This is Part: Two on Modern-day Monetary Systems in our deep dive series into:
Where we answer the questions:
Does Time=Money? Is money the root of all evil? Who controls money? Why does money hold so much power over us? Is money modern-day slavery? and more!
So strap yourselves again as we continue our journey and investigate the different types of money, look into modern-day reserve currencies and discover the many modern applications of money offers us in today’s world.
If you missed the first installment in this series, be sure to catch up on Part: One – The evolution of money, where we explore its origins!
Here is
What role does money serve in the modern world?
We are far removed from the trading of shells and beads we discussed in the first part of this series. Today’s monetary systems and policies have developed complex levels of sophistication far above a mere bartering system or a value of exchange.
Money plays a crucial role in the modern world by serving as a medium of exchange, a store of value, and a unit of account. As a medium of exchange, money is used to facilitate transactions between buyers and sellers. This allows people to buy and sell goods and services without having to barter or trade directly.
As a store of value, money allows people to save and invest for the future. It provides a way to transfer purchasing power from the present to the future, which is particularly important in an economy with a high rate of inflation.
As a unit of account, money is used to measure the value of goods and services and to compare the relative worth of different items. This allows people to make rational economic decisions and to compare the costs and benefits of different choices.
Overall, modern-day monetary systems play a crucial role in the world by providing the most widely used means of exchange and also facilitating economic activity. As it stands most of us cannot imagine living without these systems in place, and might not even be aware of all the various ways we use money to make our lives easier.
Let’s explore:
10 Modern day applications of money
- Medium of value exchange – Buying and selling goods and services
- A store of value – Saving and accumulating wealth
- Unit of account – Measuring the value of goods, services, and financial assets
- Deferred payments – Making and receiving payments over time
- Facilitation of transactions – Financial products and services and investments
- Infrastructure & essential services – Think taxes, and what they’re supposed to be used for
- Education – That we overpay for and then use to make more money
- Security – Domestic as well as international
- Energy – Infrastructure, as well as the distribution of it
- Welfare – Providing financial support and assistance to those in need and providing stability to society
As we get to the bottom, we start to see that a large part of the way we use money in modern society is based on the provision of infrastructure, education, and societal support in the forms of healthcare, law enforcement, and welfare.
Our modern-day money systems have evolved along with our needs and have embedded themselves deeply into the way we live our lives, however, they have also grown in complexity. If you compare it to 50 years ago, then you will find yourself a long way from Kansas when considering the variety of financial products and services availble.
What are the different types of money?
The modern monetary systems that we deal with today have evolved in a range of different financial products and services, all backed by different assets and securities, and different applications. Some of them you may find familiar, others surprising, however, they all come together to form the complex financial markets we deal with today.
10 different forms of money used today:
- Commodity money: This is a form of money that is directly tied to a specific physical commodity, such as gold or silver, but they also include other valuable commodities such as copper, manganese, uranium, and many others. They are used as a medium of exchange and a store of value based on practical usage.
- Fiat money: This is a form of money that is not directly tied to a physical commodity, but is instead declared by a government or institution to be legal tender or money that must be accepted as payment for goods and services. Fiat currency makes up most of the financial transactions taking place today
- Representative money: This is a form of money that represents a claim on a specific underlying asset, such as a gold or silver certificate that can be redeemed for a certain amount of the underlying commodity. This is also where money starts to get complicated.
- Digital money: This is a form of money that exists in electronic forms, such as digital currency or electronic payment systems. This is also very likely to be the dawn of a new age, where transactions are completed almost instantaneously by computers and algorithms over blockchains. We have a comprehensive post in the form of a beginner’s guide to cryptocurrencies worth checking out, as well as an article on how not to lose all your money on crypto for the traders amongst you!
- Virtual money: This is also a form of digital money, however, it relates more to the virtual currencies used in online gaming or social media platforms.
- Credit money: This is a form of money that is created through the use of credit, such as loans or credit cards, which allows people to access money that they do not have in their physical possession.
- Money substitutes: This is a form of money that is not itself money, but can be easily converted into money, such as checks or money orders that are underwritten by financial institutes.
- Token money: This is also not a conventional form of money itself, but is still accepted as a means of exchange, think of examples such as casino chips or transit tokens.
- Fractional reserve money: This is a form of money that is created by banks through the process of fractional reserve banking, in which banks hold a fraction of their deposits in reserve and create new money by lending out the remaining funds. This is also one of the biggest traps of our monetary system, which we discuss in Part: Four of this series on What is money.
- Inflationary money: This is a form of money that is subject to inflation, or a decline in its purchasing power over time, due to an increase in the supply of money relative to the goods and services available for purchase. This is also another one of those problematic areas that we dive into in Part: Four.
Basically, all of these different types of money make up the modern monetary system. There are more examples than are listed here and many many sub-classes that make up the millions of transactions placed on a daily basis and they are all just an exchange of value between the different types of money.
