Near money

History

Over the past two centuries what has been accepted by the public as money has been expanded from gold and silver coins to include first bank notes and then bank deposits subject to transfer by check (cheque). Until recently, most economists would have agreed that money stopped at that point. No such agreement exists today, and the definition of money appropriate to present circumstances is debated. Since the 18th century, economists have known that the amount of money in circulation is an important economic variable. As the theories became more carefully specified in the 19th and early 20th centuries, they included a variable called the money supply. What is an acceptable enough medium of exchange to count as money? It has ever changed and will continue to change over time

Functions of money

If we concentrate only on the medium-of-exchange function of money, money in advanced economies today consists of coins, notes and deposits subject to transfer by check or check-like instruments. These are the assets included in M1, the narrowly defined money supply which includes currency and those deposits that are themselves usable as media of exchange. No other asset constitutes a generally accepted medium of exchange; indeed, even notes and checks are not universally accepted, especially in substantial quantities.

However many media of exchange, like banknotes (with zero interest yield) and demand deposits (whose interest yields tend to be quite low), may function relatively poorly as a store of value — one of the functions of currency. Assets that earn a higher interest return — if available — will fulfil this function better; but these other assets will probably not function as a medium of exchange.

Assets with slightly lower liquidity

Thus near money can be considered as assets that fulfill the store-of-value function (as well as can be expected given the economic conditions) and are readily converted into a medium of exchange but are not themselves a medium of exchange. Deposits at a bank, savings and loan association, or building society etc. are a characteristic form of near money. Provided that the terms of the account permit immediate withdrawal, the deposit owner knows how much purchasing power he currently holds, and can turn the deposit into a medium of exchange (cash or a checking deposit/current account ) almost immediately.

Short fixed term deposits (such as 30-day Treasury Bills) and government bonds which are close to their maturity date are examples of assets which are not quite as liquid as a bank account that permits immediate withdrawal, but in many circumstances the difference is not important. Such assets are therefore often also regarded as "near money".