Money and

Monetary Policy
What is Money?

Money is an item or medium of transaction that

represents perceived worth. As a result, it is
widely accepted as a method of payment for
products and services, as well as debt repayment.
Money makes the world go around. Money is
used to enable transactions and power economic
growth. Typically, economists describe money,
where it comes from, and how much it is worth.
 Medium of Exchange
• Before the development of a medium of exchange—that
is, money—people would barter to obtain the goods and
services they needed. Two individuals, each possessing
some goods the other wanted, would enter into an
agreement to trade.
Early forms of bartering, however, do not provide the
transferability and divisibility that makes trading
efficient. For instance, if someone has cows but needs
bananas, they must find someone who not only has
bananas but also the desire for meat. What if that
individual finds someone who has the need for meat but
no bananas and can only offer potatoes? To get meat, that
 Fiat Money
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. For a booming economy, the need for gold to give
money value is extremely inefficient, especially when its value is really
created by people's perceptions.
• 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. 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
 Fiat Money

The term "fiat" is a Latin word that is

often translated as "it shall be" or "let it
be done." Thus fiat currencies only
have value because the government
maintains that value; there is no utility
to fiat money in itself.
The History of Money
• In the Beginning: Barter
Barter is the exchange of resources or services for
mutual advantage, and the practice likely dates back
tens of thousands of years, perhaps even to the dawn
of modern humans. Some would even argue that it's
not purely a human activity; plants and animals have
been bartering—in symbiotic relationships—for
millions of years. In any case, barter among humans
certainly pre-dates the use of money. Today
individuals, organizations, and governments still use,
and often prefer, barter as a form of exchange of
goods and services
• 9000 - 6000 B.C.: Cattle
Cattle, which throughout history and
across the globe have included not only
cows but also sheep, camels, and other
livestock, are the first and oldest form of
money. With the advent of agriculture also
came the use of grain and other vegetable
or plant products as a standard form of
barter in many cultures.
• 1200 B.C.: Cowrie Shells
The first use of cowries, the shells of a mollusc
that was widely available in the shallow waters of the
Pacific and Indian Oceans, was in China. Historically,
many societies have used cowries as money, and
even as recently as the middle of this century,
cowries have been used in some parts of Africa. The
cowrie is the most widely and longest used currency
in history.
• 1000 B.C.: First Metal Money and Coins
• Bronze and Copper cowrie imitations were
manufactured by China at the end of the Stone Age
and could be considered some of the earliest forms
of metal coins. Metal tool money, such as knife and
spade monies, was also first used in China. These
early metal monies developed into primitive versions
of round coins. Chinese coins were made out of
base metals, often containing holes so they could be
put together like a chain.
• 500 B.C.: Modern Coinage
Outside of China, the first coins developed out of lumps
of silver. They soon took the familar round form of today,
and were stamped with various gods and emperors to mark
their authenticity. These early coins first appeared in Lydia,
which is part of present-day Turkey, but the techniques
were quickly copied and further refined by the Greek,
Persian, Macedonian, and later the Roman empires. Unlike
Chinese coins which depended on base metals, these new
coins were made from precious metals such as silver,
bronze, and gold, which had more inherent value.
• 118 B.C.: Leather Money
• Leather money was used in China in the
form of one-foot-square pieces of white
deerskin with colorful borders. This could
be considered the first documented type of
banknote.
• A.D. 800 - 900: The Nose
• The phrase "To pay through the nose" comes from
Danes in Ireland, who slit the noses of those who
were remiss in paying the Danish poll tax.
• 806: Paper Currency
The first known paper banknotes appeared in China. In
all, China experienced over 500 years of early paper
money, spanning from the ninth through the fifteenth
century. Over this period, paper notes grew in production
to the point that their value rapidly depreciated and inflation
soared. Then beginning in 1455, the use of paper money in
China disappeared for several hundred years. This was
still many years before paper currency would reappear in
Europe, and three centuries before it was considered
• 1500: Potlach
• "Potlach" comes from a Chinook Indian custom that
existed in many North American Indian cultures. It is a
ceremony where not only were gifts exchanged, but dances,
feasts, and other public rituals were performed. In some
instances potlach was a form of initiation into secret tribal
societies. Because the exchange of gifts was so important
in establishing a leader's social rank, potlach often spiralled
out of control as the gifts became progressively more lavish
and tribes put on larger and grander feasts and
celebrations in an attempt to out-do each other.
• 1535: Wampum
• The earliest known use of wampum,
which are strings of beads made from clam
shells, was by North American Indians in
1535. Most likely, this monetary medium
existed well before this date. The Indian
word "wampum" means white, which was
the color of the beads.
• 1816: The Gold Standard
• Gold was officially made the standard of value in
England in 1816. At this time, guidelines were made
to allow for a non-inflationary production of standard
banknotes which represented a certain amount of
gold. Banknotes had been used in England and
Europe for several hundred years before this time,
but their worth had never been tied directly to gold.
In the United States, the Gold Standard Act was
officially enacted in 1900, which helped lead to the
establishment of a central bank.
• 1930: End of the Gold Standard
• The massive Depression of the 1930s, felt
worldwide, marked the beginning of the end of
the gold standard. In the United States, the
gold standard was revised and the price of gold
was devalued. This was the first step in ending
the relationship altogether. The British and
international gold standards soon ended as well,
and the complexities of international monetary
regulation began.
• The Present:
Today, currency continues to change and develop,
as evidenced by the new $100 U.S. Ben Franklin bill
and also here in our country as seen in our latest coin
and paper bills.

