Money, Credit, and Crises: Understanding the Modern Banking System by Nektarios Michail

Part I
A History of Banking

1. A Brief History of Money and Credit
Nektarios Michail
Central Bank of Cyprus, Nicosia, Cyprus
Nektarios Michail
Email: nektariosmichail@centralbank.cy
What is money? Despite our daily use of it, it is not often that we
ponder what makes something money, especially in the modern era
where we take the prevalence of paper or digital money as granted.
Throughout history, there have been different uses of various forms of
money, and in each step in money’s advance, people have reshaped the
way they do their commercial transactions and have introduced new
distinctions.
1
In the broadest sense, in order for something to be considered as
money, it needs to serve four functions: (a) being a medium of
exchange, (b) an overall standard, (c) a measure of value, and (d) a
store of wealth. Being a medium of exchange means that money has
the ability of facilitating transactions, so long as it is accepted by all the
parties involved. In this sense, practically everything can be used as
money: pieces of paper with a stamp on it, cigarettes, iron, copper, and
as has been the norm until the early twentieth century, gold.
This brings up interesting complications: suppose John owes Paul 5
chickens, then John can potentially repay his debt by providing 20
pieces of fruit. This simple example suggests that even intangibles like
trust and creditworthiness can be employed as a means of transaction;
in fact, they have been, and still are in use throughout the world.
The above example also introduces the idea of credit: it could be the
case that Paul’s chickens have not hatched yet, or that John’s trees did

Money, Credit, and Crises: Understanding the Modern Banking System by Nektarios Michail