MONEY and BANKING FULL GRAPHICS

MONEY FOREVER?

Some economists regarded money to be the source of all social evil and tried to remodel the society so that no money would be needed. Others believed that economic evolution would lead spontaneously to the future society without money. Is it possible that they were right or will money stay with us forever?

 Student 1

I think economic evolution leads to development of money. Money may be made more liquid and easier for exchanges throughout the world with economic development but it will never disappear. People will find a way to keep some kind of form of money. If people do not have money in the future, they will form it again. To give an example I will use vouchers you talked about in class. Vouchers were exchanged between people, and by having this quality vouchers become part of the definition of money even though they are not officially money. Also, people were able to get some of the things they wanted with vouchers, and it was convenient because it was better than nothing. Another example of money formation happened in Argentina. During high inflations a group of people formed a little “market” where they used barter system to exchange goods. Other people began to join in. Eventually the leader formed some type of “notes” which could be traded for a specific amount of some type of good or service. The trade became much simpler as these notes got around the market. Eventually inflation occurred in this artificial market. MONEY DEPENDS ON THE PAYMENT SYSTEM WHICH IS A METHOD OF CONDUCTING TRANSACTIONS IN THE ECONOMY BESIDES THE FIAT AND COMMODITY MONEY DESCRIBED ABOVE, IN ECONOMY ALSO EXIST ELECTRONIC MONEY. ELECTRONIC MONEY IS VERY EXPENSIVE DUE TO THE SETUPS OF THE COMPUTERS FOR EVERY LITTLE TRANSACTION. ALSO ELECTRONIC MONEY IS BAD BECAUSE THEY DO NOT PROVIDE A RECEIPT. ALSO THE SECURITY AND PRIVACY PROBLEMS ARISE. BECAUSE OF SO MANY PROBLEMS SOME PEOPLE WILL REFUSE TO GIVE UP FEAT MONEY OR AS MENTIONED ABOVE WILL FORM ANOTHER FORM OF CURRENCY. The point I am trying to make is that even if society does get remodeled so that the future society does end up without money, people will find ways of creating FIAT OR COMMODITY money and making it more convenient for their lives. AT THE SAME TIME ELECTRONIC MONEY OR SOME TYPE OF MONEY THAT ARISE PROBLEMS SUCH AS SECURITY, CONVENIENCE AND PRIVACY WILL ALWAYS EXIST. The created money will be easily exchanged, store value, be unit of account and be liquid.

 Student 2

The idea of money is an advancement from the system of no money, thus an elimination of money would be considered a de-evolution of a society. A society without money would be a barter system. This would be the exchange of one physical good for another physical good. This is highly inefficient because it would require finding two people who desire each other’s good (ex. A baker who wants a fish and a fisherman who wants bread). So that people do not have to go through the hassle of this, money has been created. Money must have three characteristics. It must be a store of value (actually worth something), a unit of account (can be counted, accumulated and divided), and a medium of exchange (universally accepted). US money used to be based on the gold standard. This meant that you could take a dollar and exchange it for a certain amount of gold. Today though, this type of money no longer exists. The US was finally removed form the gold standard in 1973 and now we have Fiat Money. This kind of money has no value other than it is trusted by people to be accepted and the issuer behind it, the US Treasury, backs the money up as a low risk. The supply of money must also be controlled so that there is not too much of it so that it becomes devalued, yet there is enough that a growing economy can keep growing. This is regulated by the Federal Open Markets Committee, a committee of the Federal Reserve. No longer though are only dollars as paper accepted as money. The use of Travelers checks, credit cards, debit cards, e-cash and electronic transfers have made the need for carrying paper money obsolete. With advancements like these in the money system- items that are not money themselves but represent money in every aspect- may the existence of actual paper money extinct. Only the future, increase in technology and acceptance of such instruments will be able to dictate whether paper money will be forever or not. Money is changing, there is no doubt about it. Technology has made the use of transferring mass amounts of money much easier than ever before. Yet, the idea of money as (1) a unit of account (2) a store of value and (3) medium of exchange will always be what money is. And, therefore, paper money may disappear but the idea of money is here forever. For those who think money is the source of evil, I suggest they reexamine their lives and moral values to come up with another scapegoat.

