What Are Money Substitutes?
What Are Money Substitutes?
Money is defined in the Merriam Webster’s Collegiate Dictionary Tenth Addition as “a monetary value obtained by sale or exchange of one kind of property or of a group of related properties.” Money is used in a variety of contexts, including sport, business, politics, education, and society. It is an abstract object with no particular use or function in most human actions and societies. Money may be regarded as the price of power, time or talent. Money is any tangible or verifiable account that is normally accepted as payment for specific goods and services, repayment of debts and return of goods or services, in a given society or socio-economical context.
To be able to influence the supply of money power, banks must accumulate a stock of it as liabilities. The most common means of doing this is by creating loans. Banks can also buy government bonds or other financial securities from other banks. They then distribute the money power in accordance with the terms of the loan. A bank can use different financial tools like credit control, interest rate management, balance sheet management, and interest rate aggregation to intervene in the market and influence the money supply.
Cryptocurrency are digital objects that can be used as legal tender in transactions. Cryptocurrency are defined as any digital entity that functions as a store of value and a unit of account independent of any country, government, political subdivision, or central board. Cryptocurrency are the ones used for online banking, shopping, electronic money transfers, computer network transactions, and virtual money systems such as PayPal and WorldPay. There are numerous types of currencies. These include:
There are a number of theories that explain how money substitutes in the economy. One of the most widely accepted theory is that money substitutes are created when a nation’s central bank prints more than it needs to keep the national money supply balanced. This excess money is then made available to banks for making commercial paper loans. After which banks lend this money to businesses and individuals for making their transactions. This makes businesses and individuals able to fulfill their monetary needs through cash transactions.
Another theory on money substitutes suggests that money substitutes are obtained when banks lend their own currency. For instance, if a bank earns profits by issuing commercial paper currencies, it will end up with extra liabilities. The liabilities accumulated will make banks insolvent. So banks will need to obtain physical assets that can be transformed into liquid assets, i.e., bank notes. In order to do that, banks purchase these assets from other banks and then sell them to their customers. Once a bank becomes solvent again, it will be able to resume issuing bank notes.
The third type of monetary substrate is the precious metals market. Gold, silver, platinum, and palladium are the assets of this market. Gold and silver coins are highly regarded as money substitutes because they are more popular than any other commodities. If you own gold and silver coins, then you are surely a creditor to the central bank of the country. Because it is highly unlikely that the central bank can generate enough physical currency to back its domestic currency liabilities, it will use its money liabilities as collateral for the assets it owns. Usually, when a creditor borrows money from the central bank, he pays interest according to the formula: (Totalityweight (Exchange Trade-In Weight)/Exchange Trade-In Profit).