Definitions of Money
The process of money creation raises a fundamental issue: What is money? In an economy with money but without promissory notes and fractional reserve banking, money is relatively easy to define: Money is the total amount of gold and silver coins in circulation, or their equivalent. The money creation process above, however, indicates that a broader definition of money might encompass all the notes and coins in circulation plus all bank deposits.
More generally, we might define money as any medium that can be used to purchase goods and services. Notes and coins can be used to fulfill this purpose, and yet such currency is not the only means of purchasing goods and services. Personal cheques can be written based on a bank chequing account, while debit cards can be used for the same purpose. But what about time deposits or savings accounts? Nowadays transfers can be made relatively easily from a savings account to a current account; therefore, these savings accounts might also be considered as part of the stock of money. Credit cards are also used to pay for goods and services; however, there is an important difference between credit card payments and those made by cheques and debit cards. Unlike a cheque or debit card payment, a credit card payment involves a deferred payment. Basically, the greater the complexity of any financial system, the harder it is to define money.
The monetary authorities in most modern economies produce a range of measures of money (see Exhibit 3). But generally speaking, the money stock consists of notes and coins in circulation, plus the deposits in banks and other financial institutions that can be readily used to make purchases of goods and services in the economy. In this regard, economists often speak of the rate of growth of narrow money and/or broad money . By narrow money, they generally mean the notes and coins in circulation in an economy, plus other very highly liquid deposits. Broad money encompasses narrow money but also includes the entire range of liquid assets that can be used to make purchases.
Because financial systems, practice, and institutions vary from economy to economy, so do definitions of money; thus, it is difficult to make international comparisons. Still, most central banks produce both a narrow and broad measure of money, plus some intermediate ones too. Exhibit 3 shows the money definitions in four economies.