 Student 3

This assertion that money will or even could disappear completely from any large economy is a fallacy. Money is different than simply a measure of wealth—wealth includes other aspects as well. Money has three essential functions for an economy: 1) as a means of exchange, 2) as a unit of account, and 3) as a store of value. As sole provider of these functions within an economy, money cannot disappear.

What can change, however, is the form that money takes. Traditionally, money has often been made of precious metals. Yet the inconvenience of this form caused it to take on the newer paper form (although it was still backed by gold and later by silver and gold). Today, more efficient electronic forms of money transfer have taken shape, and have, to a large extent in many cases, replaced the paper bill for payment. These include the use of money transfers by debit, check, and ATM cards; credit cards have also provided an easier method of payment. And while these electronic money transfer cards do not satisfy all three specifications necessary to be labeled “money”, they do illustrate a continuing evolution of money rather than any sort of disappearance of money.

 Schumpeter’s assertion that the main promoters of economic development are entrepreneurship and profit motive adds evidence to this point. If, for instance, a capitalist economy degenerated into socialism, in his eyes the factors of development would necessarily weaken. The decreased profit motive might then lead to a decreased demand for money; this, in turn, would severely impact the very institutions that help also to increase economic efficiency—financial intermediaries such as banks and credit companies.

Nor are cash, travelers checks and the like the only form of money today. They are labeled “M1” meaning they are the most liquid form of money, but there exist two other forms as well: “M2” and “M3”, with decreasing liquidity, respectively. M3, though it is least liquid, still satisfies the three requirements of the term “money”. It is also by far the largest of the three categories.

In short, money came to be because of the gross inefficiencies of the barter economy. If, for instance, three different people each wished to trade his respective product for that of one of the others, but there existed no “double coincidence” among any of them, the trade would likely not occur at all.

Those countries which have implemented grand experiments intending to rid themselves of the “evils of money” have failed miserably. One must look only to the Soviet scheme to confirm that point. And while China, as the largest of the communist countries still in business, shows few signs of a changing its political ways, its economic system is largely—and surprisingly—capitalist. Money is a tool, plain and simple. It increases economic and market efficiencies. It will, as such, continue its existence in on form or another indefinitely.

 Student 4

MONEY WILL ALWAYS EXIST IN SOME FORM. IT IS NOT JUST PAPER BILLS AND COINS. It may take on different forms over time, as it has throughout history. However, for economic efficiency, we need money, REGARDLESS OF THE PHYSICAL FORM, to serve as a store of value, UNIT OF ACCOUNT, and means of exchange.

In the simplest form, money allows individuals in a society to MORE EASILY accommodate their individual consumption preferences by being able to make exchanges with money. This lowers the transactions costs and increases liquidity because, unlike in barter economies, money can facilitate an exchange without a direct exchange of goods or services for other goods or services.

Government distribution of resources to individuals is inefficient. The government doesn’t know each individual’s preferences, so trading would take place, naturally giving rise to some unofficial form of money to facilitate easier exchange OF GOODS TO ARRIVE AT A DISTRIBUTION THAT ACCOMMODATES INDIVIDUAL UTILITY FUNCTIONS. HOWEVER, WITHOUT A MONETARY SYSTEM TO FACILITATE EXCHANGE WITHOUT HAVING TO LOCATE SOMEONE WHO WILL GIVE YOU HIS GOOD IN EXCHANGE FOR YOUR GOOD, OFTEN THE SEARCH COSTS WILL BE TOO HIGH AND SOME TRADES WILL NOT BE MADE AND INDIVIDUALS WOULD ACHIEVE A LOWER UTILITY. THUS, A MONETARY SYSTEM WOULD BE DESIRED TO RAISE UTILITY LEVELS BY LOWERING TRANSACTIONS COSTS.

