This is an extract of our The Time Value Of Money document, which we sell as part of our Banking Law Notes collection written by the top tier of King's College London students.
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What is money?
● Problematic, because there can be different definitions in law, in economics, and in finance.
● An asset that is generally accepted as payment for goods and services or repayment of debt.
○ Medium of exchange. Facilitates the exchange of goods. Greater convenience, because no need for barter trading as in the past.
○ Unit of account. Money as an instrument for measuring the (economic) value of things?
○ Store of value. This is slightly controversial.
● Commodity monies.
○ Things of intrinsic value, such as gold, silk, whale teeth, etc.
● Fiat monies.
○ Value due to government decree.
○ The value of a £10 note comes from governmental decree. But how does it work? The government issues legislation saying that the currency issued by the central bank is legal tender; legal tender means that, even if the currency becomes worthless because of inflation, it can nevertheless still be used to pay taxes.
● The underlying idea of money appears to be that of debt: I owe something to you for some service or goods that you have provided me with in the past.
○ It used to be that, if I have nothing that you want right now, I could owe you a favour that you can call on sometime in the future.
○ But, as society became more complex, I may no longer know my blacksmith or butcher personally, and a centralised means of exchange therefore became necessary.
● Forms of money:
○ Cash (in the form of bank notes and metal coins);
○ Central bank reserves; and
○ Bank deposits.
■ What happens to a bank's balance sheet when a customer deposits
■ £50 in the customer's bank account is a £50 debt owed by the bank to the customer. So, the bank has £50 more in cash, but also has £50 more in debt, the result being that its balance sheet has grown and its firm value has grown by £50.
■ Banks can increase the money supply in society by granting more loans.
○ Note that bank deposits constitute 97.4% of the money used in the economy,
while cash accounts only for 2.6%.
○ What of cryptocurrencies?
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