Reading: Unit 1

What Is Money?

The following material is condensed from:

FINANCE & DEVELOPMENT, September 2012, Vol. 49, No. 3  by Irena Asmundson and Ceyda Oner

Money is anything that can serve as:

• A store of value This allows excess value at one time to be kept for later need
• A unit of account This provides a common means for prices
• A medium of exchange This creates a shared means to purchase and sell

Without money, the economy would have to be based on barter, exchanging one thing for another.  You would have to seek out someone who needs what you have, either in terms of material goods or services you provide, and who can provide the material goods or services you need, which could take a long time.  Once that person is found, an agreed amount of what you can give needs to be negotiated for what you need.  How many eggs does it take to pay for a pair of dentures, and would the dentist be able to use that many eggs all at once?

Many things have been used as money, including cowry shells, pepper corns, barley, and gold & silver.  Ideally, what is used for money should be:

• High in replacement cost
• Durable/non-perishable
• Convenient to exchange

Precious metals, traditionally gold and silver, hit all three points; they are costly to replace, enduring, and maintain their value.  Moreover, they can easily be processed into coins of specified size.  The disadvantage of using precious metals is their weight.  Because of this, paper notes giving the holder the right to exchange the note for a specific amount of a precious metal began to replace using coins made of the precious metal. Ultimately, the link between the paper note and the precious metal was severed, creating fiat money: money whose actual value existed only because the nation and its populace agreed to ascribe value to it.  The same is true of coins, now: they represent value that is independent of, and greater than, their intrinsic value.

With the advent of fiat money, there is the potential for governments to print whatever money they need.  Not having to possess a supply of precious metals to back the currency allows the governing body to flood the economy with fiat money, which expands the total amount of money available for purchasing goods and services.  As a result of that, with the number of available goods and services remaining fairly constant, the amount of money offered or demanded for a given good or service will climb, a process called inflation.  If that process continues, the population will lose confidence in the fiat currency, becoming less and less willing to accept it, either preferring the money printed by another country with a stabler currency or turning the paper money into durable goods, like precious metals or land.  The reverse process, where the money supply shrinks but the amount of goods and services available stays the same or grows, is called deflation.  During deflation, the value of the currency tends to rise—it takes less money to purchase a given good or service than it did before.

Official estimates of the amount of currency in an economy are often made, most frequently called "broad money."  This includes everything providing a store of value, and liquidity.  Liquidity, in this context, means financial assets that can be sold at, or close to, their full market value on short notice.  Currency is and transferrable deposits are included in this computation, but they are not the only things. Liquidity can also include:

• National currency: all the money issued, usually by the central government
• Transferrable deposits: demand deposits (transferable by check or money order); bank checks (if used as a medium of exchange); traveler's checks (if used for transactions with residents); and deposits otherwise commonly used to make payments (such as some foreign-currency deposits)
• Other deposits: Nontransferable savings deposits; term deposits (funds left on deposit for a fixed length of time); or repurchase agreements (in which one party sells a security, agreeing to buy it back at a fixed price)
• Securities other than shares of stock: tradable certificates of deposit, and commercial paper (essentially a corporate IOU)

Origins of Money and Banking

Modified from A History of Money from ancient times to the present day by Glyn Davies.

Money may be defined by its functions:

• Specific Functions (Generally microeconomic)
• Concrete Functions
• Medium of Exchange
• Means of Payment
• Storage of Value
• Abstract Functions
• Unit of Account
• Common Measure of Value
• Standard for Deferred Payments
• General Functions (Generally macro-economic and abstract)
• Liquid Asset
• Framework of the Market Allocative System (i.e. prices)
• Causative Factor in the Economy
• Controller of the Economy

In short: Money is anything that is widely used for making payments and accounting for debts and credits.

Over the span of time, many things have been used for money, including:

• Amber
• Beads
• Cowries
• Drums
• Eggs
• Feathers
• Gongs
• Hoes
• Ivory
• Jade
• Kettles
• Leather
• Mats
• Nails
• Oxen
• Pigs
• Quartz
• Rice
• Salt
• Umiacs
• Vodka
• Wampum
• Yarns
• Zappozats (decorated axes)

Money appears to have originated, to a great degree, from non-economic causes—tribute as well as trade, blood money and bride money, barter, ceremonial & religious rites, as well as commerce.  It seems that the use of money probably evolved out of deeply rooted customs; the clumsiness of barter did provide an economic impulse but does not appear to have been the primary one.  Money developed independently in different parts of the world; the only civilization of which we are aware that functioned without money was the Inca civilization.

