What types of money exist?

The most important function of money is that it can be used as a means of exchange. However, in modern societies, money also serves as a store of value and as a unit of common account, since the economy measures the value of things in money. But is all money the same? The answer is no: you have to differentiate between legal money and bank money.

The legal money, constituted by the bills and coins issued by a competent institution, is the one that circulates through an economy. Currently, Spain is one of the countries of the European Union (EU) integrated into the so-called eurozone, that is, they have adopted the euro as currency, so the agency in charge of issuing and controlling the amount of money in circulation It is the European Central Bank (ECB), chaired by Mario Draghi.

Meanwhile, bank money is what is recorded in different types of support but that somehow exists only because “it is in the bank”. Obviously, when we deposit legal money in a bank, it disappears physically and is born as bank money, that is, it ceases to be effective.

There are many types of bank money. Banks, as private companies that are, try to capture the savings of families to channel it for other purposes, and in this sense offer different products or financial assets that seek to adapt to the needs or characteristics of their customers. The most important are the following:

  • Demand deposits or savings. Although these two types of deposits were different years ago in terms of availability and interest rate, today it is difficult to differentiate between a current account and a book. In general, both deposits allow their holders to have money immediately, either in cash or by using checks or cards.
  • Time deposits. Are those whose owner, in exchange for a remuneration, agrees to keep them for a specified period so that they can not dispose of them without incurring a penalty. Within the banking sphere, this type of deposit is the most popular for bank customers.

At the macroeconomic level, for a better study of the money supply, that is, the amount of money circulating in an economy, monetary aggregates are established according to their liquidity. Their definitions, which depend on the types of money they comprise, are the following:

M1 = Cash in the hands of the public + Demand deposits

M2 = M1 + Savings deposits

M3 = M2 + Time deposits

ALP (Liquid Assets held by the Public) = M3 + OAL (Other Liquid Assets)

Finally, we should mention a type of special money that has emerged in recent years. We refer to crypto money, among which bitcoin is the best known. It is a type of money based on mathematical algorithms and that is not backed by a central bank.