Money Supply Essay Example | Topics and Well Written Essays - 750 words - 1

Money Supply - Essay Example The second function arises from the previous one. Once two persons have their subjective values compared in the same equivalent they can settle the price of the initial 'something' they were talking about, or simply exchange it for the settled amount of the equivalent - therefore money can be a measure of exchange. Finally the third function, the storage of value can be explained as a way to keep value over time. For instance one person has 'something' that costs A. However in future, its value may change (e.g. furniture becomes antiques growing in value, or milk may turn sour losing value), and the person wants to fix it. He sells it to another person for A, and now despite all the changes that will occur with 'something', his acquired value is fixed. Of course, money was not always green papers with presidents, or coins from metal. In fact, there were so many forms of money that it is useless to talk about each one separately. It may time-saving, however, to classify all the forms into groups: barter, commodity money, fiat money, and credit money. Barter is considered to be the earliest form of exchange without any intermediary goods. For example, people simply settled the amount of cows they would like to exchange for a certain amount of pots, and exchanged the goods. It was inconvenient as someone who wanted your cows did not always have the pots you needed, and also it was difficult to determine the value of one cow: ten pots is too cheap and eleven is too expensive, but ten with a half is as much as ten. The next form was commodity money, which were tradable goods by themselves, but also an equivalent for everything else, like gold or silver coins. This form also had its drawbacks, such as unexpected inflation. For instance, in 16-17th centuries a lot of new deposits of gold and silver were discovered in new World, which led to terrible inflation in Europe: the purchasing power of gold and silver coins fell by 60-80% (Galbraith 1975). Such fluctuations were the main reason why most of the governments adopted new form of money. Fiat money is well known to us papers and coins, and also checks, e-money and other symbolic forms. Under this system symbols which are used as money, are not valuable by themselves. Therefore they can be easily restored if damaged without owner losing value. Another form, which is the youngest of all, is the credit money. These are not payable on demand, but rather present a claim that can be used for purchasing. The trick with credit money is that it is not current payment, but a promise of payment in future, which upholds additional risks for both sides of a deal. Thus, during the evolution of money forms following characteristics were developed for an ideal money form: durability, divisibility, homogeneity, and convenient for transportation and storage. Since money can be presented in such various forms, the question of calculating all the money available in one country, for instance, has become increasingly difficult. The notion of money supply is used to reflect different forms of money available within an economy. The narrowest measure of money supply is M0, which is the total of all physical currency (paper, coins), plus central bank accounts that can be exchanged for physical currency. In other words M0 shows how much cash with public are in the country. M1 includes M0 and the total of deposit balances without any