Primitive Forms of Money

The author suggests that for most early forms of money, the value began in their use for ornamentation; manillas (metallic ornaments worn as jewelry in west Africa), wampum and precious metals are listed as likely having had their origins as money derived from their ability to be used for ornament or ostentation.

Potlatch ceremonies, best known among the Native American people, were a form of barter that had social and ceremonial functions that were at least as important as the economic ones.  Obligations and reciprocity of the giving of resources in the potlatch are significant.  The interaction of Solomon and the Queen of Sheba are an old, and a very celebrated, example of a potlatch.

Cattle were described by Glyn Davies as having been humanity's first working capital asset, perhaps mainly over their use in ceremonial sacrifices which developed into their use as money.

The Invention of Banking and Coinage

Davies indicates that the invention of banking preceded the development of coinage.  It appears to have developed in ancient Mesopotamia, where palaces and temples provided secure storage for grain and other commodities.  Receipts were used for recording deposits, but also as transfers to original depositors and third parties.  Ultimately even private houses became involved in banking, and the Code of Hammurabi contained laws regulating banking activity.  In ancient Egypt, storage of harvests in state warehouses led to a similar system of banking, with written orders for withdrawals of deposited grain, or grain deposited to the king's account, were kept and ultimately became used as a more general method of paying debts to other, including tax gatherers, traders and priests.

Precious metals, in weighed quantities, were a common form of money. Producing coins of guaranteed weight made it possible to count out the coins to make a payment of a specified weight of the metal.  The first real coins may have been minted around 640-630 BC in Lydia, but rapidly spread to Ionia, mainland Greece and Persia.  Particularly in Athens, around 406-405 BC, coins were struck of the cheaper bronze then plated with silver to adapt to a silver shortage in Athens caused by Sparta capturing the Laurion silver mines.  This caused the Athenians to hoard the older, solid silver coins and use the cheap bronze coins for commerce, making currency even scarcer.  Davies references Aristophanes' play The Frogs as containing the first formal statement of Gresham's Law: Bad money drives out good money.

Many empires, notably the Greek and Roman empires, minted coins to commemorate great occasions or occurrences in their empire, having the coins struck with an image and/or words relating to it.  Davies pointed out that coins were the best propaganda for advertising Greek, Roman or other civilizations, until mechanical printing was developed.

Money Exchange and Credit Transfer

With the number of different currencies in use in the Hellenic world, money changing became the earliest and most common form of Greek banking, exchanging one currency for another.  This was often done in or around temples or other public buildings: see Matthew 21:12. Banks also provided bottomry which was lending to finance the carrying of freight by ships.  Other enterprises supported included mining and building of public buildings.  Credit transfer was also a characteristic feature in Delos; transactions were often carried on with real credit receipts and payments made on simple instructions.

After the fall of Rome, banking was forgotten, re-emerging in Europe about the time of the Crusades, possibly as early as the 8^th century by Arabs and the 10^th century by Jews, but the first definite evidence of a bill of exchange was in 1156.

The Royal Monopoly of Minting

Coins were by far more convenient that other forms of payment.  Because the King authenticated the coins, there was no need to weigh them, and their value often exceeded the value of the precious metal of which they were made.  Monarchs took advantage of that, recalling all coins and re-minting them every few years—initially every 6, but ultimately every 2 years—which netted the monarch a significant profit.  The government controlled coin production, and thus the money supply, until commercial banking and the adoption of paper money.

Paper Money

Paper became common in China around 960 AD but had been in place as early as 806-821 AD when Emperor Hien Tsung suffered a shortage of copper for coins.  By 1020, the quantity of paper money issued in China was excessive, triggering inflation.  Ultimately, after several episodes of hyperinflation, China abandoned paper money sometime after 1455.

