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EC 230

Lecture 2 - More About Money

monetary aggregates
desirable characteristics of money
classifying different kinds of money

Monetary Aggregates

Click here to view the Federal Reserve's most recent estimates of the monetary aggregates.

M1

M1 = currency + traveler's checks + demand deposits + other checkable deposits

M2

M2 = M1 + overnight RP's + overnight Eurodollars + money market mutual funds + money market deposit accounts + savings deposits + small time deposits

M3

M3 = M2 + large time deposits + term RP's + term Eurodollars + institutional money market mutual funds

Desirable Characteristics of Money

The only necessary characteristic of money is general acceptability. If everyone regards an item as money and is willing to accept it as payment for goods and services, that item is money.

desirable physical characteristics

Classifying Different Kinds of Money

The different kinds of money can be classified by their cost of production and circulation.

Full-bodied money is money whose cost of production and circulation is as great as its value as money. For example, the amount of gold in a $20 gold piece was purchased from metal dealers for $20.

Fiat money is produced and maintained at zero cost. The nearest example is the Susan B. Anthony dollar coin. For practical purposes, our money is fiat money.

According to Gresham's Law (bad money drives out good), money that is more than full-bodied does not remain in circulation long. If the value of copper in a penny was more than 1 cent, people would melt pennies down for other uses, e.g. electrical wires.

So, if our money is fiat money, what backs our money? The money supply is backed by the assets of the banking system since money is debt. Currency is backed by government debt and government debt is ultimately backed by the ability of the government to print more currency.

Dollar bills have value because

  1. the demand for them is greater than the supply (scarcity)
  2. general acceptability
legal tender
an item that creditors must accept in payment of debts
David A. Latzko
318 COB
Department of Business and Economics
Wilkes University
Wilkes-Barre, PA 18766
phone: (717) 408-4718
fax: (717) 408-4917
dlatzko@wilkes.edu
wilkes1.wilkes.edu/~dlatzko