Money and Near Moneys

Money in use today consists of more than just currency. It also includes deposits in checking and

savings accounts in banks and savings institutions, plus certain other investments.

Currency. All United States coins in circulation today are token coins. The value of the metal in each coin is less than its exchange value. A quarter, for example, consists of a mixture of

copper and nickel. If you melted down a quarter - which is illegal - the value of the resulting metal would be less than 25 cents. The Bureau of the Mint, which is part of the Treasury

Department, makes all coins. Of the currency in circulation in the United States today, about 9 percent is in coins.

Most of the nation's currency is in the form of Federal Reserve notes. Federal Reserve banks issue these notes. The Bureau of Printing and Engraving, also part of the Treasury Department, prints all Federal Reserve notes. They are issued in denominations of $1, $5,$10, $20, $50, and $100. The Treasury Department has also issued United States notes in

$100 denominations only. These bills have the words United States Note printed across the top and can be distinguished from Federal Reserve notes by a red Treasury seal.

United States notes make up less than 1 percent of the paper money in circulation. Both Federal Reserve notes and United States notes are fiat money or legal tender.

Checks. A checking account is money deposited in a bank that a person can withdraw at any time by writing a check. The bank must pay the amount of the check when it is presented for payment, that is, on demand. Such accounts used to be called demand deposits. Today we call these checkable deposits, and a variety of financial institutions offer them. Commercial banks used to be the only financial institutions that could offer

checkable accounts. Today all thrift institutions - mutual savings banks, savings and loan associations (S&Ls), and credit unions - offer checkable deposits.

Credit Cards and Debit Cards. Even though many people use their credit cards to purchase goods and services, the credit card itself is not money. It does not act as a unit of

accounting nor as a store of value. The use of your credit card is really a loan to you by the issuer of the card, whether it is a bank, retail store, gas company, or American Express.

Basically, then, credit card "money" represents a future claim on money that you will have later. Credit cards defer rather than complete transactions that ultimately involve the use of money.

The debit card automatically withdraws money from a checkable account. When you use your debit card to purchase something, you are in effect giving an instruction to your bank to transfer money directly from your bank account to the store's bank account. The use of a debit card does not create a loan. Debit card "money" is similar to checkable account money.

Near Moneys. Numerous other assets are almost, but not exactly, like money. These

assets are called near moneys. Their values are stated in terms of money, and they have high liquidity in comparison to other investments, such as stocks. Near moneys can be turned into currency or into a means of payment, such as a check, relatively easily and without the risk of loss of value.

For example, if you have a bank savings account, you cannot write a check on it. You can, however, go to the bank and withdraw some or all of your funds. You can then redeposit it in your checking account or take some or all of it in cash.

Time deposits and savings-account balances are near moneys. Both pay interest, and neither can be withdrawn by check. Time deposits require that a depositor notify the financial institution within a certain period of time, often 10 days, before withdrawing money. Savings accounts do not usually require such notification.

The Money Supply

How much money is there in the United States today? That question is not so easy to

answer. First, the money supply must be defined and agreed upon. Currently, two basic definitions are used, although others exist. The first is called M1 and the second M2. Both definitions include all the paper bills and coins in circulation. M1, the narrowest definition of the money supply, consists of moneys that can be spent immediately and against which checks can be written. It includes currency, traveler's checks, and checkable deposits. A broader definition of the money supply, M2, includes all of M1, plus such near moneys as money market mutual fund balances and Eurodollars.

Exercise 5. After reading the text in Exercise 4, fill in the missing word or words:

Most of the nation's currency is in the form of (1) and

(2) or Money is also in

the form of (3) that a person can draw against for purchases. Today, these accounts are also called (4) Since the 1980s,

commercial banks and (5) offer these accounts along with many other financial services.

Money can be represented by (6) , which provide

"loans" to users. (7) , on the other hand, simply withdraw money that a person already has in an account. However, most people do not like to lose the

(8) they enjoy when writing checks. Personal assets such as stocks and bonds are called near money because they have high (9) for their owners. (10) deposits and (11) are two other

examples of near money.

The money supply is designated as M1 and M2. M1 includes all currency,

(12) , and checking accounts. M2 is a broader definition of the money supply and includes all of Ml plus (13)

and (14) .