Money Income and Employment by Erich Schneider

CHAPTER I 
The Means of Payment 
in the Present-Day Economy 
The means of payment, or money, are those assets which may be 
used everywhere and at any time in the settlement of claims arising 
from the economic process. Let us consider the balance sheets of 
individual economic units (households, firms, banks and the govern-

ment) and see which items among the assets are to be regarded as 
money at any given moment of time. 
1. Let us first consider an inventory of the means of payment of 
a household at a given moment of time. As was shown in Vol. I, 
the assets (gross wealth) of a household consist of its real wealth and 
of claims against other economic units. In general these claims 
consist of claims against (a) other households, (b) firms, (c) banks 
and (d) the state. Only some of these have the characteristics of 
money, namely: (1) the claims against the central bank, held in the 
form of notes and coins, Ul and (2) current accounts (demand 
deposits) kept with the commercial banks. Time deposits and 
savings deposits (i.e. deposits which can be withdrawn only after 
agreed notice is given) are not money, since their owner has relin-

quished the right of free disposal for a fixed period of time. However, 
they may easily be turned into money by giving the required notice. 
Similarly, any bills of exchange, shares and bonds in the possession 
of a household are not money. 
If, for the sake of simplicity, we regard coins as bank notes printed 
on metal (as we did in the first volume) we may say that the means of 
payment of a household at any given moment consist of its stock of 
notes and its current accounts with banks. Notes are also called 
legal tender money, because every economic unit is obliged to accept 
them in settlement of debts. 
For a household, a current account with a bank is equivalent to 
holding an equal amount in notes. The household can convert a part 
or the whole of the account into notes at any time, i.e. it can convert 
its claim against a commercial bank into a claim against the central 
bank. The ownership of a current account thus simply means that 
the household has requested the bank to look after part of its cash. 
This gives the household considerable advantages in making its

payments. For example, if a household H wishes to settle a claim 
held against it by an economic unit U, it may, instead of making 
payment in notes, give U a cheque, i.e. an instruction to its bank to 
pay U the sum stated on the cheque. If U is willing to accept the 
cheque (there is no obligation to do so) he may present it at the 
drawer's bank for payment in cash. If U owns a current account at 
the drawer's or another bank, he may give the cheque to his bank, 
and have the sum credited to his account. In the case where house-

hold H and economic unit U keep accounts with the same bank, the 
payment is made simply by the bank's debiting the account ofH and 
crediting that ofU. In the case where U keeps an account with another 
bank, the process of payment is somewhat different and will be 
discussed shortly. In every case, however, payment is made by 
debiting the account of H and crediting that of U with the same sum. 
Instead of giving U a cheque, household H may simply instruct its 
bank to credit the account of U. In this case payment is made in the 
same way, by the bank making the appropriate transfer from one 
account to the other. In all these cases, the means of payment consist 
of current accounts, parts of which are transferred to other accounts 
by means of instructions to the banks (by cheque or banker's order). 
Since these means of payment consist of entries in the banks' books, 
they are often called book money. 
2. A consideration of the balance sheets of firms does not shed 
any new light on our original question. We merely need to note that 
some large firms keep current accounts not only with the commercial 
banks but also with the central bank. The firms' stock of money at 
any one moment thus consists of (a) their stock of bank notes 
(b) their current accounts with the commercial banks, and (c) their 
current accounts with the central bank. Both bank notes and current 
accounts with the central bank represent immediately realizable 
claims against the central bank, and may be called central bank 
money. We may say, therefore, that the stock of the means of 
payment at any one moment consists of the amount of central bank 
money plus the amount of book money held with the commercial banks. 
3. We designate the sum of the means of payment held at any one 
moment by all firms and households as the stock of money of the 
private sector of the economy. 
4. Let us now consider the stock of money held by a commercial 
bank at any one moment of time. A bank holds at any one moment 
a given amount of money in the form of (a) bank notes, (b) current 
accounts with the central bank and (c) current accounts with other 
banks. The sum of bank notes (including coins) and of current 
accounts with the central bank is called the bank's cash reserve. 

Money Income and Employment by Erich Schneider