We may give the name commodity money to that sort of money that is at the same time a commercial commodity; and the name fiat money to money that comprises things with a special legal qualification. A third category may be called credit money, this being that sort of money which constitutes a claim against any physical or legal person. [1, p. 24]

The decisive characteristic of commodity money is the employment for monetary purposes of a commodity in the technological sense. For the present investigation, it is a matter of complete indifference what particular commodity this is; the important thing is that it is the commodity in question that constitutes the money, and that the money is merely this commodity. The case of fiat money is quite different.

And the last, money is not a free good. Those who need money are willing to pay for it and those who lend money expect to be compensated. The interest rate is the cost of money. If you put $1,000 in an account in a savings and loan that pays interest of 5% per year, you will earn $50 interest in one year. The savings and loan is paying you $50 for the use of your $1,000. Similarly, if you buy a $1,000 face value bond with a coupon rate of 5%, you earn $50 interest each year. The issuer is paying $50 interest each year for the use of your $1, 000. [6, p. 67]

So, the money is not wanted, where the free exchange of goods and services is unknown. Money would still be unnecessary if the means of production were socialized, the control of production and the distribution of the finished product were in the hands of a central body. But it cannot be in a modern society. The simple statement, that money is a commodity whose economic function is to facilitate the interchange of goods and services. But money carries out also other functions. These are function of money as a general medium of payment, and the functions of money as a transmitter of value through time and space. There are 3 categories of money: commodity money, fiat money, credit money. And the last - money is not a free good.

Chapter 2

The Global Money Markets. US Money Market

In this chapter the question will be the global money markets as component of a financial market. Also we shall pay attention to the US money market.

So, the money market is a market in which the cash requirements of market participants who are long cash are met along with the requirements of those that are short cash. [5, p.9] This is identical to any financial market; the distinguishing factor of the money market is that it provides for only short-term cash requirements. The market will always, without fail, be required because the needs of long cash and short cash market participants are never completely synchronized. The participants in the market are many and varied, and large numbers of them are both borrowers and lenders at the same time. They include:

· the sovereign authority, including the central government (“Treasury”),

· as well as government agencies and the central bank or reserve bank;

· financial institutions such as the large integrated investment banks,

· commercial banks, mortgage institutions, insurance companies, and

· finance companies;

· corporations of all types;

· individual private investors, such as high net-worth individuals and

· small savers;

· intermediaries such as money brokers, banking institutions, etc.;

· infrastructure of the marketplace, such as derivatives exchanges.

The money market is traditionally defined as the market for financial assets that have original maturities of one year or less. In essence, it is the market for short-term debt instruments. Financial assets traded in this market include such instruments as U.S. Treasury bills, commercial paper, some medium-term notes, bankers acceptances, federal agency discount paper, most certificates of deposit, repurchase agreements, floating-rate agreements, and federal funds. The scope of the money market has expanded in recent years to include securitized products such mortgage-backed and asset-backed securities with short average lives. These securities, along with the derivative contracts associated with them, are the subject of this study.

The workings of the money market are largely invisible to the average retail investor. The reason is that the money market is the province of relatively large financial institutions and corporations. Namely, large borrowers (e.g., U.S. Treasury, agencies, money center banks, etc.) seeking short-term funding as well as large institutional investors with excess cash willing to supply funds short-term. Typically, the only contact retail investors have with the money market is through money market mutual funds, known as unit trusts in the United Kingdom and Europe.

Money market mutual funds are mutual funds that invest only in money market instruments. There are three types of money market funds: (1) general money market funds, which invest in wide variety of short-term debt products; (2) U.S. government short-term funds, which invest only in U.S. Treasury bills or U.S. government agencies; and (3) short-term municipal funds. Money market mutual funds are a popular investment vehicle for retail investors seeking a safe place to park excess cash. [5, p.20] In Europe, unit trusts are well-established investment vehicles for retail savers; a number of these invest in short-term assets and thus are termed money market unit trusts. Placing funds in a unit trust is an effective means by which smaller investors can leverage off the market power of larger investors. In the UK money market, unit trusts typically invest in deposits, with a relatively small share of funds placed in money market paper such as government bills or certificates of deposit. Investors can invest in money market funds using one-off sums or save through a regular savings plan.