Even in the future if everything is handled through computers, money will still exist; it just won’t be tangible. As far as I see it, society needs a store of value and means of exchange to maintain economic efficiency and to create proper incentives in society. ACCORDING TO MISHKIN’S DEFINITION, MONEY IS “ANYTHING THAT IS GENERALLY ACCEPTED IN PAYMENT FOR GOODS AND SERVICES…” SO EVEN IF GOLD BARS ARE USED IN PLACE OF CURRENCY, IT IS STILL MONEY. The possibility of preserving and gaining wealth is an incentive to be productive. Thus, money will always be an asset to society.

 Student 5

Throughout human history, money has been an essential ingredient in all sorts of transactions. The purpose of money is to eliminate the effects of trying to find the right party very time you need to purchase a good. Suppose you’re a law professor and want to buy shoes, it would be quite difficult to sell your teaching services to a shoe store owner( even if you are able to find a third party intermediary who is willing to get law services and provide same there good to the shoe store). Thus, money spontaneously evolved. By having some form of money, the transactions become much easier because now the show store and the law professor can easily do business. The argument that money should be eliminated is thus not very strong. In fact, the elimination of money was , for a short period, attempted in the communist Soviet Union with disastrous results. Philosophers often find themselves wrestling with the question whether money is the source of social evil. One doesn’t have to look past Adam Smith’s “ The Wealth of Nations” for the answer. The principle of the invisible hand provides us with reasoning for why greed is in fact beneficial to a society. Without greed and self-interest, civilization would make very little social and technological progress for one of the key incentives for invention is the acquirement of wealth. Although it is unlikely that society will rid itself of the concept that is money, the actual tradable unit that is money has gone through a process of evolution. Form salt to giant rocks, to coin and paper and finally, in the last thirty years to a unit of electrical information. Without money, society’s economic function is brutally impaired and it simply cannot function without it. (2) One of the greatest examples of how effective money can be is the development and pursuit of the Euro. The Euro has shown that pursuit of a currency that will unite other currencies rather then a desire to eliminate money. The Euro’s purpose in today’s market economy is to make transactions easier. The fact that the European countries involved sacrificed and compromised for its creation illustrates that simplifying transactions is the optimum way to do business. Money serves the purpose of doing so, and as there is ongoing trade, money, its center and connective ingredient, is unlikely to disappear.

 Student 6

In some way, shape or form, money will stay. But first let us take the definition of money. The loose definition of money is the transfer of payment in the exchange for goods & services. As we have discussed, the payment can come in many forms. An example of this is a barter society. There is no physical money, rather an exchange. However, what is the cost of this barter-like society? Well, there is a high transaction cost. Not in the modern sense of the term, but rather, there is a cost of searching for someone that wants what you have, and has what you want. This is called the “double coincidence of wants.” This cost is not, for example the cost of the paper for a check, but rather the time it takes to find a match for the goods. A system like this has many downfalls. First, the economy as a whole would not be running efficiently. Money, by nature, increases economic efficiency. Second there would be no specialization. Thus a society that had no “paper” money, be it fiat or bimetallism source would struggle to survive. Money has three attributes; unit of account, medium of exchange, and store of value. In today and FUTURE societies, these attributes are a necessity. First every society needs a medium of exchange. Be it a $20 bill, or sacks of silver coins, there needs to be some reasonable way to trade; this is a medium of exchange. Secondly, unit of account, without some general medium, there would be thousands of prices- not in terms of currency, but in terms of goods and services- this does not promote nor encourage efficiency. And lastly, and in this case the least important, store of value, where the currency is generally accepted as being redeemable. Thus, I don’t believe that the future can exist without money. However what we are seeing is the increased efficiency- that is, a lowering of transaction costs- through the elimination of paper and the substitution of electronic transfers (e-money, smart cards etc.) are all examples of a lowering of transactions costs. Overall, what I believe we will see in the future is a society with extremely low transaction costs, and a highly efficient economy with respect to money. Money, is in some way, shape or form, a necessity to society to function- and we cannot live without it.

