Money, Banking, and International FinanceBitcoins to settle transactions in the underground economy that is hidden within the internet. We
call this the deep internet where most internet users would never see. The deep internet allows
buyers and sellers to communicate with each other without revealing their location or identities.
Bitcoin is evolving into the currency of the black markets on the internet. Buyers and sellers
use Bitcoin like the numbered Swiss bank accounts. For example, they open a numbered
account at a Swiss bank that contains no personal information. Then they can use the account to
settle transactions secretly. For example, a person pays for an illegal service. This person
contacts the Swiss bank and asks the bank to transfer the bribe amount from his bank account
into the seller’s bank account. This person gives the banker a code (or private key for Bitcoin) to
approve the transfer. Consequently, the transaction remains secret because no one has revealed
his or her identities.
U.S. federal government is cracking down on the internet black market and is closing down
Bitcoin operators. Agents believe that if they can shut down the money, they can eliminate the
black markets operating in the deep Internet or prevent the funding of terrorists. For example,
the U.S. Department of Homeland Security shut down Mt Gox, the largest Bitcoin operator in
the United States in May 2013 although Mt Gox did not participate in illegal activities. U.S. law
requires all money exchangers to register with the Financial Crimes Enforcement Network.
Unfortunately, the federal government will fail because people can use Bitcoins anywhere in the
world.
Bitcoin continues to flourish despite its drawbacks and U.S. government crackdown.
Bitcoin ATMs are cropping up in Hong Kong, New York City, and Vancouver, and more stores
and vendors are accepting Bitcoins for payment.
Money Supply Definitions
Economists use two approaches in defining the money supply: transaction and liquidity. If
economists use the transaction approach, they emphasize the money’s function as a medium of
exchange. Only a few assets possess this property. As the central bank boosts the money supply,
people raise their spending that boosts national output, increases income, reduces
unemployment, and creates inflation.
If economists use the liquidity approach, they take all assets, rank them by liquidity, and
include only liquid assets in the money supply because people can easily sell these assets at a
future time at a known price with minimum costs. This approach emphasizes money’s function
as a “store of value,” because if highly liquid assets retain their value, people can easily use the
assets to purchase goods and services directly or indirectly. Why does this approach work?
When the central bank boosts the money supply, people will adjust their portfolios of assets,
affecting consumer spending, national output, income, and employment.
The Federal Reserve System defines money supply as M1, M2, M3, and L. Many central
banks in the world measure their money supply similarly to United States. However, they differ
which financial instruments they include in their measures. Every country uses different
financial instruments because countries differ in their legal systems, regulations of financial
markets, and customs.