Chapter 6 of 10All chapters
Chapter 6 of 10
Money and banking
What money is and where it comes from.
Three jobs
Money is a medium of exchange, a unit of account and a store of value. Anything doing those three works, which is why shells, metal and digits in a database have all served.
- Most money in a modern economy is created by commercial banks lending.
- A bank run is a coordination problem, which is why deposit insurance exists.
Central banks
They set short-term interest rates, act as lender of last resort and usually target low stable inflation. Independence from day-to-day politics is the standard arrangement, and it is debated.