Read this article to learn about the relations among money, near money and liquid assets.
There was a time when money included only the currency in circulation and monetary policy was chiefly concerned with the regulation of money in circulation.
Later, with the growth of the economies and commercial banking habits, bank deposits became more and more significant and money came to include currency plus bank deposits.
Besides, the money supply in the form of notes, coins and demand deposits, a variety of ‘near money’ or ‘quasi-money’ assets such as the time and saving deposits, treasury bills, saving certificates and other short-time commercial papers, which can be converted into currency or demand deposits with little or no capital loss, came to occupy an important place. It is useful to distinguish money as an asset from other assets by virtue of its superior liquidity.
Given the nature of money as a generalized claim against all things that possess economic value; it follows that money is the most liquid of all assets. Liquidity relates to the ease or convenience with which an asset can be converted from one form to another without loss of value and with a minimum of transactions costs. Although, money is an asset with highest degree of liquidity, it yields no return to its holder.
Modern economists are, therefore, quick to recognize the substitutability between money (defined as a medium of exchange) and the wide range of alternative financial assets provided by the government debt and the obligation of financial institutions. Yields are flows while assets are stocks. Yields are consumed but not exchanged, assets are exchanged but not consumed. Assets are physical goods or claims which give rise to yields. Debts are negative assets. There are only present assets, not future assets. Dealings in futures can be treated as dealings in present claims.
Basically, money, debts, and equities represent three primary ways to hold financial claims that can be converted into spending power or alternative forms of real wealth. They all entail risks of change in their value, through either changes in the price level in the case of money or changes in their current market values in the case of debts and equities. Money is the most liquid of these three asset forms, because it can be converted instantly without loss in terms of its own value into any other form of wealth holding or any good or service.
Since there are highly organized markets for debts and equities, they too can be readily converted into money and, through money, into goods or services or a different form of wealth- holding. But they differ from money because there is always the risk of a loss in their value at the time such a conversion is made owing to the possibility of a decrease in their prices. Of immediate significance to .our analysis are certain financial instruments like debt instruments.
These include short- term obligations like treasury bills and long-term obligations like bonds. Short-term obligations are almost as liquid as money and also yield a return to their holders. Business assets would include accounts receivable, credits available, stocks in trade, other business and financial assets easily saleable.
Different types of liquid assets are arranged according to their importance in the ‘liquidity ladder’; for example, notes, coins, demand deposits constitute first grade liquidity; saving deposits, treasury bills, saving certificates comprise second grade liquidity; financial claims of hire-purchase companies, building societies make up third grade liquidity. The ease with which money can be raised depends not only on the quantity of liquid assets available but on the borrowing power, profit expectations, hopes and moods as well.
Prof. S. Golden Weiser’s remark that ‘money is state of mind’ aptly describes the features of money. It is evident that liquidity or the capacity of money to function as a medium of exchange or store of value is a matter of degree rather than of kind. Money, thus, becomes a leading specie of a large genus. Hence, in a developing economy, aggregate expenditure on goods and services can be influenced both by currency and demand deposits, as well as by near money assets and theory and policy of money supply and demand must consider not only cash but also the various types of liquid assets and money substitutes.