This is one of the reasons that gold was replaced as the main form of reserve currency, while it is intrinsically valuable, it’s just not able to keep up with the demand of our modern-day monetary systems, in fact even the evolved systems that we deal with today still struggle with this.
The modern reserve currencies
We have already explored the origins and principles that makeup reserve currencies in Part: One, but now it’s time to explore the biggest players in modern markets. Global reserve currencies play a crucial role in the global economy, they are used to settle international transactions and to provide a stable and reliable store of value.
The 10 global reserve currencies by market capitalization are:
- The United States dollar: The dollar is the global reserve currency, and it is the most widely used currency for international transactions and for global trade.
- The Euro: The Euro is the second most widely used global reserve currency, and it is used by the European Union and many other countries and institutions around the world.
- The Japanese yen: The yen is the third most widely used global reserve currency, and it is used by Japan and many other countries and institutions in the Asia-Pacific region.
- The British pound: The pound is the fourth most widely used global reserve currency, and it is used by the United Kingdom and many other countries and institutions around the world.
- The Swiss franc: The franc is the fifth most widely used global reserve currency, and it is used by Switzerland and many other countries and institutions around the world.
- The Canadian dollar: The Canadian dollar is the sixth most widely used global reserve currency, and it is used by Canada and many other countries and institutions around the world.
- The Australian dollar: The Australian dollar is the seventh most widely used global reserve currency, and it is used by Australia and many other countries and institutions around the world.
- The Hong Kong dollar: The Hong Kong dollar is the eighth most widely used global reserve currency, and it is used by Hong Kong and many other countries and institutions around the world.
- The Singapore dollar: The Singapore dollar is the ninth most widely used global reserve currency, and it is used by Singapore and many other countries and institutions around the world.
- The New Zealand dollar: The New Zealand dollar is the tenth most widely used global reserve currency, and it is used by New Zealand and many other countries and institutions around the world.
Overall, these are the top ten modern global reserve currencies, but there are many other currencies that are also used as reserve currencies to varying degrees. Next, at what makes up these reserves and what makes up the value they represent.
What determines the value our reserve currencies?
This is where things start to get more complex as the way we calculate value grows more sophisticated, there are so many underlying assets and forms of stored value that it becomes hard to determine what the actual worth of something is, not to mention that a lot of it is speculative and subject to the elusive nature of consumer confidence.
The top 10 factors that determine the value of a reserve currency:
- The stability and reliability of the issuing government or institution:
The value of a currency is often based on the trust and confidence that people have in the government or institution that issues it. Therefore, the stability and reliability of the issuing government or institution can be one of the key factors in determining the value of a currency. - The purchasing power that the currency provides:
The value of a currency is also determined by the purchasing power it provides, or the ability of the currency to buy goods and services. Therefore, the inflation rate and the overall health of the economy can be important factors in determining the value of a currency. - The confidence that people have in the currency:
The value of a currency is also influenced by the confidence that people have in the currency, and by their willingness to hold the currency as a store of value. This is based on more than the political and economic ability and can be affected by many other factors such as public option and other internationally related events such as war that affect the market speculator’s outlook. - The interest rates set by the central bank:
The central bank of a country can influence the value of its currency through the use of interest rates, which can affect the demand for the currency and its exchange rate. Interest rates are one of the topics we discuss in Part: Four when we look at the problems with today’s monetary systems - The balance of trade and international trade flows:
The value of a currency can also be influenced by the balance of trade, or the difference between a country’s exports and imports, as well as by the overall flow of international trade. - The level of government debt and fiscal policy:
The value of a currency can also be influenced by the level of government debt and by the fiscal policies implemented by the government, such as tax policies and spending programs. - The level of foreign investment and capital flows:
The value of a currency can also be influenced by the level of foreign investment in the country and by the flow of capital in and out of the country. - The level of global economic growth and activity:
The value of a currency can be influenced by the overall level of economic growth and activity in the global economy, as this can affect the demand for the currency and its exchange rate. - The natural resources available:
Money makes the world go round, however, commodities make money go around, and the natural resources a country has at its disposal play a big role in determining the value of its reserve currency. This is, however, largely influenced by the level of access and infrastructure available, as well as the trade agreements governing these resources. - The level of technology and innovation:
The value of a currency can also be influenced by the level of technology and innovation in a country, as this can affect the competitiveness and productivity of the economy, and therefore the demand for the currency. This is very much linked to the amount of energy a country is able to produce, which we will get into in the next part of this series.
While some of the determining factors are directly linked to commodities, infrastructure, expertise, and governance, we can observe that the most important underlying factor that determines the value of a reserve currency is the amount of trust and confidence it can gather from the individuals and institutions that make use of it.
The core principle of value in the modern-day world is thus largely based on speculation and faith within that reserve.
This is an incredibly thought-provoking observation to make and it brings lots of follow-up questions to light.
