{"id":6833,"date":"2016-09-07T21:00:54","date_gmt":"2016-09-07T21:00:54","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/masterybusiness2xngcxmasterspring2016\/?post_type=chapter&p=6833"},"modified":"2017-04-18T17:20:43","modified_gmt":"2017-04-18T17:20:43","slug":"money-2","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-hccc-introbusiness\/chapter\/money-2\/","title":{"raw":"Money","rendered":"Money"},"content":{"raw":"

What Is Money?<\/h2>\r\n\"stone-271751_1920\"<\/a>\r\n

Introduction<\/h3>\r\nMoney<\/strong> is really anything that people use to pay for goods and services and to pay people for their\u00a0work. Historically, money has taken different forms in different cultures\u2014everything from salt, stones, and beads to gold, silver, and copper coins and, more recently, virtual currency has been used. Regardless of the\u00a0form it takes, money needs to be widely accepted by both buyers and sellers in order to be useful.\r\n

Barter and the Double Coincidence of Wants<\/h3>\r\nTo understand the usefulness of money, we must consider what the world would be like without money. How would people exchange goods and services? Economies without money typically engage in the barter system. Barter<\/span><\/strong>\u2014literally trading one good or service for another\u2014is highly inefficient for trying to coordinate the trades in a modern advanced economy. In an economy without money, an exchange between two people would involve a double coincidence of wants<\/span>, a situation in which two people each want some good or service that the other person can provide. For example, if a hairstylist\u00a0wants a pair of shoes, she\u00a0must find a shoemaker\u00a0who has a pair of shoes in the correct size and who is willing to exchange the shoes for a certain number of hairdos. Such a trade is likely to be difficult to arrange. Think about the complexity of such trades in a modern economy, with its extensive division of labor that involves thousands upon thousands of different jobs and goods.\r\n\r\nAnother problem with the barter system is that it doesn't\u00a0allow people\u00a0to easily enter into future contracts for the purchase of many goods and services. For example, if the goods are perishable, it may be difficult to exchange them for other goods in the future. Imagine a farmer wanting to buy a tractor in six months using a fresh crop of strawberries. Also, while the barter system might work all right\u00a0in small economies, it will keep those\u00a0economies from growing. The time that individuals might\u00a0otherwise spend producing goods and services and enjoying leisure time is spent bartering.\r\n

Functions of\u00a0Money<\/h3>\r\nMoney solves the problems created by the barter system. First, money serves as a medium of exchange<\/strong>, which means that money acts as an intermediary between the buyer and the seller. Instead of exchanging hairdos\u00a0for shoes, the hairstylist\u00a0now exchanges hairdos\u00a0for money. This money is then used to buy shoes. To serve as a medium of exchange, money must be very widely accepted as a method of payment in the markets for goods, labor, and financial capital.\r\n\r\nIn addition, money needs to\u00a0have the following properties:\r\n
    \r\n \t
  1. It must\u00a0be divisible<\/em>\u2014that is, easily divided into usable quantities or fractions. A $5 bill, for example, is equal to five $1 bills. If something costs $3, you don\u2019t have to tear up a $5 bill; you can pay with three $1 bills.<\/li>\r\n \t
  2. It must\u00a0be portable<\/em>\u2014easy to carry; it can\u2019t be too heavy or bulky.<\/li>\r\n \t
  3. It must be\u00a0durable<\/em>. It can't fall apart or wear out after a few uses.<\/li>\r\n \t
  4. It must be difficult to counterfeit.<\/em>\u00a0It won\u2019t have much value if people can make their own.<\/li>\r\n<\/ol>\r\nSecond, money must serve as a store of value<\/span><\/strong>. Consider the barter\u00a0between the hairstylist\u00a0and shoemaker again.\u00a0The shoemaker\u00a0risks having his\u00a0shoes go out of style, especially if he\u00a0keeps them in a warehouse for future use\u2014their value will decrease with each season. Shoes are not a good store of value. Holding money is a much easier way of storing value. You know that you don't\u00a0need to spend it immediately, because it will still hold its value the next day or the next year. This function of money doesn't\u00a0require that money is a perfect<\/em> store of value. In an economy with inflation, money loses some buying power each year, but it remains money.\r\n\r\nThird, money serves as a unit of account<\/span><\/strong>, which means that it's the ruler by which other values are measured. For example, a hairstylist may charge $30\u00a0to style someone's\u00a0hair. That $30 can buy two shirts (but probably not a pair of shoes). Money acts as a common denominator, an accounting method that simplifies thinking about trade-offs.\r\n\r\nSo money serves all of these functions\u2014it's a medium of exchange, store of value, and unit of account.\r\n\r\n[caption id=\"attachment_6885\" align=\"aligncenter\" width=\"500\"]\"Image<\/a> Uninscribed electrum coin from Lydia, 6th century BCE.[\/caption]\r\n

