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Set of mechanisms by which Governments provides money (cash) in a country¶s economy. It

usually consists of a mint, central bank and commercial bank.

Anything that is generally accepted as standard of value and a measure of wealth in a particular
country or region.

A monetary system is anything that is accepted as a standard of value and measure of wealth in a
particular region. However, the current trend is to use international trade and investment to alter
the policy and legislation of individual governments. The best recent example of this policy is
the European Union¶s creation of the euro as a common currency for many of its individual
states. Modern currencies are not linked to physical commodities (silver or gold) and are not a
contract to deliver a goods or services. As such, the value of currency fluctuates based on
politics, credit worthiness, perception and emotion in addition to monetary policy.

Monetary economics is a branch of economics. Historically, it prefigured and remains integrally

linked to macroeconomics. It provides a framework for analyzing money in its functions as a
medium of exchanges, store of value and unit of account. It considers how money, for example
fiat currency, can gain acceptance purely because of its convenience as a public good. It
examines the effects of monetary system, including regulation of money and associated financial
institutions and international aspects.

Modern analysis has attempted to provide a macro-based formulation of the demand for money
and to distinguish valid nominal and real monetary relationships for micro or macro uses,
including their on the aggregate demand for output. Its methods include deriving and testing the
implications of the money as a substitute for other for other assets and as on based explicit
frictions.

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³Global payment system comprising of financial institutions, electronic networks, conventions

and agreed upon rules, for the smooth functioning of international trade.´

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³System established to encourage monetary stability in Europe, through the implementation of
credit and exchange rate policies.´





 


The origin of currency is the creation of a circulating medium of exchange based on a unit of
account which quickly becomes a store of value. Currency evolved from two basic innovations,
both of which had occurred by 2000 BC. Originally money was a form of receipting grain stored
in temple granaries in Sumer in ancient Mesopotamia, then Ancient Egypt.

This first stage of currency, where metals were used to represent stored value, and symbols to
represent commodities, formed the basis of trade in the Fertile Crescent for over 1500 years.
However, the collapse of the Near Eastern trading system pointed to a flaw: in an era where there
was no place that was safe to store value, the value of a circulating medium could only be as
sound as the forces that defended that store. Trade could only reach as far as the credibility of
that military. By the late Bronze Age, however, a series of international treaties had established
safe passage for merchants around the Eastern Mediterranean, spreading from Minoan Crete and

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Mycenae in the northwest to Elam and Bahrain in the southeast. Although it is not known what
functioned as a currency to facilitate these exchanges, it is thought that ox-hide shaped ingots of
copper, produced in Cyprus may have functioned as a currency. It is thought that the increase in
piracy and raiding associated with the Bronze Age collapse, possibly produced by the Peoples of
the Sea, brought this trading system to an end. It was only with the recovery of Phoenician trade
in the ninth and tenth centuries BC that saw a return to prosperity, and the appearance of real
coinage, possibly first in Anatolia with Croesus of Lydia and subsequently with the Greeks and
Persians. In Africa many forms of value store have been used including beads, ingots, ivory,
various forms of weapons, livestock, the manilla currency, ochre and other earth oxides, and so
on. The manilla rings of West Africa were one of the currencies used from the 15th century
onwards to buy and sell slaves. African currency is still notable for its variety, and in many
places various forms of barter still apply.

 

These factors led to the shift of the store of value being the metal itself: at first silver, then both
silver and gold. Metals were mined, weighed, and stamped into coins. This was to assure the
individual taking the coin that he was getting a certain known weight of precious metal. Coins
could be counterfeited, but they also created a new unit of account, which helped lead to
banking. Archimedes' principle provided the next link: coins could now be easily tested for their
fine weight of metal, and thus the value of a coin could be determined, even if it had been
shaved, debased or otherwise tampered with.

In most major economies using coinage, copper, silver and gold formed three tiers of coins. Gold
coins were used for large purchases, payment of the military and backing of state activities.
Silver coins were used for midsized transactions, and as a unit of account for taxes, dues,
contracts and fealty, while copper coins represented the coinage of common transaction. This
system had been used in ancient India since the time of the Mahajanapadas. In Europe, this
system worked through the medieval period because there was virtually no new gold, silver or
copper introduced through mining or conquest. Thus the overall ratios of the three coinages
remained roughly equivalent.

