Money is a token that functions as a medium of exchange that is commonly accepted as payment for services or commodities, including repayment of debts. Another property of money, that distinguishes it from other medium of exchange, is that it has the mark of an authority (or the mark of anyone who is generally accepted) that coins it.

Money comprises of both currency, specially the numerous distributed currencies having legal tender status, as well as other kinds of financial deposit accounts, like savings accounts, certificates of deposit and demand deposits. In contemporary economies, currency is the most basic part of the money supply.

Money is not the same as 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.
Banknotes and coins

Banknotes and coins are two of the most generally used forms of money.

The word “money” is believed to originate from a temple of Hera, located on Capitoline, one of Rome’s seven hills. In the ancient world Hera was often associated with money. The temple of Juno Moneta at Rome was the place where the mint of Ancient Rome was located. “Juno” etymology may derives from the Etruscan goddess Uni (which means “the one”, “unique”, “unit”, “union”, “united”) and “Moneta” either from the Latin word “monere” (remind, warn, or instruct) or the Greek word “moneres” (alone, unique).
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, a standard of deferred payment, and a store of value.1

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. ‘Financial capital’ is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender.
Medium of exchange

Money is used as an intermediary for trade, in order to avoid the inefficiencies of a barter system, which are sometimes referred to as the ‘double coincidence of wants problem’. Such usage is termed a medium of exchange.
Unit of account

A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a “measure” or “standard” of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt.

Divisible into small units without destroying its value; precious metals can be coined from bars, or melted down into bars again.

Fungible: that is, one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art or real estate are not suitable as money.

A specific weight, or measure, or size to be verifiably countable. For instance, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect.
Store of value

To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved — and be predictably useful when it is so retrieved. Fiat currency like paper or electronic currency no longer backed by gold in most countries is not considered by some economists to be a store of value.
Market liquidity

Liquidity describes how easily an item can be traded for another item, or into the common currency within an economy. 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.
Types of money

In economics, money is a broad term that refers to any instrument that can be used in the resolution of debt. However, different types of money have different economic strengths and liabilities. Theoretician Ludwig von Mises made that point in his book The Theory of Money and Credit, and he argued for the importance of distinguishing among three types of money: commodity money, fiat money, and credit money. Modern monetary theory also distinguishes among different types of money, using a categorization system that focuses on the liquidity of money.
Commodity money

Commodity money is any money whose value comes from the commodity out of which it is made. The commodity itself constitutes the money, and the money is the commodity.3 Examples of commodities that have been used as mediums of exchange include gold, silver, copper, rice, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, etc. Since payment by commodity generally provides a useful good, commodity money is similar to barter, but is distinct because commodity money uses a single recognized unit of exchange.4

When money was invented in Greeκ area, silver was used to create coins. Silver was at that time a rather useless metal used only in jewels, but it was scarce and difficult to counterfeit. Αlthough now days silver is considered as a commodity, it was not a commodity at the time. Silver coins represented the old commodity money of iron sticks, a useful metal used in war (see Heraion of Argos). The mark of the king or of the Democracy was used as assurance that these useless silver tokens were iron’s replacements. In that sense, money was a representative and not a commodity thing from the beginning.
Representative money

Representative money is money that consists of token coins, other physical tokens such as certificates, and even non-physical “digital certificates” (authenticated digital transactions) that can be reliably exchanged for a fixed quantity of a commodity such as gold, silver or potentially water, oil or food. Representative money thus stands in direct and fixed relation to the commodity which backs it, while not itself being composed of that commodity.
Credit money

Credit money is any claim against a physical or legal person that can be used for the purchase of goods and services. 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.

This risk comes about in two ways and affects both buyer and seller.

First it is a claim and the claimant may default (not pay). High levels of default have destructive supply side effects. If manufacturers and service providers do not receive payment for the goods they produce, they will not have the resources to buy the labor and materials needed to produce new goods and services. This reduces supply, increases prices and raises unemployment, possibly triggering a period of stagflation. In extreme cases, widespread defaults can cause a lack of confidence in lending institutions and lead to economic depression. For example, abuse of credit arrangements is considered one of the significant causes of the Great Depression of the 1930s.

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. Thus the number of U.S. dollars or Japanese yen which are equivalent to each other, or to a gram of gold metal, are all market decisions which change from moment to moment on a daily basis. Occasionally, a country will peg the value of its fiat money to that of the fiat money of a larger economy: for example the Belize dollar trades in fixed proportion (at 2:1) to the U.S. dollar, so there is no floating value ratio of the two currencies.

Representative, credit, and fiat money all provide solutions to several limitations of commodity money. Depending on the laws, there may be little or no need to physically transport the money — an electronic exchange may be sufficient. Other types of moneys have as their sole use to be medium of exchange, so their supply is not limited by competing alternate uses. Credit and fiat monies can be created without limit in theory, so there is no limit on trade volumes.

