CrazyBoy's Banking Lectures: Money

@CrazyBoy • Oct 24, 2024

Oct 24, 2024

1.3K

Yesterday, I was having an interesting discussion with couple of my collegues in office on Banking topic. After the discussion, when i reconciled the things, I noticed that many of us do not know the many aspects of banking (I am not considering myself an exception).

Then second thought was why not to start a new thread on CE where we all can share the banking knowledge. I started this thread and wants to ensure that we will all make this thread a interactive thread. Do post your queries, and we all will try to get a solution for that. Also, feel free to provide comments, so that I can improve on as well.

NOTE: For now, for each topic I will be starting a new thread named as "CrazyBoy's Banking Luctures: <topic>"

Reference: Wikipedia & self made documents

-CB

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Mahesh Dahale

@mahesh-E2tZ3t • Jan 3, 2010

Re: CrazyBoy's Banking Luctures: Money

Hey CB nice Idea...

Now a Days banking knowledge is very important

"CrazyBoy's Banking Luctures"

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Anil Jain

@CrazyBoy • Jan 3, 2010

Re: CrazyBoy's Banking Luctures: Money

What is commerce ?

Commerce is a division of trade or production which deals with the exchange of goods and services from producer to final consumer. It comprises the trading of something of economic value such as goods, services, information or money between two or more entities. Commerce functions as the central mechanism which drives capitalism and certain other economic systems.

Some commentators trace the origins of commerce to the very start of communication in prehistoric times. Apart from traditional self-sufficiency, trading became a principal facility of prehistoric people, who bartered what they had for goods and services from each other.

In historic times, the introduction of currency as a standardized money facilitated a wider exchange of goods and services. The circulation of a standardized currency provides the major advantage to commerce of overcoming the "double coincidence of wants" necessary for barter trades to occur. For example, if a man who makes pots for a living needs a new house, he may wish to hire someone to build it for him. But he cannot make an equivalent number of pots to equal this service done for him, because even if the builder could build the house, the builder might not want the pots.

Currency solved this problem by allowing a society as a whole to assign values and thus to collect goods and services effectively and to store them for later use, or to split them among several providers.
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Anil Jain

@CrazyBoy • Jan 3, 2010

Re: CrazyBoy's Banking Luctures: Money

Money:
Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main functions of money are as a medium of exchange, a unit of account, and a store of value. In the past, money was almost always commodity money, money with intrinsic value from the commodity of which it is made (eg. gold and silver coins, shells, tobacco leaves, grain). However, modern monetary systems are based on fiat money – money without intrinsic value, but declared by a government to be legal tender, that is, it must be accepted as a form of payment for 'all debts, public and private'.

Etymology
The word "money" is believed to originate from a temple of Hera, located on Capitoline, one of Rome's seven hills. In the ancient world Hera was often associated with money. The temple of Juno Moneta at Rome was the place where the mint of Ancient Rome was located.The name "Juno" may derive from the Etruscan goddess Uni (which means "the one", "unique", "unit", "union", "united") and "Moneta" either from the Latin word "monere" (remind, warn, or instruct) or the Greek word "moneres" (alone, unique).

Money can mainly be devided into four types:

1) Commodity money
2) Representative money
3) Fiat money
4) Credit money

I will be explaining each type in subsequent posts with time.

-CB
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Sahithi Pallavi

@sahithi-oJZaYj • Jan 3, 2010

Re: CrazyBoy's Banking Luctures: Money

Superb thread must say!

Frankly saying, I don't have any knowledge on Banking.
So, this thread is very very helpful for me.

Thank you very much CB!!
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Kaustubh Katdare

@thebigk • Jan 4, 2010

Re: CrazyBoy's Banking Luctures: Money

Awesome initiative, CB. Please make sure the titles are informative. Lot of people are going to find them through Google search engine.

