Money is a medium in which value
is stored and generally accepted by the public for trade of common goods and
services. Money allows goods and services to be priced in increments to attain
optimal allocation of a scarce resource. If the only thing you have is a live
chicken and you want to trade it for milk and bread, you would have to find
someone that is interested on your live chicken and is willing to trade what
you desire for it, that is if the other party has what you need, therefore,
it is inefficient to barter trade since it requires double coincidence of interests
in order to facilitate a trade.
Society has advanced from that kind of trading because it makes them go nuts
and resorted to using a medium of exchange utilizing gold or other goods which
served as commodity money on top of this, the goods themselves has intrinsic
value. This way they could allocate their limited resources precisely as they
can easily divide the total quantity of gold or silver into the exact increment
of the good they require. The problem with using commodities
as a medium of exchange is that when a local economy is expanding it demanded
more of those commodity money to efficiently facilitate trades without delay.
If the required quantity of that commodity money can't be produced, there would
obviously be a shortage. A shortage in the quantity of the medium of exchange
would slow down spending therefore merchants would lower the price in order
to sell their remaining inventory.
A shortage in the medium of exchange
also means that it is worth a lot more per unit or is strengthening in value.
When the commodity money is worth a lot more it could also buy more quantity
of a good therefore lowering the price of the item is the same as increasing
the quantity that can be traded with that good for a unit of the commodity money.
Today, when a country experiences a rise in value of it's currency it is likely
to fall into the hole called deflation where prices of goods are falling due
to a strong currency.
Money can be traded faster than any asset class, it can be exchanged for any
quantity of goods and the degree of quality on services with ease without having
to negotiate for its value. A fixed value is set for the public to base their
current holdings in exchange for money therefore it is more stable and more
flexible than stocks, bonds or the illiquid land.
- M1 plus savings accounts
Money Market Funds
- M2 plus time deposits
Dollars deposited outside the country
Sale and repurchase agreement