The Role of Money
In its various forms, money has been an essential aspect of human civilization, facilitating trade, storing value, and providing a unit of account. In today’s world, money has evolved into several forms, each serving specific economic functions. This essay will explore the different forms of money, including commodity money, near money, fiat money, token money, broad money, money substitutes, and the monetary aggregates of M1, M2, M3, and M4.
Money Forms
Commodity Money
Commodity money is the oldest form of money and refers to objects that have value in themselves and their use as money. Historically, commodity money included gold, silver, copper, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, etc (Mehta, 2021). The items chosen had the essential characteristics of money: durability, divisibility, portability, uniformity, limited supply, and acceptability. Commodity money often creates a basis for trade by providing a standard of value recognized across different societies.
Near Money
Near money includes financial assets that are not cash but can be quickly converted into cash with little or no loss of value, also known as liquid assets. These include savings accounts, time deposits, money market funds, and government bonds. Near-money assets are essential for individuals and businesses as they provide a store of value that can be readily accessed in times of need or converted for purchases and investments.
Fiat Money
Fiat money is a currency that a government has declared legal tender despite not being backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material from which the money is made. Modern paper currencies, such as the U.S. dollar, the Euro, and the Japanese yen, are examples of fiat money. Fiat money gives central banks greater control over the economy because they can control the amount of money printed.
Token Money
Token money refers to money with a face value greater than its intrinsic value. The cost of producing token money is less than its value; for example, the metal in a coin is worth less than its face value. Token money is often used in a physical form, such as coins and banknotes. It is accepted as a medium of exchange because of the trust that others will accept it and the government’s decree that it must be accepted as payment.
Broad Money
Broad money measures the total money supply within an economy. It includes not only cash and checking deposits (M1) but also easily convertible near money. Economists use broad money as a key indicator to gauge the amount of money circulating in an economy and assess economic health (Mehta, 2021). It encompasses various deposits, including savings accounts, small-time deposits, and other larger liquid assets.
Money Substitutes
Money substitutes can be used as substitutes for actual money in transactions. These can include instruments like checks, debit cards, and electronic money. Money substitutes allow for the transfer of value without physical currency exchange. They are backed by the promise of their issuer to exchange them for actual money or to use them in purchasing goods and services.
Monetary Aggregates
The monetary aggregates—M1, M2, M3, and M4—are measures of the money supply used by economists to quantify the amount of money within an economy. M1 includes all physical money, such as coins and currency, demand deposits, and other liquid deposits, including checking accounts. M2 is a broader classification that includes M1 plus savings accounts, time deposits under $100,000, and non-institutional money market accounts. M3 includes M2 plus large time deposits, institutional money market funds, short-term repurchase agreements, and other more considerable liquid assets. M4 is not a standard measure and can vary by country, but it generally includes M3 plus other types of deposits, such as government debt and commercial paper.
Reference
Mehta, S. (2021). Protocols of money: A Primer on the History and Evolution of Money. Chapterone.