[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Money as a Store of Value People will exchange what they have for money
only if they believe that they can later exchange money for things they need. For
money to serve as a medium of exchange, it must hold its value. Economists call this
third function of money the store of value function. Governments once feared that
paper money by itself would not hold its value unless it was backed by a commodity
such as gold. People had confidence in paper money because they knew they
could exchange it at banks for a precious metal.
Today, however, all major economies have fiat money—money that has value only
because the government says it has value and because people are willing to accept
it in exchange for goods. Dollar bills carry the message “This note is legal tender for
all debts, public and private.” The term legal tender means that if you owe $100, you
have fully discharged that debt if you pay with a hundred dollar bill (or a hundred onedollar
bills).
We are now ready for the economic definition of money. Money is anything that
is generally accepted as a unit of account, a medium of exchange, and a store of
value. Money is, in other words, what it does.
MEASURING THE MONEY SUPPLY
What should be included in the money supply? A variety of things fulfill some of the
functions of money. For example, in a casino, gambling chips are a medium of exchange,
and they may even be accepted by nearby stores and restaurants. But no establishment
except the casino is obligated to take chips; they are neither a generally accepted
medium of exchange nor a unit of account.
Economists’ measure of money begins with the currency people carry around.
Economists then expand the measure to include other items that serve money’s
three functions. Checking accounts, or demand deposits (so called because you can
get your money back on demand), are part of the money supply, as are some other
forms of bank accounts. But what are the limits? It is helpful to imagine items on a
continuum: at one pole are those that everyone would agree should be called money,
at the other are those that should never be considered part of the money supply,
and in between are what works as money in many circumstances.
Economists have developed several measures of the money supply to take account
of this variety. The narrowest, called M1, is the total of currency, traveler’s checks,
and checking accounts. More simply, M1 is currency plus items that can be treated
like currency throughout the banking system. In late 2003, M1 totaled $1.3 trillion.
A broader measure, M2, includes everything that is in M1, plus some items that
are almost perfect substitutes for M1. Savings deposits of $100,000 or less (i.e., up to
the limit covered by federal insurance) are included. So are certificates of deposit
(deposits put in the bank for fixed periods of time, between six months and five
years), money market funds held by individuals, and eurodollars, or U.S. dollars
deposited in European banks. In late 2003, M2 totaled $6 trillion.
The common characteristic of assets in M2 is that they can be converted easily
into M1. Economists describe as liquid an asset that is easily converted into M1 without
losing value. You cannot just tell a store that the money needed to purchase a
shirt is in your savings account. But if you have funds in a savings account, it is not
CREATING MONEY IN MODERN ECONOMIES ∂ 617