I still maintain that we cannot part with money. However, while doing a bit of searching on the web I came across an EXTREMELY interesting essay written as part of an entrance exam to Oxford University. In the essay this person insists that money is “superfluous to the exchange process” and furthermore puts forth the notion that “without money, food would be more readily distributable to the hungry, beneficial, but not cost-effective, programmes could be instigated on a wide-reaching scale, and scientific research could gain terrific momentum with out the millstone of expense around it's neck.” (Article found at http://www.netmatrix.demon.co.uk/no_money.html ) This article goes further to accept the reason that we have money is based on our human nature and our social habits as the need for money- a bit of a digression. However in all, the essay explains, in the authors opinion, why we have money and why we might be better off without it. I also came across an interesting book, “The Future of Money” by Bernard Lietaer, which isn’t as extreme as the above mentioned essay, but still quite intriguing. Lietaer insists that there might be more of a privatization of money first, like we have already seen in the form of frequent flier miles, as he mentions. He also brings to light the fact that “1,900 local communities in the world, including over a hundred in the US, are now issuing their own currency, independently from the national money system. Some communities, like in Ithaca, New York, issue paper currency; others in Canada, Australia, the UK or France issue complementary electronic money.” He continues to give examples of places and situations that might prove better off with the a different for of money. While I still maintain that money is truly necessary to sustain our current well-being, these two opinions have enlightened me to a possible, not plausible, world without money. And money will stay with us forever- maybe not in the same form it is in now, but it will stay with us forever.

 Student 7

Money itself, rather than being evil and harmful to society, has actually been very beneficial. Meanwhile, one might be willing to say that it is the pursuit of money that is evil. In a money-less society, transaction costs would be huge. Bartering sometimes provides situations where two merchants don't always want what the other is selling. Money solves this problem by BEING AN INTERMEDIATE GOOD THAT EVERYONE IS WILLING TO HAVE, THUS eliminating the need for the two to want each other’s goods. If we had accurate information and super powerful calculators, then perhaps bartering might work. Every person would carry their calculators, and compute what one good is worth in terms of another. If the number of goods remained constant, then this system might work. A potato might always be worth a stick of gum, and 10 sticks of gum might always be worth a sandwich, so with my calculator I'd be able to calculate what I need to pay for the sandwich in terms of POTATOES, OR the good that I have (10 potatoes = 1 sandwich; 10 sticks of gum = 1 sandwich). However, the system fails if new goods come into the market, or if existing goods change in any way (AS IS THE CASE IN REAL LIFE), because in this case, keeping up with the relative change in value among goods would be close to impossible. THE PRICE OF EACH GOOD IN TERMS OF ANOTHER WOULD BE CONSTANTLY CHANGING.

But what if everything were for free? I desire a car, so I go to a dealership and pick it up. The guy in the factory that made the car then comes to me because I am an architect, and he needs a house. I build him a house. The workers who build the house get hungry, so they go to a restaurant to get food, the cook goes to the farmer to get chickens, the farmer goes to the car dealership to get a truck, etc. Everything for free poses a problem, which is the free-rider problem. If everyone agrees to the system and works providing goods and services, there should be no problem. But surely there will be someone who will reap the benefits while not providing. Not only that, but there is no incentive to work in hard jobs when, FOR EXAMPLE, everyone could technically produce art, which is easier then building a house or DEVELOPING A COMPLEX MATHEMATICAL ALGORITHM. The only incentive would have to come from a central government telling people what to do. In that case, I prefer the “evils" of money to the loss of freedom. So in the end, it’s my belief that money will indeed stay forever. It will SURELY evolve in some ways, as it has done in the past, But until something better is found, it will stay, for society is crippled without it.

