Money serves as a medium of exchange, an intermediary used in trade to avoid the inconveniences of a pure barter system. It is a store of purchasing power, something that people use to transfer purchasing power from the present to the future. Money is also a measure of value or unit of account, something that can be used to value goods and services, record debts, and make calculations. In other words, it is a measurement for value.
Characteristics of Money
Why is the Canadian dollar considered money but money from the Monopoly game not? What gives a $20 bill or $100 check account entries value? The answer lies in the characteristics of money:
Acceptability: Money must be generally accepted by everyone. Without this, an object is not money, no matter how it scores in terms of the other characteristics. This is the problem Bitcoin has - it’s not accepted by everyone. It’s only accepted by very few people for transactions and it’s just not accepted widely enough to be considered as money.
Legal Tender: Acceptability is strengthened because the government has designated currency as legal tender. That means that paper currency must be accepted in payment of a debt.
Relative Scarcity: Money derives its value from its scarcity relative to its utility or want-satisfying power. Sand could never be used as money because sand is everywhere. The scarcity or rareness drives value in a lot of cases.
Durability: Money needs to retain its value. Perishable items would not serve well as money. For example, a banana wouldn’t be good as money because it would just disintegrate.
Portability: For example, digital money in a bank account can be instantly transferred to buy goods and pay financial obligations.
Divisibility: Money should be capable of being divided into smaller units and enable it to purchase both high and low price commodities. Suppose we used animals as money then nothing could be worth less than an animal because you cannot divide a living creature into smaller pieces.
The Canadian Financial System
The four traditional pillars of the Canadian Financial System were Charter Banks, trust companies, insurance companies, and investment dealers. Financial deregulation allowed institutions in each pillar to perform a wider range of functions. Well, 80 Charter banks operate in Canada. Six big Banks dominate the sector: RBC, TD Canada Trust Bank, Scotia Bank, BMO, CIBC, and the National Bank of Canada.
Components of the Money Supply
The total stock of money circulating in the economy is the money supply. There are various possible components to the money supply. Two key components are currency (includes notes and coinage) and demand deposits or funds (bookkeeping entries to which depositors have immediate access). These are the most liquid forms of money. Other components include notice deposits (funds for which deposit takers may require notice withdrawals), term deposits (funds to which depositors have no access for a fixed period), and foreign currency deposits (funds held by Canadian residents that are valued in foreign currency).
Money Demand
There are two types of money demand. Transaction demand is related to money’s use as a means of exchange to make transactions and varies directly with real output in the price level. Asset demand is related to the money’s use as a store of purchasing power and is inversely related to the nominal interest rate.
Conclusion
Understanding the functions and characteristics of money is crucial for comprehending the dynamics of the economy. Money, in its various forms, plays a vital role in facilitating trade, storing value, and providing a standard measure for pricing goods and services. Its characteristics, such as acceptability, durability, portability, and divisibility, make it a unique and indispensable tool in the economy.
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