What is money?

Andreas Bjerkedal

March 31, 2021

As for now, there is no good definition of money. However, economists agree on
three functions that money needs to have in order to be recognized as money.
Money needs to be:
A medium of exchange – meaning it can be used to facilitate trade of goods between
parties.
A unit of account – meaning it can be used for bookkeeping purposes.
A store of value – meaning it can be saved for later use without losing its purchasing
power.

To understand money, we need to look at how it is created. Many people think the
central bank is responsible for creating money, but this is not the case. It is the
regular banks that have been in charge of creating new money.

Money is created in the bank thru the issuance of debt. When a bank extends a loan
to a person or entity, it does not transfer already existing money to the borrower’s
account. The bank actually creates the money in the borrower’s account by typing in
the amount. This new money shows up as a deposit in the borrower’s account. The
deposit shows up, like every other deposit, as a dept owed to you by the bank, on
the liability side of the bank’s balance sheet. At the same time, it shows up as loan to
you on the asset side. Voilà. New money is created by the banks in the form of debt.

Historically, central banks have only made physical money on behalf of the
government. Their role in the financial system have been to set interest rates and
thus regulated the demand for money. However, after the financial crisis in 2009,
central banks have also printed money in the same way banks do. They have done
this thru a process called quantitative easing (QE).

After the gold standard was abolished in 1971 and replaced with the FIAT system,
there was soon no restrictions on how much money could be created by the banks.
The gold standard didn´t allow this. The gold standard regulated how much money
could be lent to a factor similar to the growth in the gold supply. The gold supply in
turn grew by about the same rate as our economies. Thus, the gold standard

maintained a debt level of about 100% av GDP. In other words, only money earned
by the economy was made by the banks.

Today, the global debt level has risen to more than 300% of GDP and is increasing
exponentially. The reason for the surge in the debt level is the central banks´
obligation to create consumer price inflation. This has led to a dramatic rise in all
prices, including asset prices such as stocks and real estate, and a corresponding
loss of the purchasing power of money.

FIAT currencies have for these reasons experienced long lasting depreciating value.
Currencies produced by the FIAT system is not a reliable store of value anymore and
thus cannot any longer be recognized as real money.

Globe will reintroduce the tie between money and GDP previously ensured by the
gold standard, but in a much more accurate and transparent manner.

(1)
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-
modern-economy

Andreas Bjerkedal

March 31, 2021

Share this Article

Share on facebook
Share on twitter
Share on linkedin
Share on facebook
Share on twitter
Share on linkedin

Contact us

We will get back to you within no time.