Money Explained

I think that Niall Ferguson’s book and series – The Ascent of Money makes a good read and also helps to explain some of the mystifying aspects of money. There is a humorous video here – explaining money with Niall Ferguson and Stephen Colbert asking ‘Am I money ?’

What is Money?

Money is an object used as a medium of exchange between two parties. It can have intrinsic value like gold or it can be a universally accepted instrument such as notes and coins printed by a Central Bank.

Functions of Money

  1. Medium of Exchange (can be widely accepted for payment of debt / goods)
  2. Unit of Account (measure of relative worth of goods / debt)
  3. Store of Value (inflation means cash tends to reduce value over a period of time)
  4. Standard of deferred payment (money is used to payback debt. Closely related to unit of account.

Types of Money

  • Narrow Money = cash, notes and coins. This is what springs to mind when people think of money.
  • Broad Money = notes and coins + bank + building society deposits. This is often known as paper money because it exists in accounts but banks don’t actually keep the total value of bank deposits as cash (they keep a very small %)

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