25. Money

Can anybody remember when the times

were not difficult and money not scarce?

Ralph Waldo Emerson

Anything can act as money if it is generally accepted by people as money. In Britain, and all advanced economies, the greater part of the supply of money consists of deposits in bank accounts, rather than notes and coins. The size of this quantity of bank money is influenced by the reserves that the banks hold, and an increase or decrease in reserves will tend to result in an increase or decrease in the total quantity of money.

B anking institutions in this country have evolved over centuries, and the organisation of the banking system plays an important part in determining the extent of the Bank of England’s control over the monetary system.

It is important for economists to examine the role of money. Money is basically the communications medium of the economic system, the means by which transactors indicate their wants, and their preparedness to offer supplies of economic goods. Any major imbalance in the monetary system can have a disruptive effect on the ‘real’ world of production.

O ver the years the role of money has been formalised as provid­ing three distinct functions, the provision of a medium of exchange, of a unit of account and of a store of value.