Barter is the earliest form of trade. It basically means you trade anything for anything. It had many drawbacks, you first had to find someone that has the thing you want, and then you had to hope he would want to trade it with you for your stuff. But how do you know how many fish is a cow worth, anyways?
Money can be anything that is generally accepted in payment for goods and services at a particular geographical area.
1. Stage: Commodity money - basically goods such as knives or cattle, because these were people willing to accept for their produce. It was different everywhere, and it was quickly abandoned because it lacked certain qualities, that money should have. These qualities are:
2. Stage: Precious metals - such as gold and silver. They have always been scarce enough to make them valuable enough. However, trading with metals required special tools that people had to carry with them.
3. Stage: Coinage - precious metals had predetermined weights, often stamped with the face of king and their value. However, over time these coins were losing their value because they were easily chipped, and monarchs were sometimes mixing them with cheap metals.
4. Stage: Paper money - they came to existence when early goldsmiths accepted deposits of precious metals to keep them safe for people. They gave the owner a receipt so they knew what value they have deposited.
5. Stage: Deposit money - nowadays you don't even need cash to pay, you can use these and pay with your card.
Liquidity is te ability to exchange something for cash, without a loss of value.
M1, the most liquid form (also called "near money"??)
M2 is M1 + money-mmarket accounts, saving accounts, mutual fund accounts and other easily liquidated kinds of savings in all financial institutions.
M3 is M2 + large-denomination certificates of deposits held by private institutions.
L is M3 + most securities (bonds, treasury bills and other government-issued credit instruments)