What is Money?


Money is a precondition for a modern society, not least due to its role in the thousands of payments made by households and firms every day. The money stock consists primarily of deposits in bank accounts, while banknotes and coins account for a much smaller share. The deposit and loan services provided by banks are essential to the functioning of our society. Published 20 November 2014.

Before bank deposits and cheque payments came into widespread use in the last century, money was equal to cash. Today it is more convenient to make payments by transferring funds directly from one's own bank account to the recipient's, e.g. using the Dankort debit card. It is up to households and firms to decide whether they prefer to hold cash or bank deposits. So in practice the households and firms define the term "money" via their transaction patterns.

The role of banks

Banks generate deposits and thus money when they grant loans. The deposit and loan services provided by banks are essential to the functioning of our society. Although the money stock consists primarily of deposits in bank accounts, it is not possible to create more money than households and firms demand.
With a well-functioning financial sector, volumes of deposits and lending can rise in periods when demand for liquidity is high. This means that creditworthy firms can obtain the loans needed for investment purposes. At the same time, households can plan their consumption profile over time, so that consumption may exceed income in periods of low income. The same applies in connection with the purchase of e.g. a home or a car. The debt incurred can be repaid at a later date.
In this way the banks contribute to a flexible economic system, to the benefit of the general public. Given their importance to society, the banks are subject to extensive regulation and supervision by the authorities. One of the aims is to ensure that they do not take on excessive risks.
 

The role of Danmarks Nationalbank

Danmarks Nationalbank issues banknotes and coins but does not regulate the creation of money in connection with bank deposits and lending. But ultimately the monetary policy  pursued by Danmarks Nationalbank does determine demand for money in the private sector. This is because Danmarks Nationalbank's monetary policy interest rates are reflected in the banks' deposit and lending rates, which in turn have a direct impact on demand for deposits and loans and hence also on the money stock. Interest rates also affect economic activity, which has a bearing on households' and firms' demand for bank deposits and loans.