A money market exists in virtually every country in the world, and all such markets exhibit the characteristics we describe in this study to some extent. For instance, they provide a means by which the conflicting needs of borrowers and lenders can achieve equilibrium, they act as a conduit for financing of all maturities between one day and one year, and they can be accessed by individuals, corporations, and governments alike.

In addition to national domestic markets, there is the international cross-border market illustrated by the trade in Eurocurrencies A Eurocurrency is a currency that is traded outside of its national border, and can be any currency rather than just a European one.. [5, p. 10] Of course, there are distinctions between individual country markets, and financial market culture will differ. For instance, the prevailing financial culture in the United States and United Kingdom is based on a secondary market in tradable financial assets, so we have a developed and liquid bond and equity market in these economies. While such an arrangement also exists in virtually all other countries, the culture in certain economies such as Japan and (to a lesser extent) Germany is based more on banking relationships, with banks providing a large proportion of corporate finance. The differences across countries are not touched upon in this study; rather, it is the similarities in the type of instruments used that is highlighted.

A security is an instrument that represents ownership in an asset or debt obligation. Securities are classified as either money market securities, capital market securities, or derivative securities.

Money market securities are short-term indebtedness. By “short term” we usually imply an original maturity of one year or less. The most common money market securities are Treasury bills, commercial paper, negotiable certificates of deposit, and bankers acceptances. [6, p.44]

Treasury bills (T-bills) are short-term securities issued by the U.S. government; they have original maturities of either four weeks, three months, or six months. [6, p.44] Unlike other money market securities, T-bills carry no stated interest rate. Instead, they are sold on a discounted basis: Investors obtain a return on their investment by buying these securities for less than their face value and then receiving the face value at maturity. T-Bills are sold in $10,000 denominations; that is, the T-Bill has a face value of $10,000.

Commercial paper is a promissory note--a written promise to pay--issued by a large, creditworthy corporation. These securities have original maturities ranging from one day to 270 days and usually trade in units of $100,000. [6, p.45] Most commercial paper is backed by bank lines of credit, which means that a bank is standing by ready to pay the obligation if the issuer is unable to. Commercial paper may be either interest - bearing or sold on a discounted basis.

Certificates of deposit (CDs) are written promises by a bank to pay a depositor. Nowadays they have original maturities from six months to three years. [6, p.45] Negotiable certificates of deposit are CDs issued by large commercial banks that can be bought and sold among investors. Negotiable CDs typically have original maturities between one month and one year and are sold in denominations of $100,000 or more. Negotiable certificates of deposit are sold to investors at their face value and carry a fixed interest rate. On the maturity date, the investor is repaid the amount borrowed, plus interest.

Eurodollar certificates of deposit are CDs issued by foreign branches of U.S. banks, and Yankee certificates of deposit are CDs issued by foreign banks located in the United States. [6, p.45] Both Eurodollar CDs and Yankee CDs are denominated in U.S. dollars. In other words, interest payments and the repayment of principal are both in U.S. dollars.

Bankers' acceptances are short-term loans, usually to importers and exporters, made by banks to finance specific transactions. An acceptance is created when a draft (a promise to pay) is written by a bank's customer and the bank “accepts” it, promising to pay. [6, p.46] The bank's acceptance of the draft is a promise to pay the face amount of the draft to whoever presents it for payment. The bank's customer then uses the draft to finance a transaction, giving this draft to her supplier in exchange for goods. Since acceptances arise from specific transactions, they are available in a wide variety of principal amounts. Typically, bankers' acceptances have maturities of less than 180 days. Bankers' acceptances are sold at a discount from their face value, and the face value is paid at maturity. Since acceptances are backed by both the issuing bank and the purchaser of goods, the likelihood of default is very small.

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