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Chapter 15. Payment Systems > A Word About Money

A Word About Money

Before talking about payment, it is prudent to talk about money. It is convenient to think about two kinds of money: token and notational. Tokens are like coins or paper money: they have value in and of themselves. In the earliest days of token-based money, the tokens were valued for what they were made of. Today, it is usually the case that token money has value by fiat, because a government has issued the tokens and declared their value.

In contrast, notational money refers to something that represents value stored somewhere else. For example, a check has no intrinsic value, but it represents a commitment to transfer money. Moreover, a check cannot be freely transferred around; it is useful only to the party named on it. Payment instruments that extend credit are a variation of notational money. When one uses a credit card, for example, one agrees to pay the designated amount at some point in the future, and the transaction is guaranteed by the financial institution that issued the credit card.[2]

[2] Under some circumstances, the bank that issued a credit card may not guarantee the transaction. This is often true for mail-order transactions, where the customer and the card are not physically present.


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