Why Are Currency And Checkable Deposits Money

Why Are Currency and Checkable Deposits Considered Money?

The seemingly simple question, "Why are currency and checkable deposits considered money?", delves into the fundamental nature of money itself and its role in a modern economy. Understanding this distinction is crucial for grasping macroeconomic principles, personal finance, and the overall functioning of financial systems. This article will explore the various characteristics of money, focusing on why physical currency and checkable deposits are classified as such, and differentiating them from other financial instruments.

The Functions of Money

Before diving into the specifics of currency and checkable deposits, it's essential to understand the three primary functions money serves within an economy:

1. Medium of Exchange:

This is perhaps the most critical function. Money acts as an intermediary in transactions, eliminating the need for bartering. Imagine a world without money – every transaction would require a double coincidence of wants, where both parties possess something the other desires. Money simplifies trade dramatically, allowing for specialization and efficient allocation of resources. Both currency and checkable deposits excel in this function. You can use physical cash directly, or write a check/use a debit card directly linked to your checkable deposit to purchase goods and services.

2. Store of Value:

Money allows individuals and businesses to store purchasing power over time. This doesn't imply that money's value remains constant; inflation can erode its purchasing power. However, relative to many other assets, money provides a relatively liquid and readily accessible way to store value for short-to-medium term needs. Currency, being physical, certainly provides a store of value, although its vulnerability to theft and loss needs to be acknowledged. Checkable deposits, while subject to bank failures (though mitigated by deposit insurance in many countries), also serve as a relatively safe store of value, offering immediate accessibility.

3. Unit of Account:

Money provides a standardized unit for measuring and comparing the value of goods and services. Without a common unit of account, pricing and economic calculations become incredibly complex. Both currency and checkable deposits fulfill this function seamlessly. Prices are quoted in monetary units (e.g., dollars, euros, pounds), and economic data, such as GDP and inflation, are tracked and expressed using these same units.

Currency: The Tangible Form of Money

Currency, in its physical form (coins and banknotes), is the most basic and universally accepted form of money. Its acceptance stems from:

• Government Backing: In most countries, currency is issued by a central bank, which is usually a government institution. This backing lends credibility and stability to the currency. The government's commitment to maintaining its value (through monetary policy) helps ensure its acceptance as a medium of exchange.

• Intrinsic Value (Historically, Not Necessarily Now): Historically, currency often had some intrinsic value tied to the materials from which it was made (e.g., gold or silver). Today, however, most currencies are fiat money, meaning their value is not tied to a physical commodity but derives from government decree and public trust.

• Convenience and Portability: Currency is easily carried and used for small transactions. Its portability contributes significantly to its widespread use as a medium of exchange.

• Anonymity (To a Degree): While transactions using currency can be tracked through sophisticated methods, they offer a higher degree of anonymity compared to electronic transactions, though this anonymity is becoming increasingly limited with advancements in technology.

Checkable Deposits: Money in Your Bank Account

Checkable deposits, also known as demand deposits, represent money held in accounts from which funds can be withdrawn on demand via checks, debit cards, or electronic transfers. These deposits are considered money because:

• Immediate Liquidity: The defining characteristic is the ability to access funds immediately. Unlike savings accounts or investments that might have restrictions or penalties for early withdrawal, checkable deposits offer instant liquidity. This near-instant accessibility makes them a highly efficient medium of exchange.

• Accepted as Payment: Businesses and individuals widely accept checkable deposits as payment, just as they accept currency. The use of checks, debit cards, and electronic payments linked to checkable deposits highlights their seamless integration into the payment system.

• Low Transaction Costs (Relatively): Compared to other payment methods, checkable deposits generally have relatively low transaction costs. While fees may apply for some services, they are usually lower than those associated with money orders or wire transfers.

• Security and Insurance (Usually): Many countries have deposit insurance schemes that protect a certain amount of money held in checkable deposits in case of bank failure. This government backing further strengthens public trust in checkable deposits, reinforcing their status as money.

Distinguishing Money from Near-Money

It's important to differentiate between money (currency and checkable deposits) and near-money. Near-money represents financial assets that can be quickly converted into money but aren't directly usable as a medium of exchange. Examples include:

• Savings Accounts: These accounts offer higher interest rates than checkable deposits but usually have some restrictions on access to funds.

• Money Market Accounts: These accounts offer slightly higher interest rates than savings accounts and may provide limited check-writing capabilities, blurring the line somewhat, but they are not as liquid as checkable accounts.

• Certificates of Deposit (CDs): These are time deposits with fixed interest rates and penalties for early withdrawal. While they can be cashed in before maturity, they are not as readily available as checkable deposits.

• Treasury Bills: Short-term government securities that can be quickly sold in the market, but their value fluctuates, and selling them might incur transaction costs.

The key difference lies in liquidity and immediate accessibility. Money can be used directly for transactions without any significant delay or cost. Near-money requires a conversion step, which can involve time, fees, or a potential loss of value.

The Evolution of Money and its Future

The evolution of money, from bartering to physical currency to electronic forms, reflects technological advancements and societal changes. The future of money is likely to involve further integration of digital currencies and electronic payment systems. Cryptocurrencies, while not yet universally accepted as money, represent a potential shift in how we transact, challenging traditional notions of what constitutes money. However, their volatility and lack of widespread acceptance currently prevent them from being classified as money in most contexts.

Conclusion: Why Currency and Checkable Deposits Remain Central

Despite ongoing technological developments and the emergence of new payment instruments, currency and checkable deposits remain the most fundamental forms of money. Their acceptance as a medium of exchange, their ability to store value (relatively), their function as a unit of account, and their high liquidity collectively ensure their continued importance in the global financial system. Understanding this distinction between money and near-money is crucial for both individuals managing their finances and policymakers guiding macroeconomic policy. The characteristics outlined above – immediate liquidity, widespread acceptance, and government backing (in the case of currency and often checkable deposits) – are the key reasons why these remain the cornerstones of our financial systems. As technology continues to evolve, the form of money might change, but its fundamental functions will likely remain consistent.