What is money?
Have you ever seen a coin that is made of totally blank, unmarked metal? All coins start like this, but at some point most get stamped or marked by a king, an emperor or a nation. Once stamped, these metal disks are suddenly transformed into money.
What does money do?
Money buys stuff — easy, right? Beyond this, economists have come up with some handy ways to think about what it is we do with money that help explain why it’s so important to our day to day lives.
Who creates money?
Money creation starts much the way you would expect. A government agency like a central bank or a treasury puts in an order for more money to be printed. Then, in a factory or mint somewhere, someone’s face is stamped on a bill or coin, turning previously useless paper or metal into valuable currency. This money is then shipped to private commercial banks, who give it to the the rest of us when we make a withdrawal from our bank or ATM. But that’s only a small part of the story.
Why does money creation matter?
This may come as a surprise, but money and money creation have traditionally not been particularly central to economic theory. A popular idea in economics, called the neutrality of money, argues that while changes in the money supply will probably affect the price of stuff, they won’t have any effect on the really concrete things like jobs or salaries. According to this theory, understanding money creation is important for understanding price changes but not much more. This theory has been around for a long time, but today most economists aren’t quite convinced of it.