Introduction to Money

Federal Reserve System
Measuring Economic Health
Economic Cycle
Consumer Confidence
World Of Money
Trading Money
Psychology Of Money
Time Value of Money
What's Check 21?

Money is any token or other object that functions as a medium of exchange that is socially and legally accepted in payment for goods and services and in settlement of debts. Money also serves as a standard of value for measuring the relative worth of different goods and services and as a store of value. Some authors explicitly require money to be a standard of deferred payment.

Money includes both currency, particularly the many circulating currencies with legal tender status, and various forms of financial deposit accounts, such as demand deposits, savings accounts, and certificates of deposit. In modern economies, currency is the smallest component of the money supply.

Money is not the same as real value, the latter being the basic element in economics. Money is central to the study of economics and forms its most cogent link to finance. The absence of money causes a market economy to be inefficient because it requires a coincidence of wants between traders, and an agreement that these needs are of equal value, before a barter exchange can occur. The use of money is thought to encourage trade and the division of labor.

Most money doesn't have any value of its own. It's worth what it can buy at any given time. Bills come in different sizes, colors and denominations in different countries. Their real value is based on the economic strength of the country that issues them.

Paper money has had its ups and downs because its value changes so quickly with changing economic conditions. When there is lots of money in circulation, prices go up and paper money buys less. That's known as inflation.

Money is permanent fixture of modern society, but the bills and coins we use have a limited lifespan. Old money is taken out of circulation and replaced on a regular basis.

The way this process works is:

The U.S. treasury ships new money to the Federal Reserve Banks which, in turn, distribute the new money to individual banks in their region. The banks distribute the money to their customers, including businesses and individuals.

The money circulates through the economy and around the world, changing hands many times as people pay in cash and get change back. Businesses and individuals deposit their cash, including old bills, in their bank accounts.

The banks separate the worn bills and coins they collect from the ones that can stay in circulation. They ship the worn (and very dirty) ones back to their Fed branch or bank.

Federal Reserve Banks return the old money to the Treasury. Paper money is shredded and burned into mulch. Coins are sent back to the Bureau of the Mint branches for melting and recasting. Each coin carries the mark of the branch where it was minted: D for Denver (Colorado), S for San Francisco, and P (or no mark at all) for Philadelphia.