7.2 Types of Money and the Money Supply

Notes

• Commodity money has value of its own, such as gold coins, salt or tobacco (used as money in colonial Virginia).
• Representative money stands for something of value, such as paper certificates that could be traded for gold or silver.
• Fiat money has value because the government declares it legal tender and people trust it, not because it can be exchanged for gold. U.S. dollars are fiat money. The U.S. stopped exchanging dollars for gold for its citizens in 1933 and for foreign governments in 1971.
• Liquidity is how easily an asset can be used to buy things. Cash is the most liquid asset.
• The Federal Reserve measures the money supply:
• M1: the most liquid money, including currency held by the public and checking deposits (and, since 2020, savings deposits).
• M2: M1 plus near money such as small certificates of deposit (CDs) and retail money market funds.
• Credit cards are not money; they are a way of borrowing money.