Can't wait to read.
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Manish Goyal

@manish-r2Hoep • Jan 4, 2010

Re: CrazyBoy's Banking Luctures: Money

If you are talking about banking lectures then i think you must be aware of some Deposit schemes provided by banks.

Here are some of deposit schemes of which i am aware of...

1.Multi option deposit (MOD): A unique deposit schemes of Term deposit/Special Term Deposit in conjunction with Savings Bank or Current Account. Minimum deposit –Rs. 10,000/-. The depositor can draw the amount from his SB & Current Account related to his MOD at the time of his need without breaking the whole deposits.
but if amount exceeds 10,000 then it will automatically turned into Fixed Deposit and you will get interest on it.
2.Savings Plus Account: Your money earns interest even while you are taking comfortable steep as the Saving excess chosen there should units gets automatically converted into the term deposit- Minimum Balance Rs. 5000/-
3.SBI Tax Saving Deposit Scheme: The depositor in this scheme gets rebate under 80 c clause of income tax. Minimum deposit Rs. 1,000/- maximum deposit Rs. 1.00 lac.
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Anil Jain

@CrazyBoy • Jan 4, 2010

Re: CrazyBoy's Banking Luctures: Money

Nice knowledge Goyal.

However, right now I do not want to jump on to the deposit schemes directly. In this specific thread I am explaining Money and its type. I will create a completely separate thread for Deposits.

-CB
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Manish Goyal

@manish-r2Hoep • Jan 4, 2010

Re: CrazyBoy's Banking Luctures: Money

alright 😛
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Anil Jain

@CrazyBoy • Jan 4, 2010

Re: CrazyBoy's Banking Luctures: Money

Thanks for the appreciaion !!!

Commodity money
Commodity money's value comes from the commodity out of which it is made. The commodity itself constitutes the money, and the money is the commodity. Sounds confusing? OK, let me come up with examples,

Examples of commodities that have been used as mediums of exchange include gold, silver, copper, rice, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, barley, etc. These items were sometimes used in a metric of perceived value in conjunction to one another, in various commodity valuation or Price System economies. Use of commodity money is similar to barter, but commodity money provides a simple and automatic unit of account for the commodity which is being used as money.

Aspects
Commodity money is to be distinguished from representative money which is a certificate or token which can be exchanged for the underlying commodity. A key feature of commodity money is that the value is directly perceived by the users of this money, who recognize the utility or beauty of the tokens as they would recognize the goods themselves. That is, the effect of holding a token for a barrel of oil must be the same economically as actually having the barrel at hand. This thinking guides the modern commodity markets, although they use a sophisticated range of financial instruments that are more than one-to-one representations of units of a given type of commodity.

Since payment by commodity generally provides a useful good, commodity money is similar to barter, but is distinguishable from it in having a single recognized unit of exchange.

People left their surplus clothing, toilet requisites and food there until they were sold at a fixed price in cigarettes. Only sales in cigarettes were accepted - there was no barter Of food, the shop carried small stocks for convenience; the capital was provided by a loan from the bulk store of Red Cross cigarettes and repaid by a small commission taken on the first transactions. Thus the cigarette attained its fullest currency status, and the market was almost completely unified.
In another example, in U.S. prisons, after smoking was banned in about 2003, commodity money has switched in many places to cans or foil pouches of mackerel fish filets, which have a fairly standard cost and are easy to store. These may be exchanged for many services in prisons where personal possession of currency is prohibited.

Metals
In situations where the commodity is metal, typically gold or silver, a government mint will often coin money by placing a mark on the metal that serves as a guarantee of the weight and purity of the metal. In doing so, the government will often impose a fee which is known as seigniorage.

Functions of commodity money
Although some commodity money (barley), has been used historically in relations of trade and barter (Mesopotamia circa 3000 BC.), it can be inconvenient to use as a medium of exchange or a standard of deferred payment due to transport and storage concerns, and eventual rancidity. Gold or other metals are sometimes used in a price system as a store of perceived value, that does not break down due to environmental deterioration, and can be easily stored (demurrage).

