Introduction
Money is one of he most brilliant human inventions in history. It can also be seen as the source of evil, because it leads to inequality, exploitation, and alienation. It took centuries to develop the current forms of money, and it continues to evolve, in an age of rapidly increasing international commerce and global travel. The concept of money raises many questions related to justice:
Do people by and large get adequate compensation for their work; and how do we make this assessment?
Is the capitalist financial system itself just? People can earn money through work, or through investments, in which case money produces more money by purchasing the work of others. Is this fair?
Is it fair that there are vast differences in the way people get paid for the same kind of work in different countries? A factory worker in the US earns a lot more than a factory worker in Bangladesh. This differential is created through the different strengths of the economic systems, and has nothing to do with the work itself. From the point of view of the company the worker just costs much less in Bangladesh. But is this just from the point of view of the workers?
The Functions of Money
Money fulfills three specific functions:
it serves as medium of exchange,
it is a store of value,
and it functions as the basic unit of account.
1. The medium of exchange means that money can be traded for everything. it is the most liquid form of exchange medium.
2. A store of value means that money can be held for a time without losing its purchasing power.
3. The unit of account means that the price of different items is measured with the units of money; thus, money is a yardstick of value across the economy.Money avoids the need for barter, which is an inefficient way of organizing exchange in the economy. Barter also requires a double coincidence of wants. (I need to want what you have, and vice versa.) Money helps the economy to function more smoothly.
In addition to these three functions, money can also be seen as a market information system. Since the price is only a function of the relation between supply and demand, it gives you information about this relationship and how it develops and changes. This is valuable information for the prediction of future events, and we see how this market information system blossoms into markets for stocks, futures, or options.
The Forms of Money
What exactly qualifies as money? Economists use three definitions, which build upon each other - M0, M1, M2, and M3.
Mo is simply the total amount of cash in the economy.(According to the Federal Reserve, there was $1.2 trillion in the M0 supply stream as of July 2013. Much of it is held by other governments or outside banks.)
The M1 definition of money includes currency, traveler’s checks, and checking accounts. )In June 2013, the M1 money supply for U.S. dollars equaled about $2.5 trillion.)
The M2 definition of money includes everything in M1, plus savings accounts and money market mutual funds. (As of June 2013, this was about $10.5 trillion.)
The M3 definition of money includes everything in M2, plus certificates of deposit and other time deposits. Since 2006, M3 is no longer used by the Federal Reserve as economic indicator.
Credit cards and debit cards are not money. Credit cards are a way of borrowing in the short term and paying later. Debit cards are a way of paying immediately. But they are methods of payment that don’t directly alter the amount of money in an economy.
The currency for a country gets issued by the Central Bank. Paper money is like the money in a casino, except that in the case of a country's currency, the value is backed up by the reserve banks. The gold standard was in effect until 1971, and it tied the money supply to the gold reserves owned by the US government. THis system became impractical when the US had to borrow large amounts of money, and when the dollar became the de facto currency for the world. Recently, there have been attempts to create money independent from any governmental institution, see bitcoins.
Bitcoin is a form of currency based on blockchain technology. It circumvents government control, and does not require trust between the parties. The technology is revolutionary:“ It is a peer-to-peer system of payments independent of financial institutions. Here is the original paper by Satochi Nakamoto from 2008 that describes the approach.
The image above shows a Yap stone at the village of Gachpar on Yap, a Micronesian island. This stone serves as money. It never changes location, it just gets used as reference for who owes what to whom. Money needs to keep a constant value, so that the equation x costs y does not change too much over time.
What else can qualify as currency?
Shells, precious metals, stones
government-issued IOU's (Bonds, etc.)
paper money, backed by reserves.
Everything else that can function as medium of exchange.
Barter systems have been used extensively in the past.
Any system that keeps track of who own what to whom, for instance when a government assesses tax burdens on properties or economic exchanges.
Money and Value
The different forms of money demonstrate that it functions as a symbolic system that can be supported by many physical objects. almost anything can take the place of the actual currency - sea shells, precious metals, stones, animals, etc. History shows that even humans can be used as currency, in the form of slaves.
One of the goals for the money supply regulators is stability. If they value of the currency fluctuates, there is inflation or deflation, which makes economic planning much more difficult.
Because money is itself some kind of object with value, it can also be bought and sold, and the outcome are money markets. Prices for money are measured in interest rates.
In the past, this stability of money was controlled by the so-called "gold standard." If governments agree that the total value of a country's currency should be backed by gold, the government cannot willfully create more money in order to finance itself. This gold standard ended with Nixon in 1971, because he had to finance the Vietnam war. Since then, the value of a currency simply depends on the Government's will to keep the value stable. This is not just important in order to avoid inflationary or deflationary pressures, but also for international relations. Governments can experience capital flight, when nobody wants to buy the currency and thus the value plunges. This would make it harder for the citizens of this country to travel abroad.
Questions to consider
There is an opposition between the value expressed in money and what we consider as value in human interactions. Trustworthiness or honesty are values only as long as they are not translated into a monetary value: A person would not be considered honest if this trait comes with a price. So what exactly is value? Can you buy trust?
Money leads to quantification: If everything can be expressed through a number (what it costs), everything can be seen as exchangeable with everything else. A dozen eggs is then equivalent to a pound of apples, or to one hour of low-paid work. But in reality, eggs, apples, or labor are very different things. Do we not produce a virtual world of total exchangeability that makes reality as it is disappear?
Does money lead to universal objectification? Once we apply a price to something, didn't we objectify it? If the price expresses the relation between supply and demand, then I know the replacement value of the particular object. It is no longer unique, it is just another object that has a cost associated with it. This relationship of objectification can be extended into the realm of human activities: The hourly salary for a fast-food worker does not reflect what it means for her to perform this service, it only reflects what companies have top pay in order to find someone who will perform this work.
Are we entering a new economic paradigm with the rise of the sharing economy? Wasn't there always a communism of daily life, where people would do things for each other without getting paid for it? Can this model be expanded?
The anthropologist Marcel Mauss argued that gift exchanges were the start of civilization: they create reciprocal expectations, and obligations.
We now live in a debt economy. Just the average credit card debt for American households is $7100 at the end of 2019. What is the future of debt in America, and is this system sustainable?