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In pre-modern China, the need for credit and for circulating a medium that was less of a burden
than exchanging thousands of copper coins led to the introduction of paper money, commonly
known today as banknotes. This economic phenomenon was a slow and gradual process that
took place from the late Tang Dynasty (618±907) into the Song Dynasty (960±1279). It began as
a means for merchants to exchange heavy coinage for receipts of deposit issued as promissory
notes from shops of wholesalers, notes that were valid for temporary use in a small regional
territory. In the 10th century, the Song Dynasty government began circulating these notes
amongst the traders in their monopolized salt industry. The Song government granted several
shops the sole right to issue banknotes, and in the early 12th century the government finally took
over these shops to produce state-issued currency. Yet the banknotes issued were still regionally
valid and temporary; it was not until the mid 13th century that a standard and uniform
government issue of paper money was made into an acceptable nationwide currency. The already
widespread methods of woodblock printing and then Bi Sheng's movable type printing by the
11th century was the impetus for the massive production of paper money in pre-modern China.

At around the same time in the medieval Islamic world, a vigorous monetary economy was
created during the 7th±12th centuries on the basis of the expanding levels of circulation of a
stable high-value currency (the dinar). Innovations introduced by Muslim economists, traders
and merchants include the earliest uses of credit, cheques, promissory notes,[4] savings accounts,
transactional accounts, loaning, trusts, exchange rates, the transfer of credit and debt,[5] and
banking institutions for loans and deposits.

In Europe paper money was first introduced in Sweden in 1661. Sweden was rich in copper,
thus, because of copper's low value, extraordinarily big coins (often weighing several kilograms)
had to be made.

The advantages of paper currency were numerous: it reduced transport of gold and silver, and
thus lowered the risks; it made loaning gold or silver at interest easier, since the specie (gold or
silver) never left the possession of the lender until someone else redeemed the note; and it

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allowed for a division of currency into credit and specie backed forms. It enabled the sale of
stock in joint stock companies, and the redemption of those shares in paper.

However, these advantages held within them disadvantages. First, since a note has no intrinsic
value, there was nothing to stop issuing authorities from printing more of it than they had specie
stop back it with. Second, because it increased the money supply, it increased inflationary
pressures, a fact observed by David Hume in the 18th century. The result is that paper money
would often lead to an inflationary bubble, which could collapse if people began demanding hard
money, causing the demand for paper notes to fall to zero. The printing of paper money was also
associated with wars, and financing of wars, and therefore regarded as part of maintaining a
standing army.

For these reasons, paper currency was held in suspicion and hostility in Europe and America. It
was also addictive, since the speculative profits of trade and capital creation were quite large.
Major nations established mints to print money and mint coins, and branches of their treasury to
collect taxes and hold gold and silver stock.

     

With the creation of central banks, currency underwent several significant changes. During both
the coinage and credit money eras the number of entities which had the ability to coin or print
money was quite large. One could, literally, have "a license to print money"; many nobles had
the right of coinage. Royal colonial companies, such as the Massachusetts Bay Company or the
British East India Company could issue notes of credit²money backed by the promise to pay
later, or exchangeable for payments owed to the company itself. This led to continual instability
of the value of money. The exposure of coins to debasement and shaving, however, presented the
same problem in another form: with each pair of hands a coin passed through, its value grew
less.

The solution which evolved beginning in the late 18th century and through the 19th century was
the creation of a central monetary authority which had a virtual monopoly on issuing currency,
and whose notes had to be accepted for "all debts public and private". The creation of a truly
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national currency, backed by the government's store of precious metals, and enforced by their
military and governmental control over an area was, in its time, extremely controversial.
Advocates of the old system of Free Banking repealed central banking laws, or slowed down the
adoption of restrictions on local currency. (See Gold standard for a fuller discussion of the
creation of a standard gold based currency).

At this time both silver and gold were considered legal tender, and accepted by governments for
taxes. However, the instability in the ratio between the two grew over the course of the 19th
century, with the increase both in supply of these metals, particularly silver, and of trade. This is
called bimetallism and the attempt to create a bimetallic standard where both gold and silver
backed currency remained in circulation occupied the efforts of inflationists. Governments at this
point could use currency as an instrument of policy, printing paper currency such as the United
States Greenback, to pay for military expenditures. They could also set the terms at which they
would redeem notes for specie, by limiting the amount of purchase, or the minimum amount that
could be redeemed.

By 1900, most of the industrializing nations were on some form of gold standard, with paper
notes and silver coins constituting the circulating medium. Private banks and governments across
the world followed Gresham's Law: keeping gold and silver paid, but paying out in notes. This
did not happen all around the world at the same time, but occurred sporadically, generally in
times of war or financial crisis, beginning in the early part of the 20th century and continuing
across the world until the late 20th century, when the regime of floating fiat currencies came into
force. One of the last countries to break away from the gold standard was the United States in
1971.

