Financial Economics Term Paper

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Economics

Why that Dollar in Your Pocket is More than just a Piece of Paper

Money in contemporary society has taken a primary role in life. It affects everything from the quality of a person's social life to the quality and quantity of available food. Below the history, value and use of money are considered.

The first system of economy was a barter system. Because of issues such as double coincidence of wants as a necessary condition of trade, acquiring goods by this system was often costly in terms of time and effort. In order to reduce transaction time, a money system emerged. The first money emerged in the form of goods. Goods that evolved into money were those that were generally accepted in exchange for goods. Livestock and grain are examples of goods that became money during the years of around 9000-6000 BC. Cattle are estimated to probably be the oldest form of money known to civilization.

Interestingly, it is supposed that the invention of writing in Mesopotamia during around 3100 BC was motivated by the need to keep accounts. Banking was subsequently invented during 3000-2000 BC in this area (Davies & Davies 1999).

Silver began to be accepted as money during 2250- 2150 BC. In China cowry shells began to be used as money during 1200 BC. During 640 BC- 630 BC coins were invented in Lydia. These were usually an amalgam of gold and silver. Base metal coins were invented in China during 600-300 BC. From here, the use of coins spread rapidly from Lydia to Greece, Athens and Corinth (Davies & Davies 1999).

The first documented occurrence of inflation is during 218-201 BC the Punic war between Rome and Carthage results in a debasement of the purity and weight in coinage. This was done to keep up with the demand to pay the enormous amounts of troops necessary to fight the war. During 30 BC - 14 AD Augustus Caesar introduces the tax systems that survive to this day: sales tax, land tax and a flat-rate poll tax (Davies & Davies 1999).

It is therefore clear that money has a very long and complicated history since the first systems of goods as money has developed.

Value

The concern over the decreasing value of money is often voiced in economic circles. Similarly, the decreasing value of a certain currency is bemoaned. But the basic value of money is based simply on its general acceptability as a means of exchange. Goods that were used as money in very ancient times were those that were acceptable to everybody. Everybody was willing to trade goods and services for cattle, for example. Today money in the form of paper and coins is acceptable to everybody.

From this principle further value issues emerge. The stock market for example determine the value of goods and thus the value of money invested in them. To increase the value of investments, market experts suggest that losses should be taken seriously, while profits should be kept in place in the market. The value of weak stock tends to remain so or even deteriorate. This stock is a poor investment because of its low value (Hoenig 2002).

Again, the value of time plays a role in stock investments. Time spent on losing stock could better have been invested in stock with better potential:

Every second that ticks by is an opportunity to be making money -- even if only by compounding in cash at the risk-free rate." (Hoenig 2002)

Because losing trades tend to stay that way for longer than is immediately predicted by its investors, the money spent waiting for improvement eventually incurs a substantial loss.

Another economic phenomenon closely related to the value of money is the global exchange rate. During 1998 the question of Roth reconversions were a primary issue in economic circles. By this system, converting money repeatedly saved people money on their taxes, until the Government stepped in with stricter regulations, but which only the first conversion will save taxes (Bischoff 1998).

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A further issue is the Euro, Europe's single currency. The value of the Euro has determined and been compared to the value of all other currencies. This has become a powerful global currency.

The European Central Bank's effort to maintain price stability has meant a sharp rise in interest rates. Inflation is also influenced adversely, helped by higher oil prices. Higher interest rates then impact negatively on the area's economy as well (Beggs 2000).

Use

The uses of money is of course as versatile as money itself. The most common use is of course as unit of exchange. Money is used to buy every items such as clothing and food. As a unit of account, money is used to measure the value of goods. Using its monetary value, the value of the good is determined compared to the value of all other goods. This is the same system by which the value of money itself in terms of global currency is determined. Finally, money as store of value means to determine the ability of a good to maintain its value over time.

In modern society, money has many interesting uses that have evolved over the centuries. Apart from the main uses, money is also used to accumulate more money by means of investment, or to acquire a loan. The advance of the Internet has then also brought about new uses of money, that were previously unthought of. One such concept is micropayments (Bowbrick 2003).

The system of micropayment is used to charge Internet visitors a low price for low value information and services. The payment for these is often as low as a penny at a time. The system was begun by a Dutch firm called Digicash in 1994 (Bowbrick 2003). Digicash developed a system by which low payments could be made online. Issues such as security, no lower limit on transaction value, and user anonymity were to ensure the success of the system. Another interesting development in this effort is a brand new currency: cyberbucks. One million of these were originally made available. Although it appeared to be a good idea to provide the public with untraceable private currency, cyberbucks never became as popular as originally envisioned, and the company became obsolete (Bowbrick 2003).

The problem appeared to be related to acceptability. Nobody had confidence that cyberbucks were a desirable means of exchange. The anonymity involved with the transactions did not appeal to merchants, while governments did not approve of the alternative currency. Internet users, the target market for the currency, did not see any value in micropayments. Competition from Visa and Mastercard Internet services also proved an insurmountable obstacle.

Cyberbucks however did not completely vanish (Bowbrick 2003). Some users began a market for the cyberbucks, in the same way as foreign exchange traders. An email mailing list, to which bids were submitted, was used to trade the currency. Still, the trading as well as the currency eventually did lose the interest of users. Again, the reasons for this is usefulness; the idea of cyberbucks is redundant.

Bowbrick (2003) reports a new attempt at the above failed idea. This is called Peppercoin. The aim is to make the electronic currency more desirable by making very small online transactions economical for merchants. Profit-eating charges by credit card companies for small transactions are bypassed by failing to pay out on the majority such transactions. A statistical method is used to choose payment options.

According to Bowbrick however the idea is not viable because the main problem has not been solved. There is no demand for cyber currency. The desirability is non-existent.

A clever idea has been allowed into a hostile and crowded marketplace with only its intellectual credentials to protect it. Techies, and the companies they build, often cannot believe that….....

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