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Money and Payment System
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Money aggregatesamount of cash
BUTother forms of money too
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= currency in circulation+ demand deposits
+ checkable deposits+ travelers checks
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= M1+ savings deposits
+ small time deposits+ retail money marketdeposits
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get larger M1 < M2
add less liquid assets to larger measures
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Components of M1
1%
23%
28%
48%
currency
traveler's checks
demand deposits
other checkable
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Components of M2M1
22%
small CDs
20%savings
39%
money
market
19%
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move together in general BUT behavior can vary in short-term
M2 most watched
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The payments system is a web ofarrangements that allow for the
exchange ofgoods and services, as well as assets. It is critical
this functions well.
Money is at the heart of the paymentssystem.
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The possible methods of payment are:1. Commodity / Monies
2. Checks
3. Electronic Payments
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Commodity monies are things with intrinsicvalue. Included items
like silk and salt.
To be successful, must be:
Usable by most people, Able to be made into standardized
quantities, Durable, Easily transportable, and Divisible into
smaller units.
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Gold has been the most common as it meetsthese requirements.
In 1656, Stockholm Banco issued Europe'sfirst paper money King
of Sweden printed too many to try to finance a
war and the bank failed.
In 1775, the Continental Congress of theUnited States of America
issues continentals
to finance the Revolutionary War.
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Because of huge quantities issued, peoplebecame suspicious of
government-issuedpaper money.
In 1862, the Confederate and the Uniongovernments printed money
with no backing.
After the Civil War, the US reverted to usinggold as money.
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Gold coins and notes, backed by gold, wereused into the 20th
century.
Todays paper money is called fiat money,because its value comes
from government
decree, or fiat. We are willing to accept these bills as
payment because the US government standsbehind its paper
money.
In the end, money is about trust.
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A check is an instruction to the bank to takefunds from your
account and transfer them toanother account. A check is therefore
not a final payment as currency
is.
A check sets in motion a series oftransactions as seen in
Figure.
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Electronic payments take the form of: Credit and debit cards
Electronic funds transfers
Stored-value card
E-money
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Debit Cards Works like a check - tells the bank to transfer
funds
from your account to another.
Credit Cards A promise by a bank to lend the cardholder
money
to make a purchase.
They do not represent money.
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Stored-value card Take it to a bank or an ATM, transfer money to
the
card, then use the card at a merchant.
Limited usefulness so far.
Limited in what can be purchased with them. Require specific
hardware.
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E-money Can be used to pay for purchases on the Internet.
You open an account by transferring funds to theissuer of the
e-money.
When shopping online, you instruct the issuer tosend your
e-money to the merchant.
Really a form of private money.
