The Role of Money

Role of Money

     Money is anything that is generally accepted in payment for goods and services or for the retirement of debt.  This definition has several important words, especially anything and generally accepted.  Anything may perform the role of money, and many different items, including shells, stones, and metals, have served as money. During the history of different countries, a variety of coins and paper moneys have been used. The other important words are generally accepted. What serves as money in one place may not be money elsewhere. This fact is readily understood by anyone who travels abroad and must convert one currency to another. The paper that serves as money in Great Britain, called pounds, is not used as money in the Philippines. A British traveler must convert pounds into peso to buy goods in Manila.

Money may also be used to transfer purchasing power to the future. In this second role, money acts as a store of value from one time period to another. Money, however, is only one of many assets that may be used as a store of value. Stocks, bonds, savings accounts, savings bonds, real estate, gold, and collectibles are some of the various assets that you may use to store value.

While you may store value in these non monetary assets, you cannot buy goods and services with them. To do that, you must convert the assets into money. The ease with which an asset may be converted into money is its liquidity.

liquidity

Unfortunately, the word liquidity is ambiguous. In some contexts it means ease of converting an asset into cash without loss. A savings account with a commercial bank is liquid, but shares of IBM would not be liquid, since you could sustain a loss. In other contexts, liquidity means ability to sell an asset without affecting its price, in which case the stock is liquid. The context in which the word is used often indicates the specific meaning.

central_bank

The power to create money is given by the constitution for the National Government. Congress established a central bank and gave it power to control the supply of money and to oversee the commercial banking system. Although the Central Bank has control over the supply of money, most of the money supply is produced through the creation of loans by by the banking system.

Source:  Capital Markets by Keith C. Brown and Herbert Mayo
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