Outside money refers to money that is an asset to its holder and does not correspond to a liability for anyone else in the economy. Examples include gold coinage and certain types of government-issued money. This concept contrasts with inside money, where the money is an asset for the holder but corresponds to a liability for the issuing entity.
Historical Context
Outside money has been a crucial element in the history of economics and finance, playing a significant role during various monetary systems such as the gold standard. Its definition and utilization have evolved over time, reflecting changes in economic theories and practices.
Types/Categories of Outside Money
1. Commodity Money
- Gold and Silver Coins: Historically, gold and silver coins served as outside money. They have intrinsic value and are not liabilities for anyone.
- Other Commodities: Various other commodities like salt, tea bricks, and tobacco have served as money in different cultures.
2. Fiat Money
- Government-Issued Currency: Currency issued by a government can be considered outside money if it is not backed by any debt.
- Central Bank Reserves: Reserves held by central banks that are not liabilities of commercial banks.
Key Events
The Gold Standard
- Introduction: The gold standard was introduced in the 19th century, where the value of a country’s currency was directly linked to gold.
- Bretton Woods System: Post-World War II, the Bretton Woods system pegged major currencies to the U.S. dollar, which was convertible to gold.
- End of the Gold Standard: In 1971, President Nixon announced the suspension of gold convertibility, leading to the end of the Bretton Woods system and a shift towards fiat currencies.
Detailed Explanations
Economic Theory
- Money Supply: Outside money affects the overall money supply without creating corresponding liabilities.
- Inflation and Deflation: The supply of outside money can influence inflation and deflation. An increase in outside money supply without a matching rise in goods can cause inflation.
Mathematical Models
Economists use various models to understand the role and impact of outside money in the economy.
Quantity Theory of Money
- \( M \) = Money supply
- \( V \) = Velocity of money
- \( P \) = Price level
- \( Q \) = Output (real GDP)
Charts and Diagrams
Money Supply Components
pie
title Money Supply Composition
"Outside Money": 30
"Inside Money": 70
Importance and Applicability
Outside money is crucial in understanding the foundational aspects of monetary economics. Its study helps in analyzing historical monetary systems, current economic policies, and the functioning of modern financial markets.
Examples
- Gold Coins: Used extensively in ancient economies as a stable medium of exchange.
- Modern Fiat Money: Some argue that certain forms of modern fiat money function as outside money under specific conditions.
Considerations
- Measurement: Identifying and measuring outside money can be complex, especially with the interplay of government liabilities.
- Economic Policies: Policies affecting outside money can have widespread economic implications.
Related Terms
- Inside Money: Money created within the private sector banking system, where assets equal liabilities.
- Fiat Money: Currency that a government has declared to be legal tender but is not backed by a physical commodity.
- Commodity Money: Money that has intrinsic value and can be used as a commodity.
Comparisons
- Outside Money vs. Inside Money: Outside money has no corresponding liability, whereas inside money is balanced by liabilities in the financial system.
Interesting Facts
- Historical Use: Salt was once used as money in various civilizations due to its value and preservative qualities.
- Prohibition of Gold Ownership: The U.S. prohibited private ownership of gold during the Great Depression to prevent hoarding and stabilize the economy.
Inspirational Stories
- Gold Rush: The California Gold Rush of 1849 showcased the importance of gold (outside money) and its impact on economic development.
Famous Quotes
- John Maynard Keynes: “Gold is a relic of barbarism.”
Proverbs and Clichés
- “Good as gold”: Reflecting the high value and reliability of gold as money.
- “Money doesn’t grow on trees”: Emphasizing the scarcity and effort required to obtain money.
Expressions
- “Solid as a dollar”: Used historically to describe reliability and stability, originally reflecting gold-backed currency.
Jargon and Slang
- [“Fiat currency”](https://financedictionarypro.com/definitions/f/fiat-currency/ ““Fiat currency””): A modern term describing government-issued money not backed by a physical commodity.
- “Gold bugs”: Slang for investors who fervently believe in the value of gold as money.
FAQs
What is the main difference between outside money and inside money?
How does outside money impact inflation?
Is modern fiat money considered outside money?
What historical events are associated with outside money?
References
- Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money.
- Friedman, M., & Schwartz, A. J. (1963). A Monetary History of the United States, 1867-1960.
- Bordo, M. D., & Eichengreen, B. (1993). A Retrospective on the Bretton Woods System.
Summary
Outside money plays a vital role in the economic landscape, from the gold coins of ancient times to the fiat currencies of today. Understanding its dynamics helps in comprehending broader economic phenomena and the formulation of effective monetary policies.