-CB
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Anil Jain

@CrazyBoy • Jan 4, 2010

Re: CrazyBoy's Banking Luctures: Money

Representative money is money that consists of token coins, or other physical or non physical "digital certificates" (authenticated digital transactions) tokens such as certificates, that can be reliably exchanged for a fixed quantity of a commodity such as gold, silver, water oil or food. The value of representative money stands in direct and fixed relation to the commodity that backs it, while not itself being composed of that commodity.

The gold standard, based on paper notes that are normally freely convertible into fixed quantities of gold, is the most common form of representative money. It was adopted by most of the industrialized countries during the 18th and 19th centuries.

History
Historically, the use of representative money predates the invention of coinage.

-CB
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Anil Jain

@CrazyBoy • Jan 4, 2010

Re: CrazyBoy's Banking Luctures: Money

Fiat Money

The term derives from the Latin fiat, meaning "let it be done". Where fiat money is used as currency, the term fiat currency is used. Today, most national currencies are fiat currencies, including the US dollar, the euro, and all other reserve currencies.

In simplest defination, Fiat money is any money that is declared by the government (typically notes and coins from a central bank, such as the Federal Reserve System in the U.S.) to be legal tender, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private.

While specie-backed representative money entails the legal requirement that the bank of issue redeem it in fixed weights of specie, fiat money's value is unrelated to any physical quantity. Even a coin containing valuable metal may be considered fiat currency if its face value is higher than its market value as metal.

A feature of all fiat money is its (typically exclusive) acceptability to the government for payment of taxes and charges.

Fiat money, if physically represented in the form of currency (paper or coins) can be accidentally damaged or destroyed. However, fiat money has an advantage over representative or commodity money, in that the same laws that created the money can also define rules for its replacement in case of damage or destruction. For example, the U.S. government will replace mutilated Federal Reserve notes (U.S. fiat money) if at least half of the physical note can be reconstructed, or if it can be otherwise proven to have been destroyed. By contrast, commodity money which has been lost or destroyed cannot be recovered.

Fiat monies usually trade against each other in an international market, and can change value, as with other goods. Thus the number of U.S. dollars or Japanese yen which are equivalent to each other, or to a gram of gold, are all market decisions which change from moment to moment.

-CB
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Anil Jain

@CrazyBoy • Jan 4, 2010

Re: CrazyBoy's Banking Luctures: Money

Credit money is any claim against a physical or legal person that can be used for the purchase of goods and services. Examples of credit money include personal IOUs, and in general any financial instrument or bank money market account certificate) which is not immediately repayable (redeemable) in specie, on demand. Credit money is naturally used as money, and may even be the primary type of money. Banknotes which are not backed by specie, whether or not they are legal tender (see fiat money for the latter case), are credit money, inasmuch as they are simply promissory notes issued by a certain bank, or system of banks.

Credit money differs from commodity and fiat money in two ways:

1. It is not payable on demand (although in the case of fiat money, "demand payment" is a purely symbolic act since all that can be demanded is other types of fiat currency)
2. There is some element of risk that the real value upon fulfillment of the claim will not be equal to real value expected at the time of purchase.

Risk comes about in two ways and affects both buyer and seller:

a. Credit money is a claim and the claimant may default (not pay).
b. The second source of risk is time. Credit money is a promise of future payment. If the interest rate on the claim fails to compensate for the combined impact of the inflation (or deflation) rate and the time value of money, the seller will receive less real value than anticipated. If the interest rate on the claim overcompensates, the buyer will pay more than expected.

-CB
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Anil Jain

@CrazyBoy • Jan 4, 2010

Re: CrazyBoy's Banking Luctures: Money

I have tried to explain the types of money with best of my knowledge (Ref: WikiPedia). If any of you have any confusion / doubts / knowledge of any other type of money which can not be included in these types, please revert back.

