10. What are the main kinds of money? (evolution)

In prisoner cigarettes served as money. In the nineteenth century money was mainly gold and silver coins. These are examples of commodity money, ordinary goods with industrial uses (gold) and consumption uses (cigarettes), which also serve as a medium of exchange. To use commodity money, society must either cut back on other uses of that commodity or use scarce resources to producing additional quantities of the commodity. But there are less expensive ways for society to produce money.

A token money is a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money. A £10 note is worth far more as money than as a 3 x 6 inch piece of high-quality paper. Similarly, the monetary value of most coins exceeds the amount you would get by melting them down and selling off the metals they contain. By collectively agreeing to use token money, society economizes on the scarce resources required to produce money as a medium of exchange. Private production of token money is illegal. token money is legal tender. The law says it must be accepted as a means of payment.

An IOU money is a medium of exchange based on the debt of a private firm or individual. A bank deposit is IOU money because it is a debt of the bank. When you have a bank deposit the bank owes you money. You can write a cheque to yourself or a third party and the bank is obliged to pay whenever the cheque is presented. Bank deposits are a medium of exchange because they are generally accepted as payment.

The Money Supply (M1), December 1995 (weekly average in billions)

Currency	$ 372
Demand deposits	389
Other checkable deposits	353
Travelers’ checks	9
Total	$ 1,123

Currency. consists of the paper money and coins. Currency is legal tender. This means the law requires that it be accepted in payment of a debt.

Demand Deposits. Demand deposits are checking accounts held by commercial banks. They are available simply by writing a check. Since checks are generally accepted, they are a form of money. The value of checks an individual or firm can write depends on the amount of money on deposit in the checking account of that individual or firm.

Until the 1980s, checking accounts or demand deposits didn’t pay interest, and a new category entitled other chekable deposits was introduced in the early 1980s to describe checking accounts that did pay interest. A checkable deposit is one that enables the depositor to make withdrawals and payments by check. Today many checking accounts pay interest if your account balance is sufficiently high.

Travelers’ Checks. Travelers’ Checks are checks sold in a variety of denominations by banks and travel agencies. Buyers pay the face amount of the check plus a small fee for the service. Travelers’ checks owe their popularity to the fact that, unlike cash, they can be replaced if they are lost or stolen.

Definitions of Money.

Currency, checking account deposits and traveler’s checks can all be used to pay for goods and services and clearly function as a medium of exchange. Other assets function like a medium of exchange but are not quite as liquid as currency.

monetary aggregates.

M1. The M1 definition of money includes a narrow range of assets that can immediately and without restriction be used to make payments. M1 consists of currency, demand deposits, other checkable deposits, and travelers’ checks.

But there is a host of other assets that are ‘almost’ as good as money. Economists call them “near money”. They are stores of value that can readily be converted into money but are not themselves a means of payment.

Near monies are, in some instances, included in their tally of the money supply. They do this by totaling the money supply according to measures known as M1, M2, M3, and L.

M2. M2 consists of M1 plus money-market accounts (рынок ссудного капитала), savings accounts, money-market mutual fund accounts, and other easily liquidated (converted to cash) kinds of savings. Money market mutual funds are funds in which individuals can invest; they earn interest and can be used to write checks over some minimum amount.

M3. M3 consists of M2 plus large-denomination certificates of deposit ($100,000 and above) that are held by private institutions.

L. L consists of M3 plus most securities that are within 18 months of maturity (достигают срока) (such as US savings bonds, treasury bills and other government-issued credit instruments). “L”, which stands for “liquidity” or the overall ability to spend, is the broadest definition of our money supply.