Lesson 2 – The Nature, Origins and Development of Money as a Social Institution. Part Two In the last lesson we discussed the functions and benefits of money - in this lesson we discuss how money came about. Suggested Reading: There are no close reading materials for this and the last lesson, but some of the material in RSU chapter 2 is relevant. You should read the whole chapter anyway to get a nice overview of some of what is to come. Quick Summary Lessons 1 and 2 Money is a social institution like language. Its existence facilitates exchange and production. Its prime function is as a medium (means) of exchange. It must also be a store of value and usually functions as a unit of account. Like many social institutions money is an evolved unintended outcome of human actions in the pursuit of personal profit and gain. All moneys evolved, directly or indirectly, from a commodity that was once not money (did not have a monetary function). All modern moneys are government moneys. At a fairly early stage governments invariably get involved and end up monopolizing the issue of money or the money base of a given political entity. Operationally money can be measured according to money is as money does. For some modern definitions exhibit 1 following. Inflation is the prime enemy of money and of a healthy economy. The existence of money led to the existence of a very complex financial infrastructure that depends on it. Exhibit 1: Practical Definitions of Money M1. = Currency outside banks plus demand deposits (checking accounts) at banks, plus other checkable deposits at banks and at all thrift institutions (savings banks). M2. = M1 plus small-denomination time deposits (savings accounts) plus money market deposit accounts and savings deposits at all depository institutions plus retail money market mutual funds shares. M3. = M2 plus large-denomination ($100,000 and over) time deposits at all depository institutions plus institutional money market mutual fund shares plus bank repurchase agreements and Eurodollars.
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