Money
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.
For other uses, see Money (disambiguation).
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 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]
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,[49] or indirectly via a fixed exchange rate system against a major currency with a stable inflation rate.[50] 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."[51]
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.[52] Some of the tools used to conduct contemporary monetary policy include:[53]
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[54] supported by the work of David Laidler,[55] 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 cental 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.[56]