Greed and the pursuit of money for personal satisfaction are a greater evil than money itself. BACK-STABBING, DECEIT, MURDER ARE ALL WORDS THAT COULD BE ASSOCIATED WITH MONEY. PEOPLE WILL DO MANY HORRIBLE THINGS TO GET THEIR HANDS ON IT. HOWEVER, IT ISN’T THE MONEY ITSELF THAT IS EVIL, AS HAS BEEN PROVEN ABOVE. WHAT IS TRULY EVIL IS MONEY’S PURSUIT. IN OTHER WORDS, PEOPLE ARE EVIL, NOT MONEY.

 Student 8

Basically, money can never become extinct because around the world money serves as motivation. Why? Because it allows you to do anything. When someone pays you for a service, you can do whatever you want with the money. If there were no money, people would choose to barter, or just do things for free. With a barter system, there is the dilemma of matching; you must always find someone to trade with you to insure that you have a desirable commodity with which to trade. If you don’t have the correct payment, you will not receive your service, and this becomes very inconvenient. Money allows prices to be quoted consistently, not in terms of different desirable payments that would ensue in a cashless society. On the other hand, if people did not barter and just did everything for free, as could happen in a cashless society. However, nothing would get done because people would have no motivation. Unless people also evolve into completely self-less beings, and do everything for free, money will be needed in order to provide the incentive for the service to be completed. Greed is inherent in human nature, and money is the only thing that can appease greed. The qualities of money: that it is a storer of value, a means of payment, and a consistent way of quoting prices, cannot be matched by another object on earth. All these qualities make it extremely desirable, and human nature will ensure its existence. THE ASPECT THAT MONEY IS THE MOST LIQUID COMMODITY MAKES IT VERY DESIREABLE AND THE ONLY THING MOST PEOPLE WILL ACCEPT AS PAYMENT. ALSO, WHILE HUMANS HAVE EVOLVED SO HAS THE CONCEPT OF MONEY, TO THE POINT WHERE NOW THERE IS A MARKET FOR MONEY; PEOPLE CAN EASILY MAKE MONEY OFF OF MONEY. IF THERE WAS SUDDENLY NO SUCH THING AS MONEY, THE RESULTS MAY SET US BACK A FEW HUNDRED YEARS TO THE POINT WHERE SUCH MONEY MARKETS DID NOT EXIST, AND THAT IS SOMETHING MOST PEOPLE ARE NOT WILLING TO ACCEPT. MONEY IS NOT EVIL; THE FACT THAT IT SEPERATES THE RICH AND THE POOR DOES NOT MEAN THAT ITS EXTINCTION WOULD BLUR THIS LINE AND EVERYONE WOULD BE ON THE SAME LEVEL. PEOPLE WOULD STILL SUFFER, AND PERHAPS EVEN MORE SO BECAUSE MONEY SERVES AS THE BEST INCENTIVE FOR ADVANCEMENT. Reference: Mishkin: The economics of Money, Banking and Financial Markets (c)2003

 Student 9

I believe that as long as there are a variety of goods and services to be traded (and there always will be), money will be an essential part of a modern economy. Perhaps, when some economists say economic evolution will lead spontaneously to a future society without money, they mean that computers and technology will be what carries out transactions. However, I believe that even this will be considered money (even if IT IS ELECTRONIC/INTANGIBLE.). I will examine the characteristics of money and the explain why an advanced economic society will always need money:

Money is a unit of account, a medium of exchange, and a store of value: A) As a unit of account, money can set values of the different prices in a society. Without this feature there would be no way to differentiate between goods with high values and goods with low values, a characteristic that any future society must have. B) Secondly, as a medium of exchange, money is easily divisible, easy to carry, WIDELY ACCEPTED, AND IT DOES NOT DETERIORATE QUICKLY. Furthermore, a medium of exchange eliminates THE PROBLEM OF “double coincidence of wants” in a barter society, BECAUSE IT can be used for the exchange of anything in the society. The future will always have the need for efficient exchanges in society, and without a medium of exchange an economy can certainly not be efficient. C) Lastly, money acts as a store of value (ALTHOUGH with inflation it doesn’t). If the future is not able to store wealth in a liquid commodity, the future will not BE ABLE TO TIME THEIR PURCHASES THE WAY THEY WOULD LIKE TO. IF MONEY DID NOT KEEP ITS VALUE OVER TIME, PEOPLE WOULD HAVE TO SPEND THEIR INCOME IMMEDIATELY. It is true that wealth can be stored in other assets such as property, but property is not liquid and it cannot be used for on-the-spot transactions.