No country anywhere in the world today has an enforceable gold standard or silver standard
currency system.

  

A banknote (more commonly known as a bill in the United States and Canada) is a type of
currency, and commonly used as legal tender in many jurisdictions. With coins, banknotes make
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up the cash form of all money. Mostly paper, Australia's Commonwealth Scientific and
Industrial Research Organization developed the world's first polymer currency in the 1980s that
went into circulation on the nation's bicentenary in 1988. Now used in some 22 countries (over
40 if counting commemorative issues), polymer currency dramatically improves the life span of
banknotes and prevents counterfeiting.

  
 

 

Since 1990, the classical form of monetarism has been questioned because of events which many
economists interpret as being inexplicable in monetarist terms, especially the unhinging of the
money supply growth from inflation in the 1990s and the failure of pure monetary policy to
stimulate the economy in the 2001-2003 period. Alan Greenspan, former chairman of the Federal
Reserve, argued that the 1990s decoupling may be explained by a virtuous cycle of productivity
and investment on one hand, and a certain degree of "irrational exuberance" in the investment
sector.

Economist Robert Solow of MIT suggested that the 2001-2003 failure of the expected economic
recovery should be attributed not to monetary policy failure but to the breakdown in productivity
growth in crucial sectors of the economy, most particularly retail trade. He noted that five sectors
produced all of the productivity gains of the 1990s, and that while the growth of retail and
wholesale trade produced the smallest growth, they were by far the largest sectors of the
economy experiencing net increase of productivity. "2% may be peanuts, but being the single
largest sector of the economy, that's an awful lot of peanuts."

In economics, the term  

can refer to a particular currency, for example Pound Sterling,
or to the coins and banknotes of a particular currency, which comprise the physical aspects of a
nation's money supply. The other part of a nation's money supply consists of money deposited in
banks (sometimes called deposit money), ownership of which can be transferred by means of

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cheques or other forms of money transfer such as credit and debit cards. Deposit money and
currency are money in the sense that both are acceptable as a means of exchange, but money
need not necessarily be currency.

Historically, money in the form of currency has predominated. Usually (gold or silver) coins of
intrinsic value commensurate with the monetary unit (commodity money), have been the norm.
By contrast, modern currency, as fiat money, has no intrinsic value.

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In most cases, each private central bank has monopoly control over the supply and production of
its own currency. To facilitate trade between these currency zones, there are different exchange
rates, which are the prices at which currencies (and the goods and services of individual currency
zones) can be exchanged against each other. Currencies can be classified as either floating
currencies or fixed currencies based on their exchange rate regime.

In cases where a country does have control of its own currency, that control is exercised either by
a central bank or by a Ministry of Finance. In either case, the institution that has control of
monetary policy is referred to as the monetary authority. Monetary authorities have varying
degrees of autonomy from the governments that create them. In the United States, the Federal
Reserve System operates without direct oversight by the legislative or executive branches. A
monetary authority is created and supported by its sponsoring government, so independence can
be reduced by the legislative or executive authority that creates it. (Revocation of authority is
unlikely in Western countries, where there has been a trend towards central bank independence.)

Several countries can use the same name for their own distinct currencies (e.g., 3

 in Canada
and the United States). By contrast, several countries can also use the same currency (e.g., the
euro), or one country can declare the currency of another country to be legal tender. For
example, Panama and El Salvador have declared U.S. currency to be legal tender, and from
1791±1857, Spanish silver coins were legal tender in the United States. At various times

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countries have either re-stamped foreign coins, or used currency board issuing one note of
currency for each note of a foreign government held, as Ecuador currently does.

Each currency typically has a main currency unit (the U.S. dollar, for example, or the euro) and a
fractional currency, often valued at 1»100 of the main currency: 100 cents = 1 dollar, 100 centimes
= 1 franc, 100 pence = 1 pound, although units of 1 »10 or 1»1000 are also common. Some currencies
do not have any smaller units at all, such as the Icelandic króna.

Mauritania and Madagascar are the only remaining countries that do not use the decimal system;
instead, the Mauritanian ouguiya is divided into 5 khoums, while the Malagasy ariary is divided
into 5 iraimbilanja. In these countries, words like 3

 or  3 "were simply names for given
weights of gold."[2] Due to inflation khoums and iraimbilanja have in practice fallen into disuse.

