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Home  >  Fundamental analysis  >  Money on the Forex


Money on the Forex



At first, money is quite a fantastic invention, comparable to the invention of the wheel. Just as with the help of the wheel the transport of goods was made easy in a previous unthinkable manner so made money the exchange of goods and even the production of goods for sale possible. Without money it was only possible to exchange service for service. The basket-maker, who needed new shoes, had first to find a shoe-maker, who needed a basket. This shows that without money a market for specialization and division of labor was impossible to achieve.

The definition of money becomes more difficult if the conception of money will be extended to more and more phenomena. This difficulty is reflected in scientific statements, for which three samples should suffice:

  • "Money is a general good of nominal validity" (F.Ltje)
  • "Money is a creation of the money order" (F.G.Knapp)
  • "Money is what is valid (G.Schmoelders)"

In the view of such precise remarks the statement of a national banker (O.Issing) is almost reassuring: Huge heaps of scientific literature show evidence that the definition of money is anything but indisputable. But, if national bankers do not know where money ends it is more than doubtful that they have a concise notion of what money is.

Looking at the exchange of services and goods, which made civilization and culture possible, money is the intermediary which frees the render of a service from being bound to one partner. Money makes it possible to sell a service to anyone interested in it and, with the received payment, unlimited by time and place, asking for a return service from anybody else. Before money came into existence these services were rendered by goods, which nearly everybody could use, such as salt, grains, tea-bricks or coca-beans.

These goods could be used because of their relatively long shelf-life as medium of exchange but they were un-handy and lost value in time. Money, being countable and durable as well as facilitating to be carried, stored and to compare prices, brought about the development of a market economy without which the civilization of today would be unthinkable.

Money is the means of exchange by which people buy and sell things. Today, when we use money, we are as likely to use plastic cards as paper bills and coins, but this was not always true. Consider how society moved from bartering goods to exchanging money.

We carry money to buy things, but money has more meaning than just its cash value. Its artistic design tells a story about its home country. What is most important and prominent about a country often finds its way on to the faces of its paper money. Money can depict a countrys landscape, its unique plants and animals, prominent people from its history, or national symbols such as a coat of arms. In Nigeria, where agriculture is a major part of the economy, images of people collecting coconuts and farmers selling their harvest can be found on the paper money. Chinas money shows images of dragons, rice fields, and beautiful mountain ranges. Some of Brazils paper money depicts monkeys and sea turtles.

These days, people regularly exchange paper bills and use plastic cards for moneybut it didnt start out that way. Before money existed, people traded items of value, such as cattle or grain. Similarly, the earliest forms of currency were inherently valuable things, such as gold, silver, or other precious resources. In Ancient Rome, soldiers were paid with salt, which was harvested from the sea. Salt could be used to season and preserve food, but more importantly, the human body requires it for survival.

In West Africa, people exchanged manillas as currency from the late 15th to the early 20th century. Manillas were ornamental bracelets made from precious metals such as copper, brass, or iron. In North America, the earliest form of currency was a shell bead called wampum. The Narragansett people are believed to be the first producers of these beads, which were created by shaping and drilling the inner spiral of Whelk shells. Wampum was valued because it took lots of time and hard work to find suitable shells and make them into beautiful beads.

Did you know that you can own a little piece of a big company? In a stock market, people buy and sell shares of a company, which are also known as stocks. A share is a unit of ownership of a company; people who own shares of a company are called shareholders. Companies sell stock because they want to raise money to expand their businessit costs lots of money to create new products, build more factories or stores, and hire more employees. People buy stock because they want to make money by choosing good investments.

Some companies give part of their profits to shareholders by paying them cash. These payments are called dividends. Nowadays, most people make money in the stock market by investing in companies that are successful. If shareholders buy stock when the value is low and sell it when the value is high, they make a profit. But, investing in the stock market can be risky. If the stock goes down in value, the shareholders lose money. Investors can buy stocks in many different kinds of companies. Examples of stock markets around the world are the New York Stock Exchange in the United States, the London Stock Exchange in England, and the Nagoya Stock Exchange in Japan.

On January 1, 1999, the European Union made money history, implementing the largest monetary changeover the world has ever seen. On that day, eleven of the countries in the European Economic and Monetary Union (EMU) adopted a new, single currency called the Euro. The Euro was a cashless currency when it was first introduced, meaning that it was only used for cashless transactions, such as electronic banking and stock market transactions. Actual Euro banknotes (bills) and coins officially went into circulation on January 1, 2002.

The original eleven countries that adopted the Euro were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. By unifying, these countries became a stronger economic and political power in the world. A single currency also allowed people, services, and goods to move freely from country to country without the inconvenience of currency exchange.

Where Does Money Get Its Value from?

At the times when gold or silver were used as money, the value of money was mainly determined by the value of the metal. This value in turn consisted of the desirability, the rarity and the difficulty to find the metal. Money made of gold or silver was like a good which was exchanged for another good. Today only cents might have some such value. The nominal worth of bigger coins and especially bills exceeds the cost of material and production by a wide margin.

Money which is itself actually worthless, is backed today by the products of the economy one can buy with it. It is a document of a claim to a service just as a received banknote is normally the proof of a previous service. If the national bank would double the amount of money tomorrow in the case of unchanged economic output, nobody would become any richer.

The result of such a doubling of money would be a doubling of all prices and nobody could buy more than before. But on the other hand all the money accounts and the debts would be cut to half of the value. This means that the creditors would lose half of the purchasing power of their assets and the debtors could now pay their debts with half of the former real value.

Money Supply - the amount of money in the economy, consisting primarily of currency in circulation plus deposits in banks: M-1 U.S. money supply consisting of currency held by the public, traveler's checks, checking account funds, NOW and super- NOW accounts, automatic transfer service accounts, and balances in credit unions.

M-2 U.S. money supply consisting M-1 plus savings and small time deposits (less than $100,000) at depository institutions, overnight repurchase agreements at commercial banks, and money market mutual fund accounts. M-3 U.S. money supply consisting of M-2 plus large time deposits ($100,000 or more) at depository institutions, repurchase agreements with maturities longer than one day at commercial banks, and institutional money market accounts.

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