies of each national central bank
sets a limit on this, requiring banks to keep reserves of fiat money to back their deposits. Sometimes, as in the U.S.A.
during the Great Depression or the Savings and Loan crisis, trust in bank policies drops very low and government must
intervene to keep the industry of credit in operation.

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Private currencies
In many countries, the issue of private paper currencies has been severely restricted by law.

In the United States, the Free Banking Era lasted between 1837
and 1866, during which almost anyone could issue their own
paper money. States, municipalities, private banks, railroad and
construction companies, stores, restaurants, churches and
individuals printed an estimated 8,000 different monies by 1860.
If the issuer went bankrupt, closed, left town, or otherwise went
out of business the note would be worthless. Such organizations
earned the nickname of "wildcat banks" for a reputation of
unreliability and that they were often situated in far-off,
unpopulated locales that were said to be more apt to wildcats than A private $1 note, issued by the "Delaware Bridge
Company" of New Jersey 1836-1841.
people. On the other hand, according to Lawrence H. White's
article in FEE (http://www.fee.org/vnews.php?nid=2794) "it turns
out that “wildcat” banking is largely a myth. Although stories about crooked banking practices are entertaining—and for
that reason have been repeated endlessly by textbooks—modern economic historians have found that there were in fact
very few banks that fit any reasonable definition of wildcat bank." The National Bank Act of 1863 ended the "wildcat
bank" period.

In Australia, the Notes Act of 1910 basically shut down the circulation of private currencies by imposing a prohibitive tax
on the practice. Many other nations have similar such policies that eliminate private sector competition. In Scotland and
Northern Ireland private sector banks are licensed to print their own paper money by the government.

Today there are several privately issued digital currencies in circulation that function as money. Transactions in these
currencies represent an annual turnover value in billions of US dollars. Many of these private currencies are backed by
older forms of money such as gold (digital gold currencies). Of course, because money is the fruit of power and can be
used for wielding or gaining more power, the one who accepts gold as legitimate money gives power to the people who
own gold's stocks. In the other hand gold is stable over thousands of years and has survived the test of time. All the other
materials have become less important as gold has proved itself the superior unit of account. Basically, price fluctuations of
gold are not because the value of gold has changed, but because the value of the currency has changed. The same happens
with some other materials, like food or energy or transport or accommodation. A plate of food has always the same value,
whatever its price is.

It is possible for privately issued money to be backed by any other material, although some people argue about perishables
materials. After all, gold, or platinum, or silver, have in some regards less utility than previously (their electrical
properties notwithstanding), while currency backed by energy (measured in joules) or by transport (measured in
kilogramme*kilometre/hour) or by food [3]
(http://www.economist.com/markets/bigmac/displayStory.cfm?story_id=3503641) is also possible and may be accepted
by the people, if legalised. It is important to understand though that, as long as money is above all an agreement to use
something as a medium of exchange, its up to the community (or to the minority which holds the power) to decide
whether money should be backed by whatever material or should be totally virtual.

Money supply
Main article: Money supply

The money supply is the amount of money available within a specific economy available for purchasing goods or
services. The supply is usually considered as four escalating categories M0, M1, M2 and M3. The categories grow in size
with M3 representing all forms of money (including credit) and M0 being just base money (coins, bills, and central bank
deposits). M0 is also money that can satisfy private banks' reserve requirements. In the United States, the Federal Reserve
is responsible for controlling the money supply (monetary policy).

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Growing the money supply

Historically money was a metal (gold, silver, etc,) or other object that was difficult to duplicate, but easy to transport and
divide. Later it consisted of paper notes, now issued by all modern governments. With the rise of modern industrial
capitalism it has gone through several phases including but not limited to:

1. Bank notes - paper issued by banks as an interest-bearing loan. (These were common in the 19th century but not
seen anymore.)
2. Paper notes, coins with varying amounts of precious metal (usually called legal tender) issued by various
governments. There is also a near-money in the form of interest bearing bonds issued by governments with solid
credit ratings.
3. Bank credit through the creation of chequable deposits in the granting of various loans to business, government and
individuals. (It is critical that we understand that when a bank makes a loan, that is new money and when a loan is
paid off that money is destroyed. Only the interest paid on it remains.)

