Monetary Policy
What Is Money? From Bread to Bitcoins
It's not about the money, money, money
We don't need your money, money, money, money
(Price Tag, Jessie G)
These lyrics tell us that money is everywhere, and everyone has something to say about it. But what is money?
What It Is and What It’s Not
Economists agree that money isn’t just any object of value. For something to truly count as money, it must meet three key criteria:
Unit of account: Money lets us compare things with things that have nothing in common. How many apples equal a car? How many coffees for a concert ticket? Without a shared unit, these comparisons are impossible.
Medium of exchange: Instead of trading your bread for a bicycle and hoping the bike shop is hungry, money acts as the universal go-between. No more double coincidence of wants.
Store of value: Your savings melt if you earn your salary in ice cream and a heatwave hits. Literally. Good money holds its value over time.
Throughout history, people have used everything from salt and gold to cigarettes (in prisons) as money, depending on the situation. Today, it’s mostly paper bills, coins, and digital numbers on your phone.
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How Much Money Is There?
Central banks track the amount of money in an economy through categories called monetary aggregates. Here’s how the European Central Bank breaks it down:
M1: Cash and immediately available bank deposits.
M2: M1 plus short-term savings accounts (up to 2 years or 3 months' notice).
M3: M2 plus more complex instruments like repurchase agreements and money market funds.
These categories matter because too much or too little money in the system can influence inflation, unemployment, and interest rates. Understanding money is the first step in understanding monetary policy.
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Why It Matters
Money is more than just what's in your wallet. It supports economic exchange, allows savings, and allows businesses to invest and grow. It’s the invisible fuel behind everything we do, from buying bread to building bridges.
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Fun thought
Could a video game currency or airline miles be “money”? Only if they meet all three conditions.
Money is what keeps the economy dancing.
So, Jessie G
Maybe it IS all about the money!