This is Part: Two on Modern-day Monetary Systems in our deep dive series into:

What Is Money?

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.

The modern world is made up of different monetary systems

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 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

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.

Modern money takes on many forms

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:

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.

Reserve currencies are a key player in our modern monetary system

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:

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:

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.

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!

Modern-day monetary systems hold many different applications for money

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.

The Simple fact is that nobody seems to be able to provide a clear answer

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?

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 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 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 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: 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.

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:

Who controls our money?

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!

TLAT is reader-supported, when you buy through the links on our site, we may earn an affiliate Commission. Learn More

If you enjoyed this content be sure to subscribe
and follow us on social media too!