The money market

What is money?

Money is a medium of exchange which is made up of notes and coins in circulation in an economy and deposits with banks and other financial institutions. This is also called the money supply. However, there are many other assets which can be described as money and therefore, it is hard to decide exactly what is money. Financial assets that can provide a good store of value and can be converted into cash easily and quickly are liquid assets and can also be thought of as near money. For example, Euros in a bank account which can be withdrawn at an ATM are money.

Physical assets such as jewellery or valuable antiques can also provide a store of value but are not as easy to sell as financial assets. For example, if I have an old chair, I can't sell it so quickly as cash. It might take me a whole week to find a buyer interested in the chair and to meet up and sell it. Therefore, physical assets like the chair are illiquid.

Bank deposits can be easily converted into cash and have therefore become the most important form of money in most modern economies.

The velocity of circulation shows the number of times notes and coins are exchanged in an economy over a given period of time. This can change over time. Here is a chart that shows the velocity of circulation of the Euro and the Dollar:

The money market

The money market is made up of everyone that wants money, for example, a firm, and everyone that supplies that money, for example, a central bank. Business organizations that specialize in providing these services are called financial institutions such as banks. A bank is a financial intermediary because it brings together people who want money to save money and people who want to borrow it. These banks earn revenue in several ways:

Charging interest on loans

When you borrow money from a bank, the bank will keep a small percentage of that money. This is called an interest.

Charging fees for the provision of other financial services

Banks also offer different services to its customers, sometimes for an additional cost, such as:

• Withdrawals from ATMs
• Exchanging and transferring foreign currencies
• Buying and selling shares in public limited companies
• Providing life, property and travel insurance
• Issuing debit and credit cards
• Storing valuables
• Organizing customer payments in the form of cheques or electronic transfers to the bank accounts of other people, businesses or government authorities
• Telephone and Internet banking services

Making investments

Banks can also use money deposited by its customers to make investments in the shares of other public limited companies. If the shares go up in value, the bank will get more when selling them. It will also receive dividends from these companies.