• The Future: Electronic Money

In our digital age, economic transactions regularly
take place electronically, without the exchange of any
physical currency. Digital cash in the form of bits and
bytes will most likely continue to be the currency of the
future.
• How Is Money Measured?
• Economists and investors ask this question to determine whether there is
inflation or deflation. Money is separated into three categories so that it is
more discernible for measurement purposes:
• M1 – This category of money includes all physical denominations of coins
and currency; demand deposits, which are checking accounts and NOW
accounts; and travelers' checks. It also includes other forms of liquid deposits
and assets such as savings accounts. This category of money is the narrowest of
the three, and is essentially the money used to buy things and make payments.
• M2 – With broader criteria, this category adds all the money found in M1 to
all time-related deposits, many types of retirement accounts, and non-
institutional money market funds. This category represents money that can be
readily transferred into cash like in the Philippines which is the Pension.
• M3 – The broadest class of money, M3 combines all money found in the M2
definition and adds to it all large time deposits, institutional money market funds,
short-term repurchase agreements, along with other larger liquid assets. M3
indicates a country's money supply or the total amount of money within an
economy. Ex. Investments.
 Money Laundering

Money laundering is an illegal activity that makes large

amounts of money generated by criminal activity, such
as drug trafficking or terrorist funding, appear to have
come from a legitimate source. The money from the
criminal activity is considered dirty, and the process
“launders” it to look clean. Financial institutions
employ anti-money laundering (AML) policies to detect
and prevent this activity.
Money laundering, a term arising from this
regulatory regime, consists of actions
taken to conceal financial movements
underlying crimes ranging from tax
evasion and drug trafficking to public
corruption and the financing of groups
designated as terrorist organizations.
 Anti-money laundering (AML

• AML legislation was a response to the growth of

the financial industry, the lifting of capital
controls, and the growing ease of conducting
complex chains of financial transactions. A high-
level United Nations panel has estimated annual
money laundering flows total at least $1.6 trillion,
accounting for 2.7% of global GDP in 2020.
 How Money Laundering Works
• Money laundering is essential for criminal organizations that use
illegally obtained money. Criminals deposit money in legitimate
financial institutions to appear as if it comes from legitimate
sources. Laundering money typically involves three steps
although some stages may be combined or repeated.1
• Placement: Injects the “dirty money” into the legitimate
financial system.
• Layering: Conceals the source of the money through a series of
transactions and bookkeeping tricks.
• Integration: Laundered money is disbursed from the legitimate
account.
 Types of Transactions
• Structuring or Smurfing: Large allotments of illegally obtained cash
are divided into multiple small deposits and spread over many
different accounts
• “Mules” or cash smugglers: Cash is smuggled across borders and
deposited into foreign accounts
• Investing in commodities: Using gems and gold that can be
moved easily to other jurisdictions
• Buying and Selling: Using cash for quick turnaround investment in
assets such as real estate, cars, and boats
• Gambling: Using casino transactions to launder money
• Shell companies: Establishing inactive companies or corporations
that exist on paper only.
Capital Control
Capital control represents any measure taken by
a government, central bank, or other regulatory
body to limit the flow of foreign capital in and out
of the domestic economy. These controls include
taxes, tariffs, legislation, volume restrictions,
and market-based forces. Capital controls can
affect many asset classes such as equities, bonds,
and foreign exchange trades.