Money is a commodity that we tend to take for granted. Most of us think of money as cash, but cash is just a small por tion of broad money. Most financial transactions are conducted using checks, electronic transfer of funds or credit cards. Economists have a number of different definitions of money. We do not need to define these here par ticularly as definitions vary from country to countr y and this is ver y much moving into the realm of macroeconomics. It is, however, worth reviewing the three fundamental functions that money performs.
Accounting basis. Money provides a means of accounting for the value of real goods. It allows, for example, one to compare the cost of a cup of coffee with the price of a telephone call.
Store of value. Money represents a form of savings, whether it is in the form of a bank deposit or cash. It provides a means of making purchases of real goods and ser vices in the future. It is not a good store of value in an inflationary environment, however.
Means of exchange. Money provides a means of exchange for real goods and ser vices. In the absence of money transactions between two par ties would have to be done on a barter basis. Bar ter is a ver y inefficient means of effecting transactions. Money reduces transaction costs and makes the real economy more efficient.
The first subjects to examine are how money is created and the role of banks in that process. In most countries the central bank controls how much money is created. The creation of money has always reminded me of a magician’s sleight of hand. While your intellect tells you one thing no matter how many times you see the trick it is still impossible to work out how it is done. The ancient street hustle of the “three cup” trick is a good example. In the case of money the con is contained in the word confidence.