Fiat money, if physically represented in the form of currency (paper or coins) can be easily damaged or destroyed. However, here 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.S. government will replace mutilated federal reserve notes (U.S. fiat money) if at least half of the physical note can be reconstructed, or if it can be otherwise proven to have been destroyed.5 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.”6

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:

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

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

The use of barter like methods may date back to at least 100,000 years ago. Trading in red ochre is attested in Swaziland, shell jewellery in the form of strung beads also dates back to this period, and had the basic attributes needed of commodity money. To organize production and to distribute goods and services among their populations, before market economies existed, people relied on tradition, top-down command, or community cooperation. Relations of reciprocity, and/or redistribution, substituted for market exchange.
Oldest paper money

Oldest paper money from Song Dynasty of China

The city states of Sumer developed a trade and market economy, while the Babylonians and their city state neighbors later developed the earliest system of economics, which is comparable to currently used civil society (law) concepts. Several centuries after the invention of cuneiform, the use of writing expanded beyond debt/payment certificates and inventory lists to be applied for the first time, about 2600 BC, to messages and mail delivery, history, legend, mathematics, astronomical records and other pursuits. Ways to divide private property, when it is contended… amounts of interest on debt… rules as to property and monetary compensation concerning property damage or physical damage to a person… fines for ‘wrong doing’… and compensation in money for various infractions of formalized law were standardized for the first time in history.7

Some (like Colin M. Kraay, E.S.G. Robinson, Charles Seltman e.t.c.) think that it is unhistorical to consider an object used in transactions as money, without this object to have the mark of the person, of the society or of the authority which coined it. They claim that red ochre, jewels, weight metrics or pieces without a pictorial design aren’t true money, only protomoney, because they lack an essential feature of money — a “type,” or mark, of a recognized issuing authority.8 They think that the history of money is actually the history of coins (and banknotes later) and any other anonymous object cannot be considered as money.

According to Aristotle, the inventor of money was Demodike (or Hermodike) of Kymi (the wife of Midas) or alternatively Pheidon king of Argos who (around 800 BC) replaced the commodity money of iron sticks with silver coins. According Herodotus inventors of money were the Lydians. According some fables, inventors were Lykos (son of Pandion II and ancestor of the Lycians) and Erichthonius or the Naxians.

One of the first Greek coins were the “Swastika” and “lion heads” electrum coins (dated 625 to 561 bc) discovered in Ionia. They were made of electrum (a naturally-occuring alloy of gold and silver). When the Lydian Croesus conquered Ionia (560 bc) he adopted the lions but instead of using electrum he began to coin the first golden currency. The hypothesis that Lydians did not use electrum coins is strenghten by the fact that most electrum coins have been discovered in excavations in Ionia and they were totally absent from archaeological finds in Sardis, capital of Lydia. (see uncertain Ionian coins and coins of the uncertain king Alyattes II ). Here is a list of electrum coins. In case they are identified as Lydian, they are always mentioned as Pre-Croeseid coinage of uncertain king and it is notable that none of them has been discovered in Sardis area. Electrum “Lion heads” have also been discovered in Lesbos.

The most famous electrum coins (dated 620-600 BC) originate from Ephesos, possibly from the Temple of Artemis. They have the stag (the symbol of Artemis) and an inscription engraved in Greek. “ΦΑΝΟΣ ΕΜΙ ΣΕΜΑ” (phanos emi sema). I am the mark (or the tomb) of Phanes.

Ancient Greeks, for religious reasons, never used individual signs, signs of kings or tyrants in their coins. Greek coins always had divine symbols, divine signs and divine faces coined and if something was written, it was either the name of a god or the name of their city state. Greeks also never used pure gold in their coins, possibly because gold was dedicated to their gods. The first who broke this tradition was Philip II of Macedon, who coined golden coins with his name, and later Alexander the Great, who put his face. After Alexander, many Greek kings and tyrants followed his example.

The phanos emi sema, being the first inscription ever found in one of the first coins ever coined may have conjuctions with Christianity. According the Orphic tradition, Phanes was the first god, he have been hatched from the World-Egg entwined with a serpent. So if Phanes is associated with Jesus, then the translation “I am the tomb of Phanes(Jesus)” reminds us the thirty pieces of silver paid in order to crucify Jesus. On the other hand Phanes name means “to bring light” so someone could also associate him with Lucifer. In that case, the alternative translation “I am the mark of Phanes(Lucifer)” reminds the mark of the beast. In both cases the conclusion is impressive and the inscription can be considered as a prophecy, although others claim that Phanes was just the name of a rich individual and there are no religious associations.

The first banknotes was used in China in the 7th century, and the first in Europe was issued by Stockholms Banco in 1661.