What is Money, How is it Measured, and How is it Created?

Everyone uses money, wants money, needs money, works for money, thinks about money, desires money, and we all know money is the way we get the things we need and want. But do you know what money is?

Money is the medium of exchange. Centuries ago, people would barter to obtain the goods and services they needed by trading resources that were abundant to them, but not abundant to others. This terms the concept of transferability. In order to barter fairly, you needed to know how much of your resource would equal the amount of the other resource.

Then in the 17th century, commodity money was created; using a type of good that functioned as currency. These goods had to be widely desired, valuable, easily storable, and portable. Gold and other precious metals are examples of this; they are widely used as a traded commodity, and before the 1970s, Gold was used to back paper currency in the US. 

Fiat Money is another type of money. It is inconvertible paper money made legal tender by the government, and it does not need to be backed by a commodity. Its value is set by supply and demand, people's faith in its worth, and by inflation or purchasing power.

How is money measured?

Money is measured by calculating three categories: M1, M2, and M3.

M1: All physical denominations of coins and currency, demand deposits, and travelers' checkers. 

M2: All the money found in M1 + all time-related deposits, savings account's deposits, and non-institutional money market funds.

M3: All the money found in M2 + all large time deposits, institutional money market funds, short-term repurchase agreements, and larger liquid assets.

Adding M1, M2, and M3 together equals a country's money supply.

How is money created?

Money is created by either the Central Bank printing the bills or by them buying government fixed-income securities in the market. To buy these securities, the Central Bank can either create the money out of thin air or it can lower interest rates and allow banks to extend low-cost loans. This encourages businesses and individuals to borrow and spend more, and this increases the money supply in the economy.

Money has changed in form throughout history, but there has always been a medium of exchange and a form of value. Money has many different forms, but it can be used anywhere because it is established and used everywhere.