Cleary any future society will need something to act as a unit of account, a medium of exchange, and a store of value or else the economy cannot evolve, nor can it maintain efficiency. I am not saying the money necessarily has to be fiat (PAPER MONEY) money. It doesn’t even have to be guaranteed by the government. For example, it could be guaranteed by some other very reliable agency. Money can even be electronic money, SUCH AS AN ELECTRONIC WIRE TRANSFER USED BY CORPORATIONS IN HIGH-PRICE TRANSACTIONS. I would consider debit cards AND SMART CARDS money (until there is nothing left in the bank account/ON THE CARD and they are worthless) since they act as a unit of account, a medium of exchange, and a store of value. The point is, for an economy to be efficient, it will always need these three qualities in a certain commodity, to allow for efficient exchange of goods. WHETHER MONEY IS TANGIBLE LIKE PAPER MONEY OR LESS TANGIBLE LIKE E-MONEY, NO MATTER WHAT IT WILL ALWAYS BE NEEDED IN THE FUTURE.

 Student 10

In the real sense, money/currency has no real value. It is only an intermediary between trading of products/goods. It allows the financial markets to work in the most efficient way by speeding up the transactions between two parties. Without money, the economy would not be working in it most efficient manner. MONEY IS LINKED TO CHANGES IN THE ECONOMIC VARIABLES THAT AFFECT ALL OF US AND ARE IMPORTANT TO THE HEALTH OF THE ECONOMY. If a society went without money, then it would only trade goods, such as bread for corn. However, it would make it very difficult to determine the value of each product due to difficult utility and preference of consumers. One person might consider bread more valuable, but the other might believe corn is MORE VALUABLE. These differences may cause a conflict in trade. Also, without money the products used in trade may be less durable; that is, they can deteriorate over time, thereby making it almost impossible to collect and save PRODUCTS FOR FUTURE USES AND INVESTMENTS. For example, bread cannot last for many years. It would go bad and make it no longer suitable for trade. This would infer a loss. Also, it is very difficult to determine one’s worth when money is not involved. People may not agree on products and their values. It is really determined by how many products/goods they own. However, as mentioned before, some goods do not last. Without money, it is almost impossible to operate the financial markets. It would be extremely difficult for banks to exist and operate in a n efficient manner. How would that make loans and provide a sufficient interest considering that different products have different values and consumers have VARYING preferences. Also, the existence of the stock market can be questions. It would be difficult to keep track of investments, individual stocks, and bonds. Money serves the proposes of making trades more efficient, placing universal values on products, determining a person’s worth and/or wealth, and allowing the financial market to exist. Since money poses are such an important role in the world economy, it is needed and will stay.

 Student 11

The usage of money will continue to be part of our society and way of life. Money provides us with three very basic, but important functions. They are (a) unit of account, (b) storage of value and (c) medium of exchange. Of the above three, the last one of them is the most important of the lot. Our economy runs on transactions of goods and services. Money provides us with an internationally recognized method of payment. The second important factor is that it provides us with a unit of account with which we can assign prices or values to our goods and services. Money provides us with a storage of values that is most of the time consistent, constant and representative of a certain common value. Let us put aside appreciation or depreciation of the currency and assume a constant value. Money gives us an almost immediate representation of how much we have and what we can get for it.

