What Is Money?

What Is Money?


♪ [music] ♪ [Alex] What is money? In previous videos, we’ve taken
the ordinary meaning of money for granted. But now we want to get
a better understanding of money, banking, and central banking. And to do that, we need to be
more precise about what money is and how we measure
the supply of money. Economists typically define money as a widely accepted
means of payment. Basically, money is anything
that can be easily used to buy goods and services. Now it’s clear from this definition
that currency — paper bills and coins —
they’re definitely money. Most of your payments, however,
are probably made by writing a check
or using a debit card — both of which transfer funds
from your bank account to the seller’s bank account. Checking accounts, therefore,
are also considered to be money. What about savings accounts? Well, now it gets
a little bit tricky. Technically, you can’t use
the funds in a savings account to buy goods and services directly. But in practice,
it’s just so easy to move funds from a savings account
to a checking account that we often also define
savings accounts to be money. For the same reasons,
we often also define funds in a money market
mutual fund to be money. What about jewelry? Is jewelry money? What about a watch or a comic book? Comic books aren’t
a widely used means of payment, but you could sell a comic book
in your local pawn shop and use the proceeds
to buy goods and services. So is a comic book money? Probably not. Unlike moving funds from a savings account
to a checking account, selling a comic book —
it takes quite a bit of work, and you never know exactly
how much you’re going to get. So we don’t consider
comic books to be money. The basic idea, then, is this: we count as money any asset that’s
a widely used means of payment or any asset that can be
easily converted into a widely used means of payment
with little loss in value. What is and isn’t money, however —
it’s not written in stone. There could be judgement calls. As a result, economists have
defined several different measures of the supply of money. The most important of these are
the monetary base and the cleverly named
“M1” and “M2.” The monetary base is defined
as currency plus reserve deposits — deposits held by banks
and other institutions in their accounts
at the central bank, the Federal Reserve. You may not have heard
of reserve deposits, but they’re basically
the checking accounts that banks use to pay one another. Since so many payments require
that funds move from bank to bank, reserve deposits are
a very important part of the financial system. M1 is defined as currency
plus checkable deposits. M2 includes M1
plus savings deposits, money market mutual funds,
and small-time deposits. Now, there are other definitions
of the money supply, but these are the ones
which are most commonly used. The monetary base is important because as we’ll see
in future videos, the Fed has the most direct control over the monetary base. However, in order to have
profound effects on aggregate demand
and the economy, the Fed must also influence
the bigger definitions — M1 and M2. And in the next few videos,
we’ll learn about the tools that the Fed uses
to try to control the money supply and aggregate demand. But first, we need
to understand more about how banks can also
influence the supply of money through fractional reserve banking
and the money multiplier. [Narrator] You’re on your way
to mastering economics. Make sure this video sticks
by taking a few practice questions. Or, if you’re ready
for more macroeconomics, click for the next video. ♪ [music] ♪ Still here? Check out Marginal Revolution’s
University’s other popular videos.

15 Comments

  • rizu 0606

    July 18, 2017

    nice video..

    Reply
  • Vaibhav Gupta

    July 18, 2017

    he's back.

    Reply
  • Gonzalo Martínez Romero

    July 18, 2017

    So the monetary base can be defined as M0 + the reserve deposits of commercial banks at the central bank? Thanks!

    Reply
  • Simon Sarevski

    July 18, 2017

    Alex man, throw that tie in the trashcan pls 🙂 cool video btw

    Reply
  • Spaceddout

    July 18, 2017

    Gold is money!

    Reply
  • Vicko Seno Saden

    July 19, 2017

    Debt-to-GDP ratio please

    Reply
  • Jesse

    July 19, 2017

    This is mostly wrong, or at the very least misleading, and the next video covering the money multiplier even more so. Sad that this information is shared by reputable economists as true. Authors, please see “Money creation in the modern economy“ by the Bank of England, and revise or delete these videos.

    Reply
  • David

    July 25, 2017

    the great majority of so called money out there sprigs off the fraud called fractional reserve lending by the banks and the feds don't have any control

    Reply
  • Noontime Spender

    July 29, 2017

    What about exchanging meth for blowjobs? Is the meth money or are the blowjobs money? And how would the multiplier apply.

    Reply
  • uawsux

    August 9, 2017

    Great video for a 14 year old but a sixteen-year-old wouldn't buy it

    Reply
  • Jepte Vergara

    September 22, 2017

    Your graphics are getting better, Marginal Revolution University – I look forward to seeing further improvements. Keep it up!

    Reply
  • Mujangga

    January 9, 2018

    All I have is a Savings Account and I can buy things from it using a debit card.

    Reply
  • Sustany Capital

    October 1, 2018

    This is not nuanced enough to describe 'money' and is using legacy understanding which conflates 'money' and 'currency'. These terms are on different semantic levels: money refers to the agreement or legal element whereas 'currency' refers to its (technical) function. More detailed here: https://www.linkedin.com/pulse/cryptocurrencies-dollars-cigarettes-christian-kameir/

    Reply
  • Phleven

    November 4, 2019

    Ask tus chinos geys

    En primera: Termina la primaria. Segunda: ¿chinos gays?¡Ellos pueden hacer que tu novia(si es que tienes aunque lo dudo) grite más duro siguiéndola en Instagram que tu en la cama! Y tercera: Son COREANOS

    Reply
  • Dasun Del

    November 16, 2019

    https://paidera.com/?r=265761

    Reply

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