Measures of Money Supply

 Money is something measurable. The total stock of moneys of various kinds at a particular point of time can be computed. A whole time series of money supply can be constructed. This will show the time behavior of money supply.

We must note two things about any measure of money supply. Firstly, the supply of money refers to its stock at any point of time. Money is a stock variable in contrast with a flow variable. It is the change in the stock of money (say) per year which is a flow.

 

Secondly, the stock of money always refers to the stock of money held by the public. This is always smaller than the total stock of money in existence. The term public is defined to include all economic units (households, firms and institutions) except the producers of money (such as the government and the banking system). For the most common definition of money, the government means the govt. of Bangladesh and the banking system means the BB plus all banks which accept demand deposits. This means that the word public is inclusive of all local authorities, non-bank financial institutions, and non- departmental public-sector and even the foreign central banks and governments and the International Monetary Fund who hold a part of Bangladesh money in Bangladesh in the form of 'deposits with the BB. In other words, in the standard measures of money, money held by the government and the banking system is not included.

 

The primary reason for measuring the stock of money in this way is that this separates the producers or the suppliers of money from the holders or the demanders of it. For both monetary analysis and policy formulation, such a separation is essential.

 

A single measure of money supply defined as the sum of currency and demand deposits, both held by the

public, we call it the narrow measure of money supply

Demand for Money

 John Maynard Keynes, in his theory of demand for money, which he called liquidity preference theory, asked the question, why do individuals hold money? He postulated that there are three motives behind the demand for money:

 

i) The transaction motive,

 

ii) The precautionary motive, and iii) The speculative motive.

i)  Transactions Motive: Individuals are assumed to hold money because it is a medium of exchange that canbe used to carry out current everyday transactions Keynes emphasized that thiscomponent of the

demand for money is primarily determined by the level of people'stransactions. The transactions component of the demand for money is proportional toincome.

 

ii)   Precautionary Motive: Besides holding money to carry out current transactions, people hold additionalmoney as a cushion against unexpected needs. Precautionary money balances come inhandy if you are hit with an unexpected bill, say for major car repair orhospitalization. Keynes believed that the amount of precautionary money balancespeople want to hold is determined primarily by the level of transactions they expect tomake in the future and that these transactions are proportional to income. Therefore,he postulated that the demand for precautionary money balances is proportional toincome.

 

iii)  Speculative Motive:Keynes did not end his theory with the transaction and precautionary motives, ratherhe added that money can be used as a store of wealth and called this motive forholding money as the speculative motive. Keynes, however, looked carefully at thefactors that influence the decisions regarding how much money to hold as a store ofwealth. Unlike classical (Cambridge) economists, Keynes believed that interest rateshave an important role to play here and he concluded that as interest rate rises. Thespeculative demand for money falls and vice versa.

The Payment System

 The  payments  system  is  the  set  of  institutional  arrangements  through  which purchasing  power  is transferred from one transactor in exchange to another. Forefficient exchange, a common medium of exchange or means of payment is necessary.The payment system is organized around the use of money. An efficient organizationof the monetary system is the sine qua non of an efficient payments system.

 An efficient payment system should permit all kinds of payments to be made withutmost convenience, expeditiously, safely and at very low costs to the economy andthe transactors.

 

For making small local payments (mostly arising in retail trade and daily wagepayments), currency has proved to be the best means of payment. For making largeand out-of-town payments, the use of checking deposits and bank drafts is morepopular. For faster payments, telegraphic transfers of money are also made. Othermodes of payment used are money orders and postal orders sold by post offices andJuiodis of indigenous bankers. For making foreign payments, banks again come intothe picture. Thus the banking system plays a dominant role in the organization andrunning of the payments system. The spread of banking in the country is important notonly for the mobilization of savings and for allocation of credit but also as a dominantcomponent of the payments system.

 

Given the public's demand for each kind of means of payment, an efficient paymentsystem must meet this demand in full. Interestingly, the importance of the smoothfunctioning of the payments system is recognized only when such a system isdisrupted.The speed with which payments are completed is also important. Speedy paymentsmake for more efficient utilization of funds and thereby of resources. As a result, thespeed (or rate) of production also goes up. This kind of intangible benefit of anefficient payment system is generally not well appreciated.

 

The organization and running of the payments system involves costs - costs to transactors and to the economy. The more efficient the payments system, the lower the cost of transfer of funds per. The gain of lower costs accurse to the whole economy.

 

There is another kind of cost of maintaining the payments system which the economy as a whole incurs. This concerns the production and maintenance of currency. In regimes of full-bodied metallic currency such costs were quite high. The paper currency system, in this sense, is much more economical.