In the future, the basis of money would still apply to us. It might not be money made of paper, but it will still be a form of Fiat money. With the recent introduction of smart cards DEBIT CARDS, ELECTRONIC CHECKS and electronic money, we are basically converting our paper money into a new form consisting of computer chips and bytes. However this is still money, just not readily obvious or conventional. However it can be considered the most liquid form, as it can be instantaneously used anywhere, anytime. HOWEVER SOCIETY WILL TAKE AWHILE TO COMPLETELY FOLLOW THIS PRACTICE, AS THERE ARE STILL PROBLEMS. FIRSTLY SETTING UP THE COMPUTER AND TELECOMMUNICATION SYSTEMS ARE COSTLY. SECONDLY THERE ISN’T A RECEIPT PROVIDE AFTER TRANSACTIONS. THIRDLY, ELECTRONIC PAYMENTS ARE IMMEDIATE, DOESN’T ALLOW CONSUMERS TIME FOR INTEREST “FLOATS”. FOURTH BUT MOST IMPORTANT ARE SECURITY AND PRIVACY CONCERNS WHICH CONSUMERS ARE MOST APPREHENSIVE ABOUT.(1)

Using any other system for instance, Barter trade, would be too confusing and complex in today’s modern society. Imagine how would a banker value his services in terms of a patrol station attendant selling oil or vice versa?

Money is not the cause of social evil. It is too simplistic and easy to blame money for any or even all of society’s problems. Is the lousy father who abandons his child to be blamed on money? It might be one reason but not the only reason. It is simply the man has no conscience or any sense of responsibility. MONEY DID NOT MAKE HIM THAT WAY, SOCIETY DID.

Overall I don’t see a world without some form of money. It is essential and a crucial part of the way we live our lives.

References: (1)Mishkin, The economics of Money, Banking and Financial Markets (World Student Series:2002),56

 Student 12

While some economists believe that money is the root of all evil, and [they] tried to remodel society so that it no longer existed, money will probably stay with us forever. At least some form of money will exist. An economic revolution will not lead spontaneously to a future society without money. Money can be defined as anything that is accepted to purchase goods and services and can be used in repayment of debt. While there is paper currency used day to day to buy goods and services, there also are other forms of money used for [larger transactions as well as those transactions that use paper currency]. Debit cards are one example of a new form of money recently being used. The cards are linked to a checking account, and as it is used, money is transferred from the account to the business you are [buying something from]. Electronic [accounts] are also used to move money around. Usually in larger amounts, companies can now simply press buttons on a computers to transfer money from their accounts to someone else's. However, some economists argue that this is not really money, and this is what they mean when they say money will not actually exist in the future. Traditionally, money has to follow three [functions] for it actually to be defined as money. It must be a medium of exchange, a unit of account, and a store of value. Fiat money (paper currency) is able to do all that. There are other things that money must [have in order to function properly]. It can't be easily counterfeited; it must be able to be held easily, meaning that you can't carry pounds of it around [in your pockets]. There are other [criteria] as well. However, the new forms of "money" that now exist, such as e-cash for example, do not follow all of these rules. In this sense, they may not even be viewed as being money for some economists even if they [can be used to purchase goods and services or can be used to repay debt]. These economists, presumably, say that paper currency will die and these new forms of payment (not money in their eyes, though that is [obviously] debatable) will take over. I disagree. Paper currency is not going to die soon, nor is it going to die at all. For one thing, putting all forms of "money" into computer and having banking done completely electronically [is expensive]. It is also risky for a lot of people. ["Electronic means of payment may raise security and privacy concerns" (Mishkin 56)]. The threat that someone could hack into their accounts is too much. In addition, not holding money [might] scare people; having it all on computer with nothing to actually physically see [could make] people nervous that it could disappear with a click of the mouse. People want to hold money in their pockets- it's too [commonplace now] to be gotten rid of forever. In the end, both electronic and paper currency, both legitimate forms of money in my eyes, will exist in the future. Electronic transfers allow for large sums to be moved, and paper currency deals with smaller sums. You can't have one without the other; they are complements, not substitutes.

Reference: Mishkin, Frederic S. The economics of Money, Banking, and Financial Markets. Boston: Addison Wesley, 2003.

 

 

 

 

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