Understanding Money, Wealth, and Income

• Money is something everyone accepts as payment, especially repayment of debt
• Acceptable forms of payment include checks and savings deposits
• Credit cards are not an acceptable form of payment

Money vs Wealth

• Money and wealth are related
• Wealth is the total collection of pieces of property that serve a purpose and store value, including cash
• Income is the flow of earnings per unit of time and is a flow concept

Security Features of Money

• Money prevents adverse selection and moral hazard
• There is no need for trust because of money's security features

Money Definition

• Money is anything generally accepted as payment for goods, services, or debt repayment
• This definition includes forms beyond currency, like checking account balances that can be accessed through checks or debit cards

Money vs Wealth and Income

• Wealth is the total collection of assets owned, including property, stocks, bonds, and cash
• Income is the flow of earnings over time, like wages or salaries
• Money is a stock of value at a given point in time, unlike the flow of income

Functions of Money

• Medium of exchange, which facilitates transactions and eliminates bartering inefficiencies
• Unit of account, which provides a standard measurement for valuing goods and services and simplifies pricing
• Store of value, which maintains value over time, allowing for savings and stored purchasing power

Medium of Exchange

• Money facilitates transactions by allowing efficient exchange of goods and services
• Without money, bartering requires a double coincidence of wants, which money eliminates

Unit of Account

• Money is a standard measure of value that allows easy comparison of the worth of different goods and services
• Money simplifies pricing, which reduces complexity when assessing value and making purchases

Store of Value

• Money can be saved and stored for future use, preserving purchasing power over time
• Money's liquidity and accessibility make it a convenient option for saving, though its effectiveness can diminish during high inflation

Requirements of a Medium of Exchange

• Standardized
• Widely accepted
• Divisible
• Easy to carry
• Does not deteriorate quickly

Types of Payment Systems

• Payment Systems are constantly evolving
• Commodity Money is an early form using items with intrinsic value like gold or silver
• Fiat Money has no intrinsic value but is established by government decree
• Currency includes physical paper bills and coins for transactions

Payment Systems

• Checks allow individuals to make payments by instructing their bank to transfer funds
• Electronic payment systems facilitate digital funds transfer, including debit cards, stored-value cards, and e-cash
• Mobile payments use devices and apps to facilitate transactions
• Cryptocurrency is a digital currency that uses cryptography and blockchain for secure, decentralized transactions

Cryptocurrency Terminology

• Blockchain is a decentralized ledger that records transactions across a network of computers securely and transparently
• Blocks are chained together to form a long historical record in a digital ledger, securing information by turning it into code

Additional Cryptocurrency Terminology

• Cryptocurrency is a digital or virtual currency that uses cryptography
• Bitcoin is the first and most well-known cryptocurrency
• Altcoins are cryptocurrencies other than Bitcoin
• Mining involves creating new cryptocurrency units and verifying transactions

More Cryptocurrency Terminology

• Wallets store and manage cryptocurrencies
• Smart contracts are self-executing contracts with terms written into code
• Tokens are digital assets on a blockchain that can represent value

Advantages of Blockchain Decentralization

• Decentralization makes blockchains more secure and resilient to attacks
• Transparency promotes trust in the system
• Users have more control over their financial transactions, as there is no need for traditional intermediaries like banks

More Advantages of Blockchain Decentralization

• Decentralized systems are harder to censor or shut down
• Cryptocurrencies can reduce transaction fees and improve speed
• Blockchain encourages continuous innovation, which creates new applications and payment systems

E-money/E-cash

• E-money/E-cash is not backed by fiat or exchanged money unlike checks and paper money
• E-money/E-cash is stored on electronic devices and computer systems
• Facilitates electronic transactions via debit cards, stored-value cards, and e-cash
• Digital wallets and smart cards are forms of E-money/E-cash

Blocks

• Transactions made during a given period is recorded in a "block"
• This requires little storage space
• The number of transactions per block depends on the data in each transaction, and it is often between 1–1000
• When new data comes in, it is connected to a block
• A blockchain is when one block is full of data and it chains back to the previous one
• Info that blocks include: magic number, block size, block header, transaction counter, transactions

Hashing

• Cryptography encodes data of any length and then converts it into alphanumeric characters of a fixed length
• This helps to ensure blocks only contain validated transactions

Mining

• This is a process that verifies and records new cryptocurrency transactions
• It makes the cryptocurrency network trustworthy and allows maintenance and updates to blockchain history
• Miners verify transactions by solving computational math problems generated by an algorithm

Advantages of Decentralized Blockchain

• Users retain their own control, with no single person or group
• Data entered is irreversible
• Transactions are permanently recorded, and a history is available to everyone
• There is no third party to ensure validity and honesty
• Each node has a copy of the distributed ledger to help validate information so that each can reach consensus about accuracy

Future of Bitcoin

• Bitcoin functions as a medium of exchange
• It is unlikely to become the main money, as it performs less as a unit of account and store of value

Cryptocurrencies and Cashless Societies

• E-money is popular, more convenient, and efficient than paper money
• Many factors are against not using paper money

Monetary Aggregates in South Africa

• M1 is most liquid and includes currency, traveler's checks, demand deposits, and other very liquid funds
• M2 includes all of M1 plus savings deposits, small time deposits, and money market mutual fund shares
• M3 includes all of M2 plus large time deposits and other larger liquid assets

M1

• M1 only includes money in circulation
• This is just coins and notes that circulate in the economy, not those held by the Monetary sector

Trades in USD in South Africa Monetary Sector

• The SARB
• Land Bank
• Corporation of Public Deposits
• Post Bank
• Private Banking Institutions
• Mutual Building Societies

Monetary Aggregates Equations

• M1 is currency in circulation plus cheque and transmission deposits
• M2 is M1 plus other short-term deposits (less than 30 days) and midterm deposits (30 days to longer than 6 months)
• M3 is M2 plus long-term deposits (longer than 6 months)

Monetary Policy

• Monetary aggregates are important for policy makers

Monetary Aggregates

• M1 versus M2 matters when considering which measure of money is being considered
• M1 and M2 can move in different directions in the short run
• The choice of monetary aggregate is important for policymakers