pecuniary adj : relating to or involving money; "monetary rewards"; "he received thanks but no pecuniary compensation for his services" [syn: monetary]

English

Etymology

From pecunia.

Pronunciation

Adjective

1. Of, or relating to, money; monetary.

   a pecuniary penalty

   a pecuniary reward

Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value. Some authors explicitly require money to be a standard of deferred payment.

Money includes both currency, particularly the many circulating currencies with legal tender status, and various forms of financial deposit accounts, such as demand deposits, savings accounts, and certificates of deposit. In modern economies, currency is the smallest component of the money supply.

Money is not the same as real value, the latter being the basic element in economics. Money is central to the study of economics and forms its most cogent link to finance. The absence of money causes a market economy to be inefficient because it requires a coincidence of wants between traders, and an agreement that these needs are of equal value, before a barter exchange can occur. The use of money is thought to encourage trade and the division of labour.

Economic characteristics

Money is generally considered to have the following characteristics, which are summed up in a rhyme found in older economics textbooks: "Money is a matter of functions four, a medium, a measure, a standard, a store." That is, money functions as a medium of exchange, a unit of account, and a store of value.

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. One of these arguments is that the role of money as a medium of exchange is in conflict with its role as a store of value: its role as a store of value requires holding it without spending, whereas its role as a medium of exchange requires it to circulate. Credit money differs from commodity and fiat money in two ways: It is not payable on demand (although in the case of fiat money, "demand payment" is a purely symbolic act since all that can be demanded is other types of fiat currency) and there is some element of risk that the real value upon fulfillment of the claim will not be equal to real value expected at the time of purchase.

The second source of risk is time. Credit money is a promise of future payment. If the interest rate on the claim fails to compensate for the combined impact of the inflation (or deflation) rate and the time value of money, the seller will receive less real value than anticipated. If the interest rate on the claim overcompensates, the buyer will pay more than expected.

Over the last two centuries, credit money has steadily risen as the main source of money creation, progressively replacing first commodity and then representative money. In many cases credit money has been converted to fiat money (see below), as governments have backed certain private credit instruments (first banknotes from central banks, then later certain types of deposits to banks), thus converting central banknotes to legal tender, and other types of notes (deposit certificates of less than a certain value) to a status not very different from fiat money, since they are backed by the power of the central government to redeem eventually with tax collection.

A particular problem with credit money is that its supply moves in line with the business cycle. When lenders are optimistic, notably when the debt level is low, they increase their lending activity which creates new money. This may also trigger inflation and bull markets. When creditors are pessimistic (for instance, when debt level is perceived as too high, or unwise lending activity in the past has resulted in situations where defaults are expected to follow), then creditors reduce their lending activity and money becomes "tight" or "illiquid." Bear markets, characterized by bankruptcies and market recessions, then follow.

Fiat money

Fiat money is any money whose value is determined by legal means, rather than the strict availability of goods and services which are named on the representative note.

Fiat money is created when a type of credit money (typically notes from a central bank, such as the Federal Reserve System in the U.S.) is declared by a government act (fiat) to be acceptable and officially-recognized payment for all debts, both public and private. Fiat money may thus be symbolic of a commodity or a government promise, though not a completely specified amount of either of these. Fiat money is thus not technically fungible or tradable directly for fixed quantities of anything, except more of the same government's fiat money. Fiat moneys usually trade against each other in value in an international market, as with other goods. An exception to this is when currencies are locked to each other, as explained below. Many but not all fiat moneys are accepted on the international market as having value. Those that are trade indirectly against any internationally available goods and services . By contrast, commodity money which has been destroyed or lost is gone.

Paper currency is especially vulnerable to everyday hazards: from fire, water, termites, and simple wear and tear. Currency in the form of minted coins is more durable but a significant portion is simply lost in everyday use. In order to reduce replacement costs, many countries are converting to plastic currency. For example, Mexico has changed its twenty and fifty peso notes, Singapore its $2, $5, $10 and $50 bills, Malaysia with RM5 bill, and Australia and New Zealand their $5, $10, $20, $50 and $100 to plastic, both for the increased durability and because plastic may be easily specifically constructed for each denomination, thus making it impossible for counterfeiters to "lift" or raise the value of a bill by using the material of a bill of lesser value as a primary source to make a counterfeit note of higher value.

