Philosophy of Money and Finance Stanford Encyclopedia of Philosophy

This is more than a 10% reduction in M1 compared to May 2022, where it stood at $20.6 Trillion. A government may also recognize some money as a legal tender, meaning that courts and government bodies must accept that form of money as a final means of payment. That means money can keep track of changes in the value of items over time and multiple transactions. People can use it to compare the values of various combinations or quantities of different goods and services. The supply of the item used as money should be relatively constant over time to prevent fluctuations in value.

The second type of money is fiat money, which does not require backing by a physical commodity. Instead, the value of fiat currencies is set by supply and demand and people’s faith in its worth. Fiat money developed because gold was a scarce resource, and rapidly growing economies growing couldn’t always mine enough to back their currency supply requirements.

Fiat money becomes the token of people’s perception of worth, the basis for why money is created. An economy that is growing is apparently succeeding in producing other things that are valuable to itself and other economies. https://1investing.in/ The stronger the economy, the stronger its money will be perceived (and sought after) and vice versa. However, people’s perceptions must be supported by an economy that can produce the products and services that people want.

  1. Although cryptocurrencies are rarely used in everyday transactions, they have achieved some utility as a speculative investment or a store of value.
  2. This act established a monetary system whereby national banks issued notes backed by U.S. government bonds.
  3. Some jurisdictions have recognized cryptocurrencies as a payment medium, including the government of El Salvador.

The third function of money is to serve as a store of value, that is, an item that holds value over time. Consider a $20 bill that you accidentally left in a coat pocket a year ago. Money serves as a unit of account, which is a consistent means of measuring the value of things. When we report the value of a good or service in units of money, we are reporting what another person is likely to have to pay to obtain that good or service.

In addition, a large amount of metallic money is not easily portable and the value of metallic coins depreciates with time. Includes money made up of metals, such as copper, brass, silver, gold, alloys, and aluminium. The need for metallic money was realized due to the limitations of commodity money. The commodity form of money involves commodities, such as cattle, grains, leather, skins, utensils, and weapons. However, in the present time, commodity money is not preferable as it lack certain important characteristics of money, such as uniformity, homogeneity, standard size and weight, portability, and divisibility.

What are the stages in evolution of money?

People have used gold, silver, cowrie shells, cigarettes, and even cocoa beans as money. Although we use these items as commodity money, they also have a value from use as something other than money. For example, people have used gold throughout the ages as money although today we do not use it as money but rather value it for its other attributes. Gold is a good conductor of electricity and the electronics and aerospace industry use it. Other industries use gold too, such as to manufacture energy efficient reflective glass for skyscrapers and is used in the medical industry as well. Of course, gold also has value because of its beauty and malleability in creating jewelry.

An illustration of the quantity theory

Thus, the income and aggregate expenditure would simultaneously fail to show any type of increase. In such a case, the price level would not rise even with the rise of quantity of money. However, it is also not guaranteed that if the increase in quantity of money reduces the rate of interest, then price level would rise or not. However, he did not agree with the view that determining relationship between quantity of money and price level is as easy as demonstrated by quantity theory. One can also
mention the “alternative currencies” movement here which
defends private money creation on entirely different grounds, most
often by appeal to the value of community (see Larue 2022, Larue et
al. 2022). But the current financial
system is not a pure creature of the free market.

So, a change in the money supply results in either a change in the price levels or a change in the supply of goods and services, or both. In addition, the theory assumes that changes in the money supply are the primary reason for changes in spending. As commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a unit of account. Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or other commodities held at a bank. During much of its history, gold and silver backed the money supply in the United States. Interestingly, antique dollars dated as late as 1957, have “Silver Certificate” printed over the portrait of George Washington, as Figure 14.2 shows.

Monetarist Approach

This is because when money growth surpasses the growth of economic output, there is too much money backing too little production of goods and services. In order to curb a rapid rise in the inflation level, it is imperative that growth in the money supply falls below the growth in economic output. For example, it took about 133 times as many “Saddam” dinars as “Swiss” dinars to buy a man’s suit in Iraq at the time. The new notes, sometimes called “Bremer” dinars, were printed in Britain and elsewhere and flown into Iraq on 22 flights using Boeing 747s and other large aircraft. In both the northern and southern parts of Iraq, citizens turned in their old dinars for the new ones, suggesting at least more confidence at that moment in the “Bremer” dinar than in either the “Saddam” or “Swiss” dinars.

Factors Affecting Money Supply

Since financial assets are
essentially promises of future money payments, a main challenge for
financial agents is to develop rational expectations or hypotheses
about relevant future outcomes. The concept of financial risk
is especially interesting from a philosophical viewpoint since it
represents the financial approaches to definition of money industry’s response to epistemic
uncertainty. However, many authors have been critical of mainstream
operationalizations of risk which tend to focus exclusively on
historical price volatility and thereby downplay the risk of
large-scale financial crises (Lanchester 2010, Thamotheram & Ward
2014).

These payments will be made using money, because money acts as a store of value. Today, the value of money (not just the dollar, but most currencies) is decided purely by its purchasing power, as dictated by inflation. That is why simply printing new money will not create wealth for a country. Money is created by a kind of a perpetual interaction between real, tangible things, our desire for them, and our abstract faith in what has value.

They prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets. A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels. Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply.

Consumer spending will thus decrease as people hold onto their money in expectation of lower prices in the future. Other phenomena affecting the amount of money that people willingly hold include income, wealth, and some measure of transactions volume. Increases in the real value of these measures will be followed by increases in the amount of real balances. A first question here, already touched upon in the discussion about
microfinance above
(section 4.3.2),
concerns the status of citizens as participants in financial markets. Should they all have a right to certain financial services such as a
bank account or certain forms of loans, because credit should be seen
as a primary good in capitalist economies (see, e.g., Hudon 2009,
Sorell 2015, Meyer 2018)? More broadly, how does the pattern of access
to credit affect the distribution of freedom and unfreedom within
society?