In fact, Schwartz and Friedman are willing to consider as money all marketable government securities which are supported at par. Notably, the Chicago School led by Milton Friedman opts to include all bank deposits, time and demand, in money supply. However, alternative definitions of money have been adopted by many writers. As such, these time and saving deposits are excluded from the pool of the money supply. What distinguishes these deposits is the fact that they earn an interest income and can be converted as means of payment only after some delay and not at once. These are no doubt liquid assets but they are not so liquid enough as to rank as money. These are no doubt a store of value but are not the means of payment but only equivalent to means of payment. The reason being that time deposits of commercial banks can be drawn only at the end of a fixed period or earlier by paying a penalty or by obtaining prior permission. When the amount of money actually being held coincides with the amount of money individuals, business houses and governments actually want to hold a condition of monetary equilibrium exists.Ī distinction must be made between the current deposits or current accounts of banks which have the status of money and deposit accounts (fixed or savings deposits) which do not have the status of money and are at best regarded quasi-money or near money. Economists make a distinction between amount of money in existence at any point of time and the amount that people and institutions may want to hold for various reasons. Since money is a stock, it means that the amount of money in existence at any point of time must be held by some entity in the economy. In contrast to income, which is measured over time the money is a stock, not a flow. Throughout history the question of not only what constitutes money but where it comes from has been both important and controversial. ![]() ![]() ![]() The stock of money always refers to the stock of money held by the public. It is the change in the stock of money during a period (say a year), which is a flow. Supply of money refers to its stock at any point of time, it is because money is a stock variable as against a flow variable (real income). Thus, the ‘quantity of money’ means the ‘total amount of money in circulation’ in existence at a time. In other words, the cash balances held by the central and state governments with the Central Bank and in treasuries are generally excluded on the ground that they arise out of the non-commercial, particularly administrative operations of the government. It should be noted that ‘money supply’ which refers to the total stock of domestic means of payment owned by the ‘public’ in a country, we consider the stock of money in spendable form only to be the main source of money supply. The total supply of money is determined by banks, the Federal Reserve, businessmen, the government and consumers.įor theoretical purposes money is defined as any asset which performs the functions of money-but in actual practice, there are many financial assets which perform these functions to a greater or lesser degree and this makes it difficult to measure empirically the magnitude of money. Some economists also include near money, or such liquid assets as savings, deposits and government bills in the money supply. Bank deposits (payable on demand) are regarded part of money supply and they constitute about 75 to 80 per cent of the total money supply in the US. ![]() The effective money supply consists mostly of currency and demand deposits.Ĭurrency includes all coins and paper money issued by the government and the banks. Money supply means the total amount of money in an economy. Read this article to learn about the supply of money in an economy and its components.
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