Thus, all debt denominated in dollars -- mortgages, money markets, credit card debt, travelers checks -- is money.
However, the creation of dollar-denominated debt (or any generic obligation) only creates money when a financial
institution is granting the debt). Thus money is the medium of exchange and unit of account.

Shrinking the money supply (M3)

Perhaps the most obvious way money can be destroyed is if paper bills are burned or taken out of circulation by the
central bank. But, it should be remembered that legal tender usually constitutes less than 4% of the broad money supply.

Another way money can be destroyed is when any bank loan is paid off or defaulted upon or any government bond is
redeemed the money value of the contract or bond is destroyed — taken out of circulation.

Money can be destroyed if savers withdraw funds from a bank, in which case that money can no longer be used for
lending. Bank savings are actually a kind of loans — savers loan their money to a bank at a low interest rate or merely in
exchange for the benefit of convenience or its security (accepting that they lose a small amount of value to inflation). The
bank then uses this loan to loan to other people, at a higher rate of interest (so it can make a profit). When this happens the
money exists in two (or more) places at once, and so the money supply increases. When a saver withdraws money, the
loan is "paid off" and it can no longer exist in more than one place at once, and this "double money" disappears.

In extreme forms, a bank run or panic may drive a bank into insolvency and, if uninsured, the savings of all its depositors
are lost. Such bank failures were a major cause of the tremendous contraction in the money supply that occurred during
the Great Depression, particularly in the United States. In that country many banking reforms were subsequently enacted
during the New Deal, including the creation of the Federal Deposit Insurance Corporation to guarantee private bank
deposits.

See also
Currency - The dominant coins and bills used within a particular country or trade region
Standard of deferred payment
Numismatics - Collection and study of money
Currency market
Local Exchange Trading Systems
Electronic money
List of finance topics
Coin of account
Federal Reserve
Social construction
Euro

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External links
The Theory of Money and Credit (http://www.econlib.org/library/Mises/msTContents.html)
The Mystery of Banking (http://www.mises.org/mysteryofbanking/mysteryofbanking.pdf)
History of Money from Ancient Times to the Present Day (http://www.ex.ac.uk/~RDavies/arian/llyfr.html) by Glyn
Davies
Shelling Out: The Origins of Money (http://szabo.best.vwh.net/shell.html)
Shell Beads from South African Cave Show Modern Human Behavior 75,000 Years Ago
(http://www.nsf.gov/news/news_summ.jsp?cntn_id=100362&org=NSF)
Money Museum at the Federal Reserve Bank of Richmond (http://www.rich.frb.org/econed/museum/)
A large collection of links (http://www.ex.ac.uk/~RDavies/arian/money.html)
Money Management (http://www.dmoz.org/Home/Personal_Finance/Money_Management/)
Philosophy of Money (http://www.bu.edu/wcp/Papers/Econ/EconShep.htm) by Alla Sheptun
Money is a Failed System (http://metamind.us/members/s/stevemoyer/email/1075695203.htm) by Steve Moyer
SALT and the Evolution of money (http://salt.org.il/money.html)
Community Exchange Systems in Asia, Africa and Latin America (http://www.appropriate-economics.org)
Rethinking and Transforming Money (http://www.seek2know.net/money.html)
How much is that worth today? (http://www.eh.net/ehresources/howmuch/poundq.php) - Comparing the
purchasing power of money in Britain from 1600 to any other year up to 2002.
Monetary Systems and Managed Economies (http://www.benbest.com/polecon/monetary.html)
Federal Reserve Bank of Chicago: Modern Money Mechanics - A Workbook on Bank Reserves and Deposit
Expansion (http://landru.i-link-2.net/monques/mmm2.html)
Understanding Capitalism Part II: Personal Property, Money and Finance
(http://www.rationalrevolution.net/articles/capitalism_property.htm)
UnitedDiversity Money Page (http://ud.lir.be/money)
The History of Money (http://www.xat.org/xat/moneyhistory.html)
Banking Without Regulation (http://www.fee.org/vnews.php?nid=2794)
e-hamburgers (http://www.kuro5hin.org/story/2003/8/2/203846/0944)
From legal tender to virtual vouchers. Past, present and possible future of money
(http://www.polyarchy.org/paradigm/english/money.html)
[4] (http://www.banknotes.com)
Popular History of Money FAQs (http://www.galmarley.com)
The official money fanlisting (http://money.fanatique.net/)

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Categories: Money | Numismatics

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