HOW DOES MONEY WORK?

Money is at the heart of the economy and political debate. It plays an essential role in our daily lives, whether for business, salaries or public debt. However, few people really understand how it is created. In fact, there are 2 types of money. So what are they and how do they work?

To understand this more easily, let's take the UK as an example. If you've ever been there, you've probably had a £5 bill in your hand. On this bill is a very interesting sentence: "The Bank of England promises to pay the bearer on demand the sum of five pounds." To understand the meaning of this phrase, it's necessary to go back slightly in time.

Before the economic crisis of 1929, known as the Great Depression, the Bank of England guaranteed the value of the pounds it put into circulation by a quantity of gold held in its vaults. So, in theory, there was parity between money and gold.

Many countries, including the United States, used the gold standard system, where the value of their currency was directly linked to a specific quantity of gold. This meant that governments had to maintain an adequate gold reserve to support the amount of money in circulation.

Money is at the heart of the economy and political debate. It plays an essential role in our daily lives, whether for business, salaries or public debt. However, few people really understand how it is created. In fact, there are 2 currencies. So what are they and how do they work?

It's important to understand that modern monetary systems are based on two types of currency: credit money (also known as debt or digital money) and central bank money (also known as fiat money).

The remaining 10% of money in circulation consists of coins and banknotes, also known as central bank money. This money is created by the central bank, and its value is guaranteed by the central bank. However, we don't have access to central banks, so this money supply is invisible to us.

When a merchant deposits his takings at the bank, the bank credits his current account. The bank therefore acknowledges that it owes him a certain sum of money.

The bank may then decide to present the bills to the central bank, which will honor its promise as written on the bills.

Central banks therefore guarantee the value of banknotes, as well as of all the central money that is invisible to us. On the one hand, because only commercial banks have access to it, and on the other, because these central banks can digitally create this money at the touch of a computer key.

Central banks can create a monetary base by purchasing assets such as government or multinational debt. However, they cannot do so without limits. Central banks are subject to constraints that require them to hold reserves in case of need. So, banks can create money as long as they can assume the associated risks.

Banks don't create money "out of thin air". Money creation is generally linked to entrepreneurial projects or loan applications, such as the purchase of real estate. When a bank grants a loan, it creates money in exchange for a guarantee of repayment. This means that every time money is created, there is an asset associated with it, whether a promise of repayment or a tangible asset.

Trust in money is based on trust in central banks. They play a crucial role in price stability and inflation prevention. By keeping inflation under control, central banks ensure that the value of money does not devalue too quickly. In this way, our trust in money is also based on our trust in the financial institutions that govern it.

The central bank is a complex concept, but one that is essential to our economy. Understanding how it works gives us a better grasp of the economic and political issues involved. Central and commercial banks play a crucial role in the creation and management of money. Ultimately, money is much more than a simple medium of exchange: it is the foundation of our economy.

The modern monetary system is based on trust in the central bank, which guarantees the value of its currency. So, despite the abandonment of the convertibility of pounds into gold, the promise of the £5 bill is still kept, thanks to this mutual trust between the various financial institutions.