RC Passage: Money and Its Definition

Time 0 0 : 0 0 : 0 0

Money is anything that is in general used in the purchase of goods and services and in the discharge of debts. Money may also be defined as an evidence of debt owed by society. The money supply in the United States consists of currency (paper money), coins, and demand deposits (checking accounts). Currency and coins are government-created money, whereas demand deposits are bank-created money. Of these three components of our money supply, demand deposits are by far the most important. Thus, most of our money supply is invisible, intangible, and abstract. 

The two most important inherent attributes that money must possess in a modern credit economy are acceptability and stability. In earlier times in the evolution of money and monetary institutions in the United States, the attributes of divisibility, portability, and visibility were important. The two legal attributes of "legal tender" and "standard money" are not of as much importance today as in the past. 

The four functions that money often performs are (1) standard of value, (2) medium of exchange, (3) store of value, and (4) standard of deferred payment. In a modern specialized economy, (2) and, most especially, (1) are the most important of these. 

Although it is agreed that the value of money has fallen in the United States over time, there are three in part conflicting theories of value that have been advanced to explain this phenomenon: the commodity, quantity, and income theories. Most economists today espouse either the second or, more typically, the third of these. Any money can retain its value as long as its issuance is limited; it need not have a commodity backing. Inflation or rising prices have been explained by demand and/or supply theories in recent years, although historically the former has been thought to provide the more satisfactory explanation. 

In saying that most of our money supply is invisible, intangible, and abstract, the author is referring to the fact that


banks are often reluctant to supply currency and coin in exchange for a check


checking accounts are not in general use in the purchase of goods and services


information about the balances in checking accounts is not publicly available


the balance in a checking account is not an actual stack of currency or pile of coins sitting inside a bank


the balance in an individual's checking account is in a constasnt state of fluctuation

GMATTM is a registered trademark of the Graduate Management Admission CouncilTM. The Graduate Management Admission CouncilTM does not endorse, nor is it affiliated in any way with the owner or any content of this web site.