The functions of money
Money is anything generally accepted as payment for goods and services. Modern economies rely on money to facilitate trade and overcome the limitations of barter. Money performs four key functions:
- Medium of exchange – it is used to buy and sell goods and services.
- Unit of account – it provides a common measure of value that allows prices to be compared.
- Store of value – it retains purchasing power over time (provided inflation is low).
- Standard of deferred payment – it can be used to settle debts in the future.
The banking system
Banks play a crucial role in the economy by accepting deposits and making loans. Commercial banks provide services such as current accounts, savings accounts, loans, mortgages and payment facilities. They use customer deposits to lend to households and firms and earn profit from the interest rate spread (difference between lending and deposit rates).
The central bank is the government’s bank. It issues the national currency, acts as lender of last resort to commercial banks, manages the country’s gold and foreign currency reserves and implements monetary policy by influencing interest rates and the money supply. The central bank also supervises the banking system to maintain financial stability.
| Institution | Key functions |
|---|---|
| Commercial bank | Accepts deposits, provides checking and savings accounts, lends to households and firms, offers credit cards and mortgages, facilitates payments and currency exchange |
| Central bank | Issues currency, manages the money supply and interest rates, acts as banker to the government and commercial banks, supervises the banking system, maintains financial stability |
Banking systems vary by country, but all play an essential role in mobilising savings, allocating credit, facilitating payments and implementing monetary policy. Financial innovation, such as mobile banking and digital currencies, continues to reshape the role of banks in the modern economy.