All doubts / comments are welcomed.

-CB
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silverscorpion

@silverscorpion-iJKtdQ • Jan 5, 2010

Well, nice going!!

But I'm not sure I get the difference between barter and commodity money!! In barter we give something that we don't need and get something that we do need in return.

In commodity money system also, we are paid in salt or barley or whatever.. So, what's the difference?
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Anil Jain

@CrazyBoy • Jan 5, 2010

silverscorpion
Well, nice going!!

But I'm not sure I get the difference between barter and commodity money!! In barter we give something that we don't need and get something that we do need in return.

In commodity money system also, we are paid in salt or barley or whatever.. So, what's the difference?

Oh SS!!!

Frankly speaking, I never give it a deep thought, before explaining the comodity money that this may arise a confusion.

Anyways, in barter system cost of the goods (to be changed with something) was not fixed. On ones requirement and judgement people used to negotiate, however in comodity money (in modern world), costs are very much standerdised.

For example: earlier in barter system on the basis of requirement you could negotiate that for 100 gm gold coin you will give 1 barrel of oil only. However, in comodity money 100 gm of gold coin has its standerd value.

Please, revert back If i have not cleared your doubt.

-CB
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silverscorpion

@silverscorpion-iJKtdQ • Jan 8, 2010

In fiat money, the money in itself holds no value, right? The government urges everyone to accept it at a fixed value. So, how is the value of money fixed? Why does the value of money change?
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silverscorpion

@silverscorpion-iJKtdQ • Jan 8, 2010

In fiat money, the money in itself holds no value, right? The government urges everyone to accept it at a fixed value. So, how is the value of money fixed? Why does the value of money change?
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tashirosgt

@tashirosgt-7BsIre • Jan 31, 2010

Legal Tender

A significant aspect of money is the concept called (in the USA) "legal tender". If you incur a debt of $100 then if you offer $100 in US currency as payment for this debt, this payment must, by law, be accepted. The person who you pay cannot refuse the payment since currency is "legal tender". But if you barter and incur a debt of "100 lbs of grain", your payment of 100 lbs of grain might be disputed on the grounds that the grain is contaminated or of inferior quality etc. For this reason, transactions made by barter incur additional costs since the parties must worry about inspecting the merchandise that is exchanged. If the transaction is for a large amount of goods, the costs of inspection can be large.
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Ashraf HZ

@Ash • Feb 1, 2010

Re: Legal Tender

This bartering talk reminds of the the phrase "One man's trash is another man's treasure" 😀

Value of the goods received is pretty much relative to the creditor I suppose.

@SS
I believe fiat money needs to be pegged to something of existing value (gold?) to be worth. Then again, the value of things depends on market forces too.
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tashirosgt

@tashirosgt-7BsIre • Feb 2, 2010

Proposals to tie the total amount of money to some commodity whose supply only increases slowly (such as gold) are impractical in economies where technological progress is rapid. The "total value" of the economy in terms of goods and services is increasing but the "total value" of the currency is not. This type of economy could be sustained if the price of goods and services fell in order to account for the constant money supply vs the increased goods and services. However, the usual result is that the supply of money to invest in new technology and industry gets choked off. So the goods and services stop increasing.

Tying the total amount of money to some commodity is usually an emergency measure. If a country has created money too freely (i.e. increased the supply of money but not increased the available goods and services proportionately) then nobody wishes to own the currency of the country. By tying to currency to a commodity, a country can dispel the fears by owners of the currency that the currency will become worthless.

There is also the remote possibility that the commodity used to back the currency will suddenly become more available due to new discoveries. For example, suppose someone discovered a vast supply of gold or a cheap way to extract it from seawater. Increased gold would make certain industrial goods increase, but a commodity like oil would have more bearing on industrial production. I think it would be better to back currency by oil than gold since a sudden increase in available oil would tend to make more goods and service available. This would compensate for the increase in money that was backed by the oil.
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