The forms of money

We think there is only one kind of euro. In reality, several circulate, and they are not created by the same people.

The first is central bank money. The money the central bank creates: banknotes, and the accounts banks hold with it.

It is the only money that depends on no private bank. A banknote cannot go bankrupt.

But banknotes are only a small part of money. In the United Kingdom, the central bank estimates they weigh about three per cent.

The rest is credit money: the balances in your bank accounts. And it comes into being in a surprising way.

Say a bank lends you two hundred thousand euros for a house. It does not take this money from any vault.

It writes two hundred thousand euros into your account. The loan creates the deposit. Money has just appeared.

When you repay, it is the reverse: the money disappears. Account money lives at the rhythm of loans.

This money is the bank's promise to give you banknotes on demand. In Europe, it is guaranteed up to one hundred thousand euros per bank.

In the app, this chapter is animated and narrated, card by card. Start free trial.

Download on theApp Store

Third form, in preparation in many countries: central bank digital currency. It is called a CBDC.

The idea: a banknote, but digital. Central bank money anyone could hold directly, without going through a private bank.

The Bahamas launched one back in two thousand twenty. China is testing its digital yuan on a large scale. The euro area is preparing a digital euro.

The awkward question: if everyone keeps their money at the central bank, what happens to banks' deposits, and so to their loans?

That is why projects often plan a cap per person. The amounts considered change as discussions go on.

Fourth form, from the private sector: the stablecoin. A digital token that promises to always be worth one dollar, or one euro.

To keep this promise, the issuer says it holds reserves: dollars in a bank, short-term government securities.

But the promise is only worth those reserves. In March two thousand twenty-three, a major stablecoin had over three billion dollars stuck in a bank that failed.

Over a weekend, it fell towards eighty-seven cents. It only came back when the state guaranteed that bank's deposits.

Others had no real reserves, only an algorithm. In May two thousand twenty-two, one of them collapsed almost to zero.

Europe now regulates these tokens, with rules on reserves and issuers. And these rules are still evolving.

Four monies, and always the same question: who promises, and what guarantees the promise?

A banknote is the central bank's promise. A deposit, a bank's, guaranteed up to a ceiling. A stablecoin, a company's.

On a screen, they all look alike. What sets them apart is what remains the day something breaks.