Three Types of Money

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There are three types of money in the economy, but as members of the public, we will have only ever used two of them – cash, and the numbers in your bank account.

1. Cash:

Physical money, or cash, is created under the authority of the Bank of England, with coins manufactured by the Royal mint, and notes printed by specialist printer De La Rue. The profits from the creation of cash (known as seigniorage) go directly to the government. Of course, it is inconvenient and risky to use cash for larger transactions. This is one of the reasons why today cash makes up less than 3% of the total money supply. Nowadays people use credit and debit cards, which allow money to be transferred electronically between bank accounts (see point 3).

2. Central bank reserves

Central bank reserves are a type of electronic money, created by the central bank and used by banks to make payments between themselves. In some respects they are like an electronic version of cash.  However, members of the public and normal businesses cannot access central bank reserves, as they are only available to those organisations who have accounts at the Bank of England, i.e. banks.  Central bank reserves are not counted as part of the money supply for the economy, due to the fact that they are only used by banks to make payments between themselves.

3. Commercial bank money

The third type of money accounts for approximately 97% of the money in circulation. However, unlike central bank reserves and cash, it is not created by the central bank or any other part of government. Instead, commercial bank money is created by private, high-street or ‘commercial’ banks, usually in the process of making loans (as described below). While this money is electronic in form, it need not be – before computers, banks could still ‘create money’ by simply adding deposits to their balance sheets.

Commercial bank money is referred to by various names, including: bank deposits, sight deposits, demand deposits, time deposits, term deposits, bank liabilities and bank credit.

For more details see: WDMCF2

Where Does Money Come From?

A guide to the UK Monetary and Banking System

Written By: Josh Ryan-Collins, Tony Greenham, Richard Werner & Andrew Jackson

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  • Jim

    What is the process by which Commercial Bank Money is converted into Central Bank Reserves?

    • GWHodgson

      There is no process for converting between Commercial Bank Money and Central Bank Reserves. Commercial Bank Money is a private agreement between each bank and its account holders that it will make payments on their behalf, using its reserves if necessary to induce other banks to complete the process. Thus the bank of the recipient of the payment will accept Central Bank Reserves from the bank of the account holder making the payment as sufficient inducement for entering into a similar agreement to make payments on behalf of the recipient. Commercial banks can use their reserves at the Central Bank to purchase banknotes issued by the Central Bank, which their account holders can then buy from commercial banks using the Commercial Bank Money in their accounts.

      • MAKU

        Explain the key forms of money in Ugandan economy?

  • Robert Hoogenboom

    Does the government have an account with the central bank? If so, does the government get central bank reserves in that account for the cash that it together with the central bank creates? How else does the government benefit from the cash that is created?

  • Robert Hoogenboom

    When the central bank wishes to help one if its friends by giving it money, or by buying its assets at book value prices and selling it back to them at market value, what does it pay with? Not in reserves, we have been told, because that isn’t money that goes into circulation. Not into digital money, because that is the deposits on the credit side of a commercial bank and the central bank doesn’t create these. Then it must print “cash”, the third type of money. But this is simply impossible when we talk about billions and even trillions. Does the central bank create an electronic equivalent of cash, which then gets transferred to the bank somehow?

  • Daniele Angriman

    What type of money do banks use to buy assets belonging to people who don’t have an account in the bank? Cash? Equity?
    When I put my wage in the bank what increases in the assets side?

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