You would have heard of payments being made by cheques instead of cash. For payment through cheque, the payer who has an account with the bank makes out a cheque for a specific amount. The value of a fiduciary currency depends on the confidence that it will be generally accepted as a medium of exchange. Unlike fiat currency, it is not declared legal tender by the government, which means people are not required by law to accept it as a means of payment. Instead, the issuer promises to exchange it back for a commodity or fiat currency if requested by the bearer. As long as people are confident that this promise will not be broken and the currency won’t lose its value due to high inflation, they can use this type of money just like regular fiat or commodity money.

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. Using a non-stable good as money produces transaction costs due to the risk that its value might rise or fall, because of scarcity or over-abundance, before the next transaction. The authenticity and quantity of the good should be readily apparent to users so that they can easily agree to the terms of an exchange. Using a non-recognizable good as money can result in transaction costs relating to authenticating the goods and agreeing on the quantity needed for an exchange. Money should be easy to carry and divide so that a worthwhile quantity can be carried on one’s person or transported.

This is sometimes part of
a strictly profit-driven investment philosophy, based on the
assumption that companies with superior social performance also have
superior financial performance (Richardson & Cragg 2010). But more
commonly, it is perceived as an alternative to mainstream investment. The background argument here is that market pricing mechanisms, and
financial markets in particular, seem to be unable to promote
sufficient levels of social and environmental responsibility in firms. Even though there is widespread social agreement on the evils of
sweatshop labor and environmental degradation, for instance,
mainstream investors are still financing enterprises that sustain such
unjustifiable practices. Therefore, there is a need for a new kind of
investor with a stronger sense of social responsibility (Sandberg
2008, Cowton & Sandberg 2012). Much subsequent debate has focused on so-called systemic risk, that
is, the risk of failures across several agents which impairs the
functioning of the financial system as such (Brunnermeier & Oehmke
2013, Smaga 2014).

Accounting firms
investigate businesses in order to make sure that their accounts
(annual reports) offer an accurate reflection of the financial
situation. While the primary intended beneficiaries of these auditing
services are shareholders (and the public at large), accountants are
paid by the firms they audit. This remuneration system is often said
to lead to conflicts of interest. We
will return to issues concerning conflicts of interest below (in
section 4.2). An alternative account holds that the creation of money need not be
intentional or declarative in the above sense. Instead money comes
about as a solution to a social problem (the double coincidence of
wants) – and it is maintained simply because it is functional or
beneficial to us (Guala 2016, Hindriks & Guala 2021).

We have already discussed the general issue of the ontological status
of money
(section 1.1
above). But there are also significant questions in political
philosophy regarding the question of where, and by what sorts of
institutions, should the money supply be controlled. One complicating
factor here is the extensive disagreement about the institutional
basis of money creation, as described above. One strand of the credit
theory of money emphasizes that in today’s world, money creation
is a process in which commercial banks play a significant role. These
banks in effect create new money when they make new loans to
individual or business customers (see McLeay, Radia, & Thomas
2014; see also Palley 1996; Ryan-Collins et al. 2012; Werner 2014a,b). James Tobin refers to commercial bank-created money, in an evocative
if now dated image as “fountain pen money”, that is, money
created with the swish of the bank manager’s fountain pen (Tobin

Bank Deposits

If you are looking for a summary of this chapter, this blog brings you Money and Credit Class 10 notes covering all the essential topics and pointers explained in this unit. The study or collection of currency, including coins, tokens, paper money, etc. is known as ___. With the appearance of paper money, the most desired quality of metal coins was . In order to understand the fundamentals of economics, it is imperative to have a good understanding of money.

  • This criticism tends to be
    directed towards financial activities that go beyond mere lending.
  • Financial
    assets are often derived from or at least involve underlying
    “real” assets—as, for example, in the relation
    between owning a house and investing in a housing company.
  • Quickonomics provides free access to education on economic topics to everyone around the world.
  • We want to include as part of the money supply those things that serve as media of exchange.
  • This type of money facilitates the exchange process because it acts as a generally accepted medium of exchange.

People can withdraw the money deposited and the accrued interest at any time. Deposits with the banks are beneficial to the depositors as well as to the nation. Money acts as the intermediate in the exchange process and thus eliminates the need for double coincidence of wants. With money as a common measure, it’s easier to quote and bargain prices.

A Unit of Account

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 industry’s response to epistemic
uncertainty. The modern financial system can thus be seen as an infrastructure
built to facilitate transactions of money and other financial assets,
as noted at the outset.

The danger here is that existing
inequalities—which many theories of justice would describe as
unjust—are reinforced even further (Herzog 2017a). But the current financial
system is not a pure creature of the free market. In the
financial system that we currently see, the principle that individuals
are to be held financially accountable for their actions, and that
they will therefore be “disciplined” by markets, is patchy
at best.

Two different credit situations

But, even without official recognition by the government, the so-called “Swiss” dinar certainly seemed to function as a fiat money. Here is how the Kurdish area of northern Iraq, during the period between the Gulf War in 1991 and the fall of Saddam Hussein in 2003, came to have its own currency, despite the pronouncement of its prime minister to the contrary. As financial assets other than checkable deposits have become more liquid, economists have had to develop broader measures of money that would correspond to economic activity. In the United States, the final arbiter of what is and what is not measured as money is the Federal Reserve System. Because it is difficult to determine what (and what not) to measure as money, the Fed reports several different measures of money, including M1 and M2.

It is important that formal credit is distributed more equally so that the poor can benefit from cheaper loans. These are the loans from moneylenders, traders, employers, relatives and friends, etc. There is no organisation which supervises the credit activities of lenders in the informal sector.

This reduced transaction costs by making it easier to measure and compare value. Also, the representations of money became increasingly abstract, from precious metals and stamped coins to paper notes, and, in the modern era, electronic records. The basic function of money is to enable buying to be separated from selling, thus permitting trade to take place without the so-called double coincidence of barter. In principle, credit could perform this function, but, before extending credit, the seller would want to know about the prospects of repayment. That requires much more information about the buyer and imposes costs of information and verification that the use of money avoids.

When Were Coins Replaced by Paper Money?

However, others express concern over the
indirect effects, which are likely to be more negative. Allowing
insider trading may erode the moral standards of market participants
by favoring opportunism over fair play (Werhane 1989). Moreover, many
people may be dissuaded from even participating in the market since
they feel that it is “rigged” to their disadvantage
(Strudler 2009).

Because money acts as a store of value, it can be used as a standard for future payments. When you borrow money, for example, you typically sign a contract pledging to make a series of future payments to settle the debt. These payments will be made using money, because money acts as a store of value.

2 Fairness in Financial Markets

In periods of rapid inflation, people may not want to rely on money as a store of value, and they may turn to commodities such as land or gold instead. Although Bitcoin remains the most popular and most expensive one, other virtual currencies have hit the market. It was released in 2009 by the pseudonymous Satoshi Nakamoto, All of the world’s Bitcoin was worth just over $522.5 billion. Keep in mind, though, that virtual currencies like Bitcoin have no physical coinage because they are traded on exchanges. Under this rule, currency printing was permitted based on the amount of gold a country had in its reserves.

A similar thought is picked up
by Marx, who argues that capitalism replaces the natural economic
cycle of C–M–C (commodity exchanged for money exchanged
for commodity) with M–C–M (money exchanged for commodity
exchanged for money). Thus the endless accumulation of money becomes
the sole goal of the capitalist, which Marx describes as a form of
“fetishism” (Marx 1867, volume I). Epistemic virtue is not only relevant for financial agents themselves,
but also for other institutions in the financial system.