5 Types of Money

You pay with a card, transfer money from your bank, or spend a balance in an app. They all feel like money. But each can represent something different: cash you hold, a deposit a bank owes you, or a claim on another company.

People disagree about the definition of money . Some start with gold ; others with bitcoin . Here, we’ll follow five forms of money and money-like claims used in everyday payments and finance.

Start with the number you see when you open your banking app.

A $1,000 bank balance is a $1,000 claim on the bank. The bank owes you that amount. Thinking of a deposit this way makes the rest of the system easier to follow.

You rely on the bank to honor that claim. In the US, FDIC insurance covers eligible deposits up to $250,000 per depositor, per insured bank, for each account ownership category.

A bank account lets you make payments without carrying cash. Behind each transfer, banks update records of what they owe and settle payments between themselves.

Suppose your employer and you use the same bank. When it pays you $1,000, the bank reduces what it owes the employer and increases what it owes you. The payment changes whose name sits beside the money.

Money-like claims also exist outside banks. The term shadow banking describes credit activity outside traditional banking. It covers more than the payment balances most of us see day to day.

A payment-app balance, a store balance, and a money market fund can all feel cash-like, but they are different claims with different protections. A digital wallet that passes a payment to your card is also different from an account that holds money for you.

For a stored balance, start by asking who owes you the money and what happens when you ask for it back. A payment may simply update the company’s record of what it owes each customer.

Check the terms before assuming a balance has bank-deposit protection. A service’s account agreement explains the conditions that apply.

A small spending balance and your retirement savings deserve different levels of attention. The larger the amount, the more it matters to know what you hold.

A brokerage account can hold securities you own, cash, or cash placed in a bank sweep program. It is not all an IOU from the broker. The SEC explains how customer assets are kept separate from the broker’s own assets.

Protections differ. SIPC can help recover eligible missing assets when a member brokerage fails. It does not cover a decline in the market value of your investments.

When an institution promises withdrawals on demand but invests in assets it cannot quickly sell, many customers asking for money at once can cause a run. That mismatch matters more than whether the account looks like a familiar bank account.

The financial crises of 2008 and 2020 showed how quickly confidence and access to funding can change. A useful question is whether the institution can meet withdrawals when many customers want cash at the same time.

Cash is different. You can hand someone a banknote without asking a bank or payment app to update an account.

That removes a particular kind of counterparty risk : the payment does not depend on a private company honoring your account balance at that moment.

You still depend on people accepting the currency, and cash can be lost or stolen. Holding notes also does not protect their purchasing power from inflation.

The histories of Zimbabwe and Venezuela show how much that distinction matters. Someone can keep every banknote and still find that the same pile buys far less.

People who distrust their local currency may prefer to hold dollars or another widely accepted currency. They are choosing which issuer and which currency they trust.

Cash also offers privacy and works without an electronic payment network. Those features can help people with limited banking access and can also make illicit payments harder to trace.

Banks need to settle payments with one another. They can use accounts at a central bank for that job. In the US, a bank’s reserve balance at the Federal Reserve is money the Fed owes that bank.

Individuals cannot open an ordinary checking account at the Fed. Eligible institutions use central-bank accounts, and the US Treasury has its Treasury General Account for government receipts and payments.

When a payment goes from one bank’s customer to another’s, the banks can settle it by transferring reserve balances. They do not need to send a truck full of banknotes.

The Fed records reserve balances. Commercial banks keep the separate records of their customers’ deposits.

Currency and bank reserves together form the monetary base . Reserves settle payments within the banking system; households generally spend bank deposits or cash.

A bank can exchange reserve balances for physical currency to meet customer withdrawals. The central bank supplies that currency. This is a different relationship from a customer asking a commercial bank to repay a deposit.

Bank deposits let the wider economy make payments without everyone holding central-bank money directly. Broad money includes deposits as well as currency. Ray Dalio illustrated the larger role of credit in the 2013 video below; his figures are historical, not current totals.

A US Treasury security is an IOU from the federal government. It is an investment, but it can also play a money-like role as a liquid asset or collateral.

Someone holding hundreds of millions of dollars cannot cover it all with one ordinary insured bank account. Treasuries offer another way to hold large sums. They are still securities, with maturity dates and prices that can change.

Treasuries give the holder a claim on government payments. Short-term bills and long-term bonds behave differently when interest rates change, so treating all of them as interchangeable with cash would miss an important distinction.

Governments also hold US Treasuries as reserve assets. Their usefulness depends on deep markets and confidence in repayment, as well as access to the assets. That access can become a political question, as this discussion of currency reserves explores.

When you look at a balance, ask what it represents. Is it cash, a bank deposit, a security, or a promise from another company? Who must do what for you to spend it?

Then ask what it will buy later. Inflation can reduce purchasing power even if the balance grows. Frustration about that can make speculative shortcuts, from NFTs to GameStop trades , feel more tempting.

Understanding what you hold gives you a better starting point than chasing a bigger number on a screen.