Money is defined in the Merriam Webster’s Collegiate Dictionary Tenth Addition as a “means of exchange.” Money is any tangible object or verifiable account that usually is accepted as payment of debts and payment of goods and services by some nation or society and payment of taxes, including social taxes, in some specific jurisdiction. In law, money is defined as debt obligation secured by the assets of a nation or society. The concept of money may be associated with the very concept of wealth, where a person has or possesses some asset that is legal or equitable in value and usually held as a means of assurance for future transactions or expected returns.
Money is most commonly defined as a negotiable abstract or legal token used as legal tender to pay the debts of individuals, nations, and institutions. Historically, money was often created out of raw land or other assets of particular value. Money, therefore, often represents ownership of something that historically increases in value. Fiat money, which is not a product of human labor but rather a commodity that depreciates in value without the intervention of an actual body of work, is the standard form of money in most modern societies. In contrast, fiat currencies are generally not backed up by any commodity.
Fiat money typically is issued by governments through the process of printing and debiting the various banks. It generally is created through the authority of the national government through the use of a central bank. Fiat money is in many different forms such as Federalist Paper, First Bank Notes, State Notes, Security Exchange Stamps, Debt Loans, Bills of Exchange, and Trusteeships.
Among the three functions of the national central bank, the most important is to serve as a lender of last resort in cases of financial crisis or inflation. Other important functions of the central bank are to control interest rates, regulate banking, and provide stabilization to an economy. The two other main functions of the central bank are to control the supply of and the demand for money. The supply of money normally is determined by the needs of the society as a whole in relation to its income and the total income of the national economy.
Within the scope of its powers, the central banks normally set the rate of interest, intervene in the financial system to take precautionary measures, and to determine appropriate programs for combating inflation. In terms of the supply of money, the power of the central bank over the supply of money is quite limited. Through the process of printing fiat money, the central banks can undertake to create money, which they believe will ultimately be useful for their citizens. This process, however, is accompanied by some dangers, such as inflation. Inflation, which may reach as high as 10% per year, is usually associated with the hyperinflation of the former classical period.
The third main function of money is to act as a representative money of a country in international trade. Through the use of various forms of fiat money, nations facilitate trade between each other on the world market. Many nations, for example, use the US dollar as a common currency, though many others use the European Central Bank as their official representative money. In this economic lowdown series, we will look at some of the most important types of money in modern society.