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. In Money and the Mechanism of ExchangeWilliam Stanley Jevons famously analyzed money in terms of four functions: Usury is a different form of abuse, where the lender charges excessive interest. Medieval trade in the Mediterranean world: This economic phenomenon was a slow and gradual process that took place from the late Tang dynasty — into the Song dynasty — Retrieved May 11, Archived from the original on May 23,
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For other uses, see Loan disambiguation. Accounting Audit Capital budgeting. Risk management Financial statement. Structured finance Venture capital. Government spending Final consumption expenditure Operations Redistribution. Central bank Deposit account Fractional-reserve banking Loan Money supply. Private equity and venture capital Recession Stock market bubble Stock market crash Accounting scandals. Retrieved May 11, Retrieved 7 Mar The Financial Express India. Archived from the original on Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Ed.
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It is necessary for developing efficient accounting systems. While standard of deferred payment is distinguished by some texts,  particularly older ones, other texts subsume this under other functions.
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. To act as a store of value , a money must be able to be reliably saved, stored, and retrieved — and be predictably usable as a medium of exchange when it is retrieved.
The value of the money must also remain stable over time. Some have argued that inflation, by reducing the value of money, diminishes the ability of the money to function as a store of value. To fulfill its various functions, money must have certain properties: In economics, money is a broad term that refers to any financial instrument that can fulfil 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.
Modern monetary theory distinguishes among different ways to measure the money supply, reflected in different types of monetary aggregates, using a categorization system that focuses on the liquidity of the financial instrument used as money. The most commonly used monetary aggregates or types of money are conventionally designated M1, M2 and M3.
These are successively larger aggregate categories: M1 includes only the most liquid financial instruments, and M3 relatively illiquid instruments.
The precise definition of M1, M2 etc. Another measure of money, M0, is also used; unlike the other measures, it does not represent actual purchasing power by firms and households in the economy.
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.
Legal tender , or narrow money M0 is the cash money created by a Central Bank by minting coins and printing banknotes. Currently, bank money is created as electronic money. 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.
Money is the most liquid asset because it is universally recognised and accepted as the common currency. In this way, money gives consumers the freedom to trade goods and services easily without having to barter. Liquid financial instruments are easily tradable and have low transaction costs. There should be no or minimal spread between the prices to buy and sell the instrument being used as money. 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 s. Many items have been used as commodity money such as naturally scarce precious metals , conch shells , barley , beads etc.
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. 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. In , 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 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 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.
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.
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. These factors led to the shift of the store of value being the metal itself: 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: 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.
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 , commonly known today as banknotes. This economic phenomenon was a slow and gradual process that took place from the late Tang dynasty — into the Song dynasty — 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 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.
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 Muslim economists, traders and merchants include the earliest uses of credit ,  cheques , promissory notes ,  savings accounts , transactional accounts , loaning, trusts , exchange rates , the transfer of credit and debt ,  and banking institutions for loans and deposits. In Europe, paper money was first introduced in Sweden in 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 enabled the sale of stock in joint stock companies , and the redemption of those shares in paper. However, these advantages held within them 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.
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