Money bewitches people. They fret for it, and they sweat for it. They devise most ingenious ways to get it, and most ingenuous ways to get rid of it. Money is the only commodity that is good for nothing but to be gotten rid of. It will not feed you, clothe you, shelter you, or amuse you unless you spend it or invest it. It imparts value on in parting. People will do almost anything for money, and money will do almost anything for people. Money is a captivating, circulating, masquerading puzzle." Federal Reserve Bank of Philadelphia, "Creeping Inflation," Business Review, August 1957.

Money is much more than a passive component of an economic system. When operating properly, the monetary system is central to the circular flows of income and expenditures that typify all economies. A smoothly functioning money system is crucial to both full production and full employment.

A Measurable Value Standard. Money represents a standard of value. Our society measures our relative worth in financial terms, however much we hate it, and even though we may sincerely believe that the things of the spirit are more important.

Exchange Medium. Money is a medium of exchange, used to buy and sell goods and services. In the old days, not so terribly long ago, whale's teeth, shells, precious metal, cattle, etc. were exchanged for food, clothing, equipment and shelter. These were mediums of barter that were not so portable, inconvenient for domestic and overseas transfers and in some cases, environmentally and politically damaging. We live on a small island, relatively isolated, yet money circulates freely. How many of us ever stop to think why this is so, or what would happen if it did not? I will be honest and confess that I do not think about it much. Why? Because it seems the money is always there, in every cash register, in every bank, in every consumer pocket, and government coffer.

What is Paper Money Value? Money's greatest value as an asset is its liquidity, and a very convenient way to store wealth. Of course, not all wealth is in money. Wealth can also be held in more illiquid real property, jewels, metals, and other paper assets (stocks, bonds), etc. all of which generally must be converted to cash. There is a time lag in such conversions, not to mention a willing buyer or seller. Money is immediately useable; few turn down a cash offer.

How can paper money have value? By a government's ability to keep the value of money reasonably stable through legislation, regulation of money supply, fiscal policy, and social practice - in simple terms, good government. While we read and hear continuous news feeds regarding the US Federal Reserve and its concerted efforts to regulate the US economy, our authorities maintain a quiet background presence, monitoring and observing financial activity.

In a chain example, does money enter a society first by an individual (or a corporation) paying for goods or services? The business receiving the money pays employees, remits payroll and consumption taxes to the government, reduces loans held by the banks, and invests profits in new inventory or other assets. The employee saves at the bank; then spends at other businesses, purchasing rent, a car, a scooter, groceries, or a home, the larger purchases most probably being paid for by borrowing from the banks. Government uses proceeds of taxes (and investment earnings on those taxes) to administer agencies operating for the public good, such as schools, financial assistance for those who have suffered setbacks in life, civic projects, and maintenance of the country infrastructure. Government may also borrow based upon revenue projections.

But, what actually happens if money supply activity changes at either end of the chain. In the accompanying chart, we see $100 enter the system at A - from tourist hands or B - international business. As those dollars spread out through the economy, they change hands many times. This is known as the multiplier effect. Where does the money go at the end of the chain? Is it recycled repeatedly within the local economy? What happens if it is invested onshore, outside of Bermuda? What happens if the amount invested at the start of the chain drops? What happens if it increases? How is money managed, when money only has value as long as it can command the equivalent amount of goods and services? How do other forces such as interest rates affect supply, demand and purchasing power? Money - one of our truly great inventions - is a fascinating subject. Can anyone live without it?

lMartha Harris Myron CPA CFP(tm) is a Bermudian, a Certified Financial Planner(tm) (US license) practitioner and VP and Manager, Personal Financial Services, Bank of Bermuda. She holds a NASD Series 7 license, is a former US tax practitioner, and is the winner 2001-The Bermudian Magazine Best of Bermuda Gold Award for Investment Advice. Confidential Email can be directed to marthamyronnorthrock.bm

lThe article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda.

Under no circumstances is this advice to be taken as a recommendation to buy or sell investment products or as a promotion for financial plans. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.