Money is an economic tool that has several roles and forms.
It is an immaterial right which value rests on a chain of commitments.
Three roles and two forms
A) Money is an economic tool that is used to:
1) Exchange (we pay with it, we get paid, we donate...),
2) Measure values (via "prices"),
3) Keep and store value (mostly in deposits, with or without interests).
A Swiss army knife of economic activities!
Because of those traits, money plays a fundamental part in economic activity and has a crucial social role with psychological implications.
B) Money has two forms:
Nowadays money is an immaterial right that has two forms:
1) The main one, "sight" bank account balances (used for transfers, checks, payment cards...).This is also called "bank money". It is well adapted to be used as "electronic cash" .Receiving, storing and sending money is done more and more by receiving, storing and sending electrons.2) Physical cash (banknotes / coins).It is also called "fiat money". Its role is more and more secondary in developed economies.
What has disappeared is precious metal money, which was the usual form of cash some centuries ago.
Money can be legally defined as a commitment based on other commitments
Money is created by the banking system, essentially as a counterpart of a myriad of bank borrowers' commitments.
The banking system commits itself to make that money, residing in its depositor's accounts acceptable and usable (as payment notably...).
Those contractual commitments can be considered as collaterals in favor of bank depositors (and indirectly banknote bearers).
Central banks, which control that creation (while issuing directly fiat money) and are lenders of last resort add another level of warranty.
States and their taxpayers are the ultimate guarantors in case the banking system cannot face its own commitment to money holders.
Monetary policy
Each central bank is responsible to control how a specific money unit (Euro, US dollar, Mexican peso, or whatever) is issued by the banking system of the related territory.
It regulates the quantity and price (interbank interest rate, to simplify, and, for some central banks, the foreign exchange rate) of that money.
It is usually considered, here again to simplify, that:
- Too much credit and money might bring consumer price inflation and /or asset bubbles,
- Not enough money might bring deflation / recession and/or underinvestment / asset crashes.
Source and further readings
Extracted from the "Economic definitions" section
of my "Behavioral economics / finance" website
Don't miss - in the same site - the "Psychology of money",
a fascinating topic that details the human and social side of money,
Patrice Bouyrat
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Bonjour,
"Dabord créez votre knol en anglais...puis utilisez lien de traduction pour faire le même en français".
Il serait mieux réceptionné et référencé.
bonne contiknolation... :-)
Andreas Kemper
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