Some of the benefits of fiat money can be a double-edged sword. For example, if the amount of money in active circulation outstrips the available goods and services for sale, the effect can be inflationary. This can easily happen if governments print money without attention to the level of economic activity, or if successful counterfeiters flourish.

A criticism of credit and fiat moneys relates to the fact that their stabilities are highly dependent on the stability of the legal system backing the currency: should the legal system fail, so will the value of any type of money that depends on it. However, this situation is typical of the maintenance of the value of any promisory note system: if a guarantor creates money or wealth by means of any legal promise to provide goods or services in the future (as is the case with both credit and fiat type moneys), then any failure of a legal system which backs up the rights of the debt-holder to collect on the promise, will act to jeopardize the value of future promises.

Money supply

The money supply is the amount of money within a specific economy available for purchasing goods or services. The supply in the US 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 US, the Federal Reserve is responsible for controlling the money supply, while in the Euro area the respective institution is the European Central Bank. Other central banks with significant impact on global finances are the Bank of Japan, People's Bank of China and the Bank of England.

When gold is used as money, the money supply can grow in either of two ways. First, the money supply can increase as the amount of gold increases by new gold mining at about 2% per year, but it can also increase more during periods of gold rushes and discoveries, such as when Columbus discovered the new world and brought gold back to Spain, or when gold was discovered in California in 1848. This kind of increase helps debtors, and causes inflation, as the value of gold goes down. Second, the money supply can increase when the value of gold goes up. This kind of increase in the value of gold helps savers and creditors and is called deflation, where items for sale are less expensive in terms of gold. Deflation was the more typical situation for over a century when gold and credit money backed by gold were used as money in the US from 1792 to 1913.

Monetary policy

Monetary policy is the process by which a government, central bank, or monetary authority manages the money supply to achieve specific goals. Usually the goal of monetary policy is to accommodate economic growth in an environment of stable prices. 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.”

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.

Governments and central banks have taken both regulatory and free market approaches to monetary policy. Some of the tools used to control the money supply include:

• currency purchases or sales
• increasing or lowering government spending
• increasing or lowering government borrowing
• changing the rate at which the government loans or borrows money
• manipulation of exchange rates
• taxation or tax breaks on imports or exports of capital into a country
• raising or lowering bank reserve requirements
• regulation or prohibition of private currencies

For many years much of monetary policy was influenced by an economic theory known as monetarism. Monetarism is an economic theory which argues 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 supported by the work of David Laidler, and many others.

The nature of the demand for money changed during the 1980s owing to technical, institutional, and legal factors and the influence of monetarism has since decreased.

History of money

According to some fables, inventors of money were Demodike (or Hermodike) of Kymi (the wife of Midas), Lykos (son of Pandion II and ancestor of the Lycians) and Erichthonius, the Lydians or the Naxians. However, the use of proto-money may date back to at least 100,000 years ago, and the use of precious metals as money dates back at least 6000 years. The use of gold as money has been traced back to the fourth millennium B.C. when the Egyptians used gold bars of a set weight as a medium of exchange, as the Sumerians had done somewhat earlier with silver bars. Coins or at least minted tokens of a fixed value first appear in the 7th century BC in Greece. The first banknotes was used in China in the 7th century, and the first in Europe was issued by Stockholms Banco in 1661.

See also

• :Category:Money
• Economics
• Coin of account
• Counterfeit, for Counterfeiting of Money
• Credit money
• Currency market
• Electronic money
• World currency
• Federal Reserve
• Fractional reserve banking
• Full reserve banking
• Labor-time voucher
• Local Exchange Trading Systems
• Numismatics — Collection and study of money
• Seignorage
• Standard of deferred payment

References

External links

• Current Currency Exchange Rates by boc
• Linguistic and Commodity Exchanges by Elmer G. Wiens. Examines the structural differences between barter and monetary commodity exchanges and oral and written linguistic exchanges.