The Gold Standard

Initially, the British pound sterling actually represented one pound of silver.  In 1816, Britain shifted to the gold standard.  France and the USA had a bimetallic standard, using gold and silver as a base for the currency.  In 1878, France went to gold only, and in 1897 Japan followed suit.  Ultimately, the USA went to the gold standard in 1900.  By 1931, Britain and most of the British Empire (Canada excluded) dropped the gold standard, along with Ireland, Scandinavia, Iraq, Portugal, Thailand and some South American companies.  Ultimately, the USA discarded the gold standard in 1973.

Intangible Money

Money has become intangible, an electronic entity, since about 1990.  New modes of money are also developing, including securitization of illiquid assets into cash, such as the copyright of music backing the bonds (see: Bowie Bonds).

Noteworthy Points

Glen Davies stresses several points in his book:

• Money did not have a single origin but developed independently in many different parts of the world.
• Many factors contributed to its development and if evidence of what anthropologists have learned about primitive money is anything to go by economic factors were not the most important.
• Money performs a variety of functions and the functions performed by the earliest types were probably fairly restricted initially and would NOT necessarily have been the same in all societies.
• Money is fungible: there is a tendency for older forms to take on new roles and for new forms to be developed which take on old roles, e.g. (this is my example) on English banknotes such as the 5 pound notes it says "I promise to pay the bearer on demand the sum of five pounds" and below that it carries the signature of the chief cashier of the Bank of England. This is a reminder that originally banknotes were regarded in Britain, and in many other countries, as a substitute for money and only later did they come to be accepted as the real thing.

Biblical Personal Finance

The 6 "R's" of Christian Personal Finance: Important Biblical Principles

Modified from: http://christianpf.com/rs-christian-finance-principles/

As Christians, we wish to honor God in all that we do, as Scripture commands us and as we delight to do more and more as we draw closer to Him.  This must be true in how we handle our finances as it is an all other areas of our lives.  Consider these 6 R's

1. Realize It's Not Yours in the First Place

In the Psalms God says:

For every animal of the forest is mine, and the cattle on a thousand hills. I know every bird in the mountains, and the insects in the fields are mine. - Psalm 50:10-11 NIV

We often speak of "stewardship,” which reminds us that we are simply managing what we have for God, since He not only created it all, He owns it all.

Psalms also says:

The earth is the Lord's, and everything in it, the world, and all who live in it. - Psalm 24:1 NIV

When I realize that, it will be the first step in using my money to His glory. After all, it's really His money, anyway.

2. Recognize Responsibility

If you are given some money and asked to manage it for someone else, you likely take great care with that money. Such needs to be true with the money God entrusts to us, as well.

In Matthew 25:14-30 NIV, Jesus told the Parable of the Bags of Gold. The master in the parable gave to each of his three servants according to their ability. Whatever you have - whether a lot or a little - is given to you by the Lord. That should help build within us a great deal of responsibility to handle that money properly.

3. Remember God First

When making out your family budget, does God have first place, or does He just get the leftovers? If you are blessed with a bonus check or some other money, is your first thought how you can spend it on yourself, or do you consider how you can use at least some of that money to further the work of the Lord? While we are not under the Old Testament law, in which the Israelites were required to give their first to the Lord, doing so is still a good way to make sure He is always the priority. Paul told those in Corinth:

Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver. - 2 Corinthians 9:7 NIV

4. Reign In Spending

If you want to honor the Lord, you need to cut down on lifestyle. That means overcoming the problem of debt, and it means avoiding frivolous spending. Christians are to be people of control (Galatians 5:22-23; 2 Peter 1:6). One place that manifests itself is in our spending.

5. Ready Your Future

While we do not know how much time we might have in this life (read James 4:13-16), we are still to consider our future. Always remember that plans can, and often do, change, and be ready for God's will in any area. However, think about the rainy days that will likely come. Consider your children or beyond (Proverbs 13:22). Think of how you can bless many people to God's glory by good, solid planning.

6. Respect Others

The rich fool in Jesus' story had some favorite pronouns: I, me, my, and mine (Luke 12:17-19). He never considered giving some of his bumper crop away or selling it at a lower price to help those with less money. No matter how much you might have, think of others. Bless them with whatever you have. If you don't have much money, you can still have someone over for a meal to bless their life. But, if you have wealth, think of how you can help and bless those who are made in the image of God.

All of these are points to consider in every financial decision and in all financial plans you make.