    Commodity versus Fiat Money<\/h3>\r\nCommodity money<\/strong> consists of objects that have value in themselves as well as value in their use as money. Gold, for example, has been used throughout the ages as money, although today it is not used as money but rather is valued for its other attributes. Gold is a good conductor of electricity and is used in the electronics and aerospace industry. Gold is also used in the manufacturing of 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 the creation of jewelry.\r\n\r\nAs commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a unit of account.\u00a0Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or another commodity held at a bank. During much of its history, the money supply in the United States was backed by gold and silver. Interestingly, antique dollars dated as late as 1957 have \u201cSilver Certificate\u201d printed above\u00a0the portrait of George Washington, as shown below. This meant that the holder could take the bill to the appropriate bank and exchange it for a dollar\u2019s worth of silver.\r\n\r\n[caption id=\"\" align=\"aligncenter\" width=\"500\"]\"Two A Silver Certificate and a Modern U.S. Bill. Until 1958, silver certificates were commodity-backed money\u2014backed by silver, as indicated by the words \u201cSilver Certificate\u201d printed on the bill. Today, U.S. bills are backed by the Federal Reserve, but as fiat money.[\/caption]\r\n\r\nAs economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved toward the use of fiat money<\/span>. Fiat money<\/strong>\u00a0is legal tender whose value is backed by the government that issued it. The United States\u2019 paper money\u2014like the dollar bill, for instance\u2014carries this\u00a0statement: \u201cThis note is legal tender for all debts, public and private.\" In other words, by government decree, if you owe a debt, then legally speaking, you can pay that debt with the U.S. currency, even though it's not backed by a commodity. The only backing of our money is widespread\u00a0faith and trust that the currency has value\u2014and nothing more.\r\n\r\nThe following video discusses some additional characteristics of money:\r\n\r\nhttps:\/\/www.youtube.com\/watch?v=lQFxbNNk7iQ&feature=youtu.be\r\n