One of my favorite public speakers, the founder of the cryptocurrency Cardano, as well as the founder and CEO of the blockchain research and engineering company IOKH, Charles Hoskinson often advocates the power held by a community, trust, and belief, and while he uses it when speaking about the future of Cardano and the way we use money as a whole, it is the same principle that governs our existing reserve currencies.
Cryptocurrency is definitely the future of finance, and while we dive deeper into it in Part 5 of this series when where we discuss the future of money, we highly recommend learning about cryptocurrencies and how to trade them.
Cardano makes up a large section of my balanced portfolio and it is exactly because of the value gained from the confidence of a community, as well as solid fundamentals that it makes up such an important part of my diverse portfolio!
How much money is there in circulation?
Please be advised that the information and figures on current supply estimations are taken from the US Fed, Ycharts, The world bank, and other “supposedly” credible sources.
| M-System | USA | Globally |
| M0 – Money Supply | 2.296T | 5.8T |
| M1 – Money Supply | 20.10T | 38.8T |
| M2 – Money Supply | 21.42T | 90.4T |
| M3 – Money Supply | 21.50T–27T | 95T -125T |
| M4 – Money Supply | 300T-600T | 544T-1.2Q |
This is a topic that I would actually encourage you to research yourself, simply to prove to you the number of inconsistencies in the statistics available. If anyone has a more reliable and accurate source, please get in touch, and we will gladly credit you for the information!
Just to clarify what M0 through M4 represent is a measuring scale for “Money supply” with specific inclusions and exclusions. This is a very complex topic, and you can read more about it on Wikipedia, here. For those just looking for a brief description, I have included the Investopedia definitions below:
What is M0 – money supply?
M0 Money: Refers to all physical currency in circulation, including coins, notes, and bills
The monetary base (or M0) is the total amount of a currency that is either in general circulation in the hands of the public or in the form of commercial bank deposits held in the central bank’s reserves. This measure of the money supply is not often cited since it excludes other forms of non-currency money that are prevalent in a modern economy.
– Investopedia on M0 Money supply.
What is M1 – money supply?
M1 money: Also known as “narrow money”’ and includes M0 in addition to other highly liquid deposits in the bank.
M1 is the money supply that is composed of currency, demand deposits, and other liquid deposits—which include savings deposits. M1 includes the most liquid portions of the money supply because it contains currency and assets that either is or can be quickly converted to cash. However, “near money” and “near, near money,” which fall under M2 and M3, cannot be converted to currency as quickly.
– Investopedia on M1 Money supply.
What is M2 – money supply?
M2 money: Consists of M1 in addition to marketable securities and less liquid deposits, it is the most commonly accepted measure
M2 is a calculation of the money supply that includes all elements of M1 as well as “near money.” M1 includes cash and checking deposits, while near/narrow money refers to savings deposits, money market securities, and other time deposits (in amounts less than $100,000). These assets are less liquid than M1 and not as suitable as exchange mediums, but they can be quickly converted into cash or checking deposits.
– Investopedia on M2 Money supply
What is M3 – money supply?
M3 money: Consists of M2 as well as money market funds like mutual funds, repurchase agreements, commercial papers, and others
M3 is a measure of the money supply that includes M2 as well as large-time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets.
The M3 measurement includes assets that are less liquid than other components of the money supply and are referred to as “near money,” which are more closely related to the finances of larger financial institutions and corporations than to those of small businesses and individuals.
– Investopedia on M3 money supply
What is M4 – money supply?
M4 Money: Is composed of M3 and all other least liquid assets, usually outside commercial banks.
M4: Cash outside banks (i.e. in circulation with the public and non-bank firms) plus private-sector retail bank and building society deposits plus private-sector wholesale bank and building society deposits and certificates of deposit.
What should you take a way from modern monetary systems?
Needless to say, but it is difficult to say exactly how much money is in circulation, as we have established by now, the speculative nature of value makes it really hard to quantify. Especially when you take it up to a global scale and add the different ways of calculating derivatives and speculative assets.
This is the part of our journey where suddenly money becomes incredibly complex, but it also serves to highlight the incredibly large potential for manipulation held in a monetary system that allows differential assets and deferred payments (loans) and the added interest that comes along with it, especially when you consider that total global debt is estimated at just over the $300 Trillion mark!
If reading this has left you feeling the same way I felt while writing it, then you definitely have a bit of a sour taste in your mouth and more than one or two questions about the way our monetary systems work. There are so simply so many concerns that need to be voiced!
To you guys, I would like to say, don’t worry, we’ll get there! I am intentionally withholding most of my concerns and criticism for Part: Four of this series, where the entire article is dedicated to the problems our modern monetary systems are facing and we can investigate it in depth!
Don’t be too disappointed though, because we are really getting to the interesting stuff now, and Part: Three starts off the questioning process.
It’s time to discover:
In Part 3 of this series
Be sure to also check out our section on growing your wealth and building your business for more great, practical, and informative finance-related content like our beginner’s article on diversifying your portfolio, or how not to lose all your money trading crypto!
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