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CHAPTER 3: WHAT IS MONEY?
Meaning of Money: Slide 2 a.
Money is not only paper and coins. Paper and coins are currency . Money as we economists understand also includes checking account deposits. Although not common in Turkey, most people have checkbooks in US and use checks for payments. We can withdraw our money easily from the ATM machine.
Therefore we must include the money held in checking account deposits when we calculate the total money supply. b.
There is a confusion with the word money because we also use it in place of income (gelir).
Income is a flow concept, money or wealth (servet) is a stock concept. One might have houses or cars included in his wealth, but these things are not money.
Functions of Money: Slide 3 a.
Medium of Exchange (Degisim Araci) i.
Imagine an economy without money. Then we have to use a barter
(takas) system . For example, I teach economics and I am hungry. I need to buy bread. If there is no money, how am I going to pay the baker? He probably does not want to get economics class. I would just hope he has a son or daughter that wants to hear some economics. For everything I want to buy, I need to find a seller that wants to pay for taking economics class. This is called double coincidence of wants . It makes exchange very difficult. Money makes exchange much more efficient than a barter system. Money helps specialization and division of labor. I specialize in teaching economics, get paid in money, then I buy various goods and services using money.

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Unit of Account (Hesap Birimi): i.
If we cannot measure value of a marker in terms of TLs or another money, then what can we use? If there is only peaches and economics lectures in the economy, then we can say: 10 peaches equals 1 economics lecture. We need only one price. If we have three goods including a movie, then we need three prices (Lecture in terms of peaches, Movie in terms of peaches, and Lecture in terms of movies). But if we have a thousand goods in the economy, then we need C(1000, 2) = 499,500. prices: price of every good in terms of every other good. This would be time-consuming. c.
Store of Value (Tasarruf Araci): One can save purchasing power by keeping money. There are other ways to store value like cars, houses, land, jewelry. These storage methods also have advantages because: i.
they increase in value by the time ii.
They provide services: cars (transport) jewelry (aesthetic)
Then why do people hold money at all? Because money is the most liquid store of value. Liquidity is a very desirable feature of money. You can convert money into goods and services very quickly. If you want to sell your house or car, it takes time, effort, costs some commission, etc. So they are less liquid.
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If there is inflation, then people are reluctant to hold money because it loses value quickly. So people in Turkey usually buy dollars to store value.
Evolution of the Payments System: Slide 4 a.
Commodity Money: Common before 19th century. Precious metals such as gold or silver or other valuable commodities. Ex: Cigarettes in prison. Must be accepted by everyone. Coins were not practical because they are hard to carry for large sums of money. Then people invented paper currency: “bank notes”.

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4b.
Fiat Money: Paper currency was at first convertible to gold or silver.
Convertibility was guaranteed by the issuer bank (this is why it was called bank note) or the government. Later became unbacked currency that is not convertible to precious metals. The only support is that it is legal tender , this means it must be accepted as payments for debts. Government guarantees this law. In most countries, it is issued by the central bank. But in some places such as Honk Kong, commercial banks such as HSBC also issue currency (my brother brought some here) by the permission of the government. c.
Checks: More common in the US d.
Electronic Payment: Internet banking and payments. e.
E-Money: Debit Cards. Is there in Turkey? Gift Cards from a store like
Carrefour? You pay certain amount like 100 YTL for the card and give it as a gift to a friend. Your friend can buy anything from the store.
Measuring Money a.
Monetary Aggregates: Slide 5 i.
M1 includes currency (nakit), checking account deposits (vadesiz mevduat hesaplari), traveler’s checks (seyahat ceki). Currency is paper and coins in circulation, excluding cash in bank vaults and ATMs. Also includes checkable deposits that earn interest (probably there is none in
Turkey). ii.
M2 includes M1 plus savings accounts (vadeli tasarruf mevduatlari) that pay interest but can also be withdrawn upon demand (fakat onceden haber verilmesi gerekiyor ve kucuk bir miktar kesintisi var). M2 includes less liquid accounts than M1.
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In Turkey, we also have M2Y = M2 + foreign currency deposits
(doviz tevdiat hesaplari). This is because of high dollarization in

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Turkey especially in 1990s. A significant fraction of total deposits are held in USD. Show the share of FX deposits in total deposits from Erdem Basci presentation ( bascidollarization.ppt
). You can also show CBRT and market interest rates.