What are the Different Types of Near-Money?

In a modern economy, money is a complex phenomenon. Money as a means of payment, in a broad logical sense, should cover all financial media that are used in the exchange transactions of the modern economic system.

The modern concept of money, thus, confines itself to currencies (legal tender) and demand deposits of commercial banks (the money viewed in traditional sense), as well as to a multitude of securities or financial assets such as bonds, government securities, debentures, time deposits with banks, equity shares, etc., which serve as a store of value.

As such, Professor Hick’s view is that, money and securities are close substitutes. To him money may be defined as “nothing else but the most perfect type of security.”

A majority of economists, however, draw a distinction between money and near-money by treating cash and changeable demand deposits with banks as a pure form of money, and financial assets as only near-money.

Types of Near-Money:

A modern community holds various kinds of financial assets to store value. Money, however, is the most liquid of all assets. Other financial assets do not command cent per cent liquidity which money does.

They are referred to as quasi-money instruments or near-money. Instruments of near-money are, in fact, claims, excluding demand deposits, against banks and other financial institutions, intermediaries, and the Central Government. The following items are generally considered as near- money:

(1) Time deposits and saving deposits with commercial banks and other banks;

() Bills of exchange;

(3) Bankers’ acceptances;

(4) Gilt-edged securities and all other redeemable and marketable government securities;

(5) Cash-surrender values of life insurance policies;

(6) Treasury Bills;

(7) Savings bonds and certificates;

(8) Re-purchasable shares in savings and loan associations;

(9) Deposits of building societies;

(10) Travelers’ cheques;

(11) Postal Savings deposits;

(1) Savings in units of Unit Trust;

(13) Shares of investment trusts;

(14) Shares of joint stock companies;

(15) Negotiable credit instruments.

Prices are expressed in terms of money. A near- money has no such function. On the contrary, the value of a near-money, any financial asset, is expressed in terms of currency money a unit of account.

Indeed, money and near-money, both, act as a store of value. But, the latter one is a better store of value because it earns income too along with being a store of value.

Distinction between money and near-money may be explained as follows:

(i) Money, for all practical purposes, refers to coins, currency notes and demand deposits of banks in a modern economy.

Near-money, on the other hand, refers to the financial assets like time deposits, bills of exchange, government bonds, shares, etc.

(ii) Money, in a conventional sense, bears 100 per cent, liquidity. Pure Money, i.e., cash, is a readily and immediately acceptable means of payment.

Near-money lacks such 100 per cent liquidity characteristics.

(iii) Holding of pure money is regarded as cash balances which earns no interest. Thus, money is not an income earning asset. Near-money is an income earning asset.

(iv) Pure money or currency money functions as a unit of account and a common measure of value.

So, quite often, people may have a greater inclination to hold financial assets rather than to hold bare cash balances as a store of value. However, since these are near-money, they cannot be used directly as a means of payment. Hence, their liquidity is less than cent per cent.

The liquidity of such financial assets near-money consists in the fact that as their prices are relatively stable, they are convertible into money proper (cash or demand deposit) by selling or discounting them, as and when required, without any or appreciable loss.

Thus, the holders of near-money hold them as close substitutes of money. As such, the degree of liquidity of near-money asset can be ascertained from the extent to which it can be held as a substitute of money without loss.

In short, the liquidity of an asset is determined by speed of its conversion into money. In an economy, the composition of the stock of financial wealth is an important factor in determining the over-all liquidity, as different categories of assets represent different degrees of liquidity.

For instance, currency money and demand deposits represent first grade liquidity; time deposits, treasury bills, government securities, saving bonds, etc., represent second grade liquidity; while deposits of building societies, financial claims of hire-purchase companies etc., represent only third grade liquidity. Indeed the demarcation between money and quasi-money assets is thin and somewhat arbitrary.