KnowledgeBank
Through the ages, money has taken various forms – from gold and silver through to the two types of money used today: cash and bank deposits.
The vast majority of all money in the UK is held electronically as deposits, with just a small proportion held in physical form as cash (banknotes and coins).
Money makes it easy for people to buy and sell things. It is seen as a reliable medium of exchange between buyer and seller.
But money has other uses, too. It helps you to store value. For instance, if you were given an ice cream worth £2, you could enjoy it right now, but if you didn’t it would melt – and that ‘value’ would disappear. But if you were given £2 instead, you could spend it any time you like.
Businesses use money when they price things. If you get your car fixed by a mechanic, you’ll be charged in pounds and pence. The price could be listed in other units (bags of rice, pints of milk, etc) but money offers a shared standard that everyone can use, making it easy to compare prices.
Throughout history, people have used all sorts of things as money such as gold, feathers and cowrie shells.
Historically, as trade increased through the centuries, commodity money such as gold and silver was used in most countries. In the 16th century, goldsmiths began storing gold coins for customers and issuing them with receipts, which could be converted back into gold on demand.
Carrying precious metals around is a considerable physical burden. Over time, people started to use the receipts instead. These receipts became a form of money themselves – and forerunners of the banknotes used today.
We have been issuing banknotes for more than 300 years. For most of that time, banknotes could be exchanged, on demand, for the equivalent amount of gold. But the link between banknotes and gold, known as the Gold Standard, finally ended in 1931. Since then, banknotes have been a form of fiat money: money that is not convertible to gold or any other asset.
One advantage of a system that uses fiat money is that the amount of money in circulation can be responsive to changing economic conditions. This can support the smooth functioning of the economy. By contrast, the total amount of money circulating in the economy during the Gold Standard was ultimately limited by the amount of gold that could be mined.
