The importance of money

Quarterly Bulletin 1970 Q2
Published on 01 June 1970

A research paper prepared in the Bank's Economic Section. The paper is largely the work of C. A. E. Goodhart, assisted, particularly in the preparation of the appendices, by A. D. Crockett.

The distinguishing characteristic of that set of assets which may be described as money is that they perform the function of a medium of exchange. This definition does not, however, allow for a clear-cut distinction in practice between those assets which should be regarded as money, and those which can not be so treated. Cash and cheques drawn on banks are the means of payment for transactions which are generally acceptable in most developed economies, and this fact has led many to conclude that cash and demand deposits in banks are the only real monetary assets. There are, however, certain demand deposits, for example compensating balances held with banks in the United States, which cannot be freely used for transactions purposes. On the other hand possession of a balance on time deposit, or access to overdraft facilities, may allow a purchaser to draw a cheque on his bank account even when he has insufficient demand deposits to meet that cheque. A more fundamental point is that the set of assets which is acceptable as payment for transactions is not immutable over time; it has changed in the past and could do so again in the future. If people should find it economically advantageous to accept, and to proffer, other financial claims in payment for transactions, then the set of assets which is to be described as money will alter.

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