    Alternatives to Traditional Currency<\/h2>\r\nWhoever said that \"cash is king\" hasn't been paying attention to how consumers choose to pay for their purchases, particularly in developed economies. Take a look at the following chart:\r\n\r\n\"Pie<\/a>\r\n\r\nIs a cashless future in the cards? A 2013 MasterCard report found that, in 2011, cashless payments made up 66 percent of global spending.\u00a0Consumers in Belgium, France, and Canada used cash the least in 2011, as cashless payments made up 93 percent, 92 percent, and 90 percent of payments respectively. In the United States, 80 percent of payments were cashless in 2011.\r\n\r\nConsumers expect to make fewer cash payments in the future, while also cutting back on credit- and debit-card use in favor of other forms of payments. In an Accenture survey, 66 percent of North Americans said they used cash daily or weekly in 2014 while only 54 percent expected to do so by 2020.\r\n\r\nMoney is an abstraction built on trust. As such, alternatives to the most tangible\u00a0form of money\u2014currency or cash\u2014and its replacement with cashless payments have become possible. In this new emerging landscape, no transac\u00adtion requires money in the form of notes and coins, and value can be exchanged through the transfer of information between transacting parties. There have been multiple waves of such alternatives.\r\n\r\nEstablished alternatives\u00a0to cash include checks, credit cards, debit cards, and prepaid debit cards. More recently, innovative options\u00a0have sprung up that not only threaten to imperil the ubiquity of cash but also upend the traditional payment\u00a0ecosystem. These include smartphone-enabled credit-card acquirers, such as Square, and Automated Clearing House or ACH acquirers, such as PayPal and Dwolla. And then there are even more ambitious alternatives to cash that have been proposed, such as Bitcoin, a Web-based cryptocurrency.\r\n\r\nUnlike traditional money, such alternatives do not derive their value from government fiat\u2014i.e.,\u00a0the government has not established their legitimacy or value<\/span><\/span>.<\/span> Each of these alternatives has\u00a0an evolved network within which it is\u00a0uniformly accepted as a means of payment; the more established\u00a0alternatives, of course, have the widest networks.[footnote]Chakravorti, B., & Mazzotta, B. (2013, September). The Cost of Cash in the United States. Retrieved September 8, 2016, from http:\/\/fletcher.tufts.edu\/CostofCash\/~\/media\/Fletcher\/Microsites\/Cost of Cash\/CostofCashStudyFinal.pdf[\/footnote]\r\n\r\nWe will examine this trend further in the next readings.\r\n

    Bitcoin<\/h2>\r\n\"Different\r\n\r\nToday, there are more than seven hundred<\/i>\u00a0digital currencies in existence. Entering\u00a0the marketplace is undertaken by so many due to the low cost of entry and the profit opportunity. In 2014, the European Banking Authority defined virtual currency<\/b> as \"a digital representation of value that is neither issued by a central bank nor a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored, or traded electronically.\" The first and most widely known instance\u00a0of such\u00a0digital, virtual, or cryptocurrency is Bitcoin.\r\n

    Bitcoin Background<\/h3>\r\nBitcoin, a peer-to-peer digital currency or cryptocurrency, operates without the involvement of traditional financial institutions, and it provides a direct digital alternative to physical currencies. Bitcoin transactions take place online directly between the buyer and seller, with each transaction having a unique encryption. Transactions are recorded on a decentralized public ledger available for network users to verify valid transactions. Special users on the network (\u201cminers\u201d) oversee this verification process. After verifying a block of transactions, miners are paid with twenty-five newly generated Bitcoins and the transactions are processed and approved; this is how the total number of Bitcoins grows. The number in circulation as of January 2015 was approximately 13.7 million, with the maximum set at 21 million. As of April 2015, their total value was $3 to $4 billion.\r\n\r\nGovernments worldwide generally do not yet see it and other digital currencies as a\u00a0destabilizing \u201cthreat,\u201d\u00a0and some scholars\u00a0have argued\u00a0that it may best be seen as a speculative investment. Bitcoin has certainly had its ups and downs:\u00a0As of April 1, 2015, its value stood at $242 per Bitcoin, after a January 14 low of $177 and a March 11 high of $296. The currency has also had a long run of troubles with hackers and fraud, most spectacularly in 2014 when the exchange Mt. Gox\u00a0declared bankruptcy\u00a0after Bitcoins worth $460 million at the time were\u00a0apparently stolen. Bitcoin\u2019s decentralized model and degree of anonymity have also raised concerns over its use in illegal money transfers, fueling potential illicit commerce across the \u201cdark Web\u201d and on\u00a0sites such as Silk Road.\r\n\r\nThe organization Bitcoin.org, meanwhile, touts the currency\u2019s potential for opening up a \u201cwhole new platform for innovation\u201d:\r\n\r\nhttps:\/\/youtu.be\/Gc2en3nHxA4\r\n

    Advantages and Disadvantages<\/h3>\r\nA 2015 Congressional Research Service (CRS) report, \u201cBitcoin: Questions, Answers and Analysis of Legal Issues,<\/a> explores the following technical, functional, and legal issues associated with Bitcoin\u2014and, by extension, all virtual currencies.\r\n\r\nBitcoin advantages:\r\n