3.1. Money and banking
- Syllabus
- 0455–2027–2028
- Topic
- 3.1
- Level
- —
Learning objectives
Explain what makes money work
Money is any generally accepted means of payment. Its forms are the things used as money; its functions are the jobs money performs; its characteristics explain why a form can perform those jobs.
| Category | Examples or meaning |
|---|---|
| forms | coins, banknotes, bank deposits and digital money |
| medium of exchange | buys goods and services without barter |
| measure of value / unit of account | gives products a common price and records transactions |
| store of value | transfers purchasing power from the present to the future |
| standard of deferred payment | states debts and future payments in agreed monetary units |
| Characteristic | Why it matters |
|---|---|
| generally acceptable and recognisable | people trust that others will receive it as payment |
| portable | value can be carried or transferred conveniently |
| durable | it survives repeated use and can store value |
| divisible | different-priced transactions can be settled accurately |
| uniform | equal units have equal value |
| limited in supply | excessive availability does not immediately destroy its value |
A debit card, credit card or cheque is normally a payment instruction or borrowing facility, not a separate form of money: it moves or accesses money held as bank deposits. During rapid inflation, money may still exchange goods but becomes a weaker store of value.
Distinguish central and commercial banks
A central bank manages the monetary and financial framework for the whole economy; commercial banks provide accounts, payments, saving and credit services to households and firms.
| Feature | Central bank | Commercial bank |
|---|---|---|
| usual ownership and aim | public institution; stability and policy objectives | usually private; profit and growth |
| main customers | government and banking system | households and firms |
| money and payments | issues notes and coins and may manage money supply | accepts deposits and enables payments |
| credit | lender of last resort to banks in difficulty | loans, mortgages and overdrafts to households and firms |
| policy and oversight | operates monetary policy, may regulate banks and manages reserves | responds to policy and manages customer credit risk |
| other services | government banking, national debt and foreign-currency reserves | saving accounts, advice, insurance, valuables and foreign exchange |
Central-bank action matters because stable prices protect purchasing power, supervision and emergency liquidity reduce the risk of bank collapse, and monetary policy influences borrowing, spending and economic activity.
Commercial banks connect savers with borrowers and make payments possible. More sound lending can finance consumption and business investment; investment can raise capacity, productivity, employment and output. The benefit depends on borrowers being able to repay and banks assessing risk well.
A central bank is not simply a large commercial bank for the public. Commercial banks may exchange currency or create deposit money through lending, but they do not normally issue the national currency or set economy-wide monetary policy.