Question

Is a \(\$ 100\) check money? Explain.

Short answer

No, a $100 check is not money. It is a document that orders a bank to pay a specific amount of money from a person's account, and while it can be used to trade in lieu of cash, it is not money itself. Unlike cash, a check is not a legal tender but an instrument to transfer money.

Step-by-step solution

Definition of Money

To start off, we need to understand the definition of money. Money is any item or verifiable record that is generally accepted as payment for goods and services. In most cases, it refers to coins or banknotes. But, it also encompasses other types of assets with economic value like bank deposits.

Understanding Checks

A check is a document that orders a bank to pay a specific amount of money from a person's account to the person in whose name the check has been issued. In this case, the check mentioned in the question is worth $100 and can be exchanged for goods and services worth up to that amount. Therefore, a check fulfils the function of money as a medium of exchange.

Final Assessment

However, it's key to differentiate that a check is not, in fact, 'money' in the strictest sense of being a standard medium of exchange, a unit of value or a store of value. Rather, it is a form of instruction to move money. While a check can, in practical terms, perform the functions of money until it's cashed, it is not considered legal tender like coins or banknotes. On another note, if the check bounces due to insufficient funds, it isn't worth the value it suggests. Hence, it can't be declared as money. Thus, a $100 check isn't money, but a promise to pay money.

Key concepts

Medium of Exchange

Money primarily serves as a medium of exchange, facilitating transactions in an economy. Historically, diverse objects such as shells, grains, or even livestock were used as currency until standardized coins and notes made trade easier and more reliable. In modern times, the accepted definition of money includes its role as an intermediary in trading goods and services.

For instance, if you want to buy a book, you can use money as a means for this trade. The seller accepts money because they trust they will be able to use that same money to purchase other goods or services they need. Checks, while they can act as a medium of exchange, are not money themselves but a representation of money; they instruct banks to process a payment with actual funds, typically from bank deposits. This highlights a critical concept in understanding money: the need for general trust and acceptance in any form that represents value.

Bank Deposits

Bank deposits are a cornerstone of the modern financial system and an integral part of what we consider money. A bank deposit refers to funds an individual places into a banking institution for safekeeping. These funds can be accessed, managed, and utilized using various financial instruments - like checks, debit cards, and online transfers.

Bank deposits are important because they represent a store of value that can be mobilized to act as a medium of exchange. Circularly beneficial, the banks use these deposits to give out loans and generate interest, while depositors can feel secure knowing their money is safely held and can be retrieved or spent at their convenience. It's vital to understand that while the money you deposit is indeed money, the account itself is a record of how much money the bank owes you – essentially an IOU from the bank to you.

Legal Tender

The term legal tender refers to money that is officially recognized and required by law to be accepted as payment for debts. Legal tender usually comes in the form of banknotes and coins issued by a government's central bank. Each country defines its own legal tender, which is protected by law to be accepted for transactions.

This concept is crucial for maintaining economic stability because it ensures that everyone in the economy accepts a consistent form of payment. While checks can act as payment arrangements, they are not legal tender as shops and businesses are not legally obliged to accept them. People have to cash them in for legal tender before they can be universally utilized to settle debts. Understanding the distinct characteristics and functions of legal tender helps clarify why, even though they represent money, checks are not money themselves but rather a promise to pay with money.