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Currently, the International Organization for Standardization has introduced a three-letter system
of codes (ISO 4217) to define currency (as opposed to simple names or currency signs), in order
to remove the confusion that there are dozens of currencies called the dollar and many called the
franc. Even the pound is used in nearly a dozen different countries, all, of course, with wildly
differing values. In general, the three-letter code uses the ISO 3166-1 country code for the first
two letters and the first letter of the name of the currency (D for dollar, for instance) as the third
letter. United States currency, for instance is globally referred to as USD.

   

In economics, a local currency is a currency not backed by a national government, and intended
to trade only in a small area. Advocates such as Jane Jacobs argue that this enables an

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economically depressed region to pull itself up, by giving the people living there a medium of
exchange that they can use to exchange services and locally produced goods (In a broader sense,
this is the original purpose of all money.) Opponents of this concept argue that local currency
creates a barrier which can interfere with economies of scale and comparative advantage, and
that in some cases they can serve as a means of tax evasion.

Local currencies can also come into being when there is economic turmoil involving the national
currency. An example of this is the Argentinian economic crisis of 2002 in which IOUs issued
by local governments quickly took on some of the characteristics of local currencies.

   

  are sets of internationally agreed rules, conventions and
supporting institutions that facilitate international trade, cross border investment and generally
the reallocation of capital between nation states. They provide means of payment acceptable
between buyers and sellers of different nationality, including deferred payment. To operate
successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels
of trade and to provide means by which global imbalances can be corrected. The systems can
grow organically as the collective result of numerous individual agreements between
international economic actors spread over several decades. Alternatively, they can arise from a
single architectural vision as happened at Bretton Woods in 1944.

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Officially established on December 27, 1945, when the 29 participating countries at the
conference of Bretton Woods signed its Articles of Agreement, the IMF was to be the keeper of
the rules and the main instrument of public international management. The Fund commenced its
financial operations on March 1, 1947. IMF approval was necessary for any change in exchange
rates in excess of 1%. It advised countries on policies affecting the monetary system.

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The big question at the Bretton Woods conference with respect to the institution that would
emerge as the IMF was the issue of future access to international liquidity and whether that
source should be akin to a world central bank able to create new reserves at will or a more
limited borrowing mechanism.

John Maynard Keynes (right) and Harry Dexter White at the inaugural meeting of the
International Monetary Fund's Board of Governors in Savannah, Georgia, U.S., March 8, 1946

Although attended by 44 nations, discussions at the conference were dominated by two rival
plans developed by the United States and Britain. As the chief international economist at the U.S.
Treasury in 1942±44, Harry Dexter White drafted the U.S. blueprint for international access to
liquidity, which competed with the plan drafted for the British Treasury by Keynes. Overall,
White's scheme tended to favor incentives designed to create price stability within the world's
economies, while Keynes' wanted a system that encouraged economic growth.

At the time, gaps between the White and Keynes plans seemed enormous. Outlining the
difficulty of creating a system that every nation could accept in his speech at the closing plenary
session of the Bretton Woods conference on July 22, 1944, Keynes stated:

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We, the delegates of this Conference, Mr. President, have been trying to accomplish something
very difficult to accomplish. It has been our task to find a common measure, a common standard,
a common rule acceptable to each and not irksome to any.

Keynes' proposals would have established a world reserve currency (which he thought might be
called "bancor") administered by a central bank vested with the possibility of creating money and
with the authority to take actions on a much larger scale (understandable considering
deflationary problems in Britain at the time).

In case of balance of payments imbalances, Keynes recommended that both debtors and creditors
should change their policies. As outlined by Keynes, countries with payment surpluses should
increase their imports from the deficit countries and thereby create foreign trade equilibrium.
Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit
country would be deflationary.

But the United States, as a likely creditor nation, and eager to take on the role of the world's
economic powerhouse, balked at Keynes' plan and did not pay serious attention to it. The U.S.
contingent was too concerned about inflationary pressures in the postwar economy, and White
saw an imbalance as a problem only of the deficit country.

Although compromise was reached on some points, because of the overwhelming economic and
military power of the United States, the participants at Bretton Woods largely agreed on White's
plan.

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‰
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‰  is a term used to describe an international financial institution that provides
leveraged loans to developing countries for capital programs. The World Bank has a stated goal
of reducing poverty. By law, all of its decisions must be guided by a commitment to promote
foreign investment, international trade and facilitate capital investment.

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The World Bank differs from the World Bank Group, in that the World Bank comprises only two
institutions: the International Bank for Reconstruction and Development (IBRD) and the
International Development Association (IDA), whereas the latter incorporates these two in
addition to three more: International Finance Corporation (IFC), Multilateral Investment
Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes
(ICSID).



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