Cambridge Dictionary defines money as the coins and bills of a certain value used for the financial exchange. Money serves as a medium of economic exchange, a measure of value, and as a mechanism of saving and storing wealth.
Money is accepted in return for goods and services, and it acts as a measure of value in the price system. It is the key mechanism of making payments and serves as a means of storing the purchasing power.
Money is not only coins and bills, but any commodity that is used as an instrument for exchange. Centuries ago people have been using seashells and cattle for any transactions if accepted by general consent. Nowadays we have many types of money: precious metals, paper money and coins, commercial bank money and digital money. They all have the same functions, but can be used in different ways.
The total amount of money assets available in the country’s economy at a certain point of time is called the money supply. It is defined by the Federal Reserve System as the total amount of assets used by households and businesses to make payments or to keep as investments.
There are various components of the money supply, which are classified as M1, M2 and MB (the monetary base). The monetary base is the total amount of currency circulating in the country and the sum of banks’ reserve balances held at the Federal Reserve. M1 stands for the traveler’s checks and currency held by the public deposits at commercial and savings banks. M2 is classified as M1 together with savings deposits, money market deposit accounts and time deposits of less than $100,000.
Also, there are several other standard measures, which include M0 (total amount of physical currency), M3 (M2 plus large time deposits and repurchase agreements) and M4 (M3 plus commercial papers and Treasury bills). Many countries around the world have different money supply standards.
The most liquid assets among the components, which can be transferred into cash in the shortest possible time with the minimal reduction of their price, are the narrow measures. The most liquid measure is M0, which includes notes and coins circulating within the country, as the physical currency can be spent very easily. MB is traditionally the second most liquid money supply component. These measures are considered to have the highest level of liquidity due to the ease with which ownership and the asset itself can be forwarded.
The least liquid money supply components are M3 and M4. These both measures include the large long-term deposits issued in amount of more than $100,000, which cannot be quickly converted into paper money. M3 and M4 are the broadest measures and are one of the most illiquid ones.
Credit cards cannot be considered as part of the money supply as they don’t fall under any standard measure. As a matter of fact, credit cards have the same function as money does: they are used to buy goods and services. However, there is a significant difference between them, as money is a financial asset while credit cards are the financial liabilities. When someone is using credit cards to buy the products, he becomes a borrower and will have to repay for the products later. Thus, credit cards cannot be a form of money because when being used to finance the purchase, credit cards create loans for the purchasers.
Works Cited
Cambridge Dictionaries Online. Money. N.p., n.d. Web. 23 Jan. 2014. <http://dictionary.cambridge.org/dictionary/american-english/money?q=money>.
Board of Governors of the Federal Reserve System. What is the money supply? Is it important? N.p., n.d. Web. 23 Jan. 2014. < http://www.federalreserve.gov/faqs/money_12845.htm>.
Federal Reserve Bank of San Francisco. Credit cards are commonly used to buy goods and services. N.p., 2005. Web. 23 Jan. 2014. <http://www.frbsf.org/education/publications/doctor-econ/2005/september/credit-card-money-supply-demand-deposits>.
