What is Supply of Money?

Supply of money in an economy at any point of time refers to the volume of money held by the households and firms for transactions and settlement of debts. In the generally accepted measures of money supply, we do not include the money held by the government and money lying with the commercial banking sector. 

This is done mainly to separate the producers of money (i.e., government and banking system) from the demands of it (i.e., the households, firms and institutions).

The supply of money at any point of time consists of:

1) Currency: I t consists of both paper currency and the coins in circulation. The former is in terms of currency notes of the denomination of rupees two and above issued by the central bank, i.e. Reserve Bank of India, and rupee one notes issued by the Government of India.

2) Net demand deposits: Total demand deposits with banks include deposits from public and those deposits which one b a l k holds with other banks (viz., inter-bank deposits). Only the former component of total demand deposits are included in supply of money, as money, by definition, is something held by public.

3 ) 'Other deposits' with Reserve Bank of India: They include demand deposits of quasi-government institutions, foreign central banks, foreign governments, the World Bank, etc. This component of money has been a very negligible proportion of total money supply in India.

The conventional measure of money supply (known as M) includes coins and currency notes in circulation with the public and the net demand deposits. This measure is often referred to as a narrow measure of money supply.

In modem literature o n money supply, distinction between money and liquidity has been emphasized. I n this context, it may be found that it is not only money (in the conventional sense) but also near-money that is part of the liquid assets available with the public for spending. People's ability to spend, therefore, depends upon the amount of overall liquidity in the economy which depends both on the total stock of money as well as near-money assets. In the near-money assets we include:

i) savings deposits with post office savings banks and commercial banks, and ii) time deposits of the banks (net of inter-bank deposits).

We know that cheque facility is available against the saving deposits, which adds to liquidity. Similarly, fixed deposits can be prematurely encashed or a loan can be taken against them. Both these options result in greater liquidity.

Poet office savings deposits are far less liquid than commercial bank savings. Savings deposits with post office can be withdrawn on demand, but have the following restrictions:

1) Chequable portion of these deposits is very small

2) There are restrictions on number of withdrawals in my week.

3) There is a maximum limit on the amount of any single withdrawal {unless an advance notice is given to the post office).

Consequently, post office savings deposits cannot serve as a medium of exchange and are less liquid than the savings deposits with the commercial bank.

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