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The foundations of money, payments and central banking: A review essay

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  • Stephen Millard

    (Bank of England)

Abstract

The purpose of this paper is to understand the economics behind the evolution of payments where by payments I mean the ‘transfer of monetary value’ (in return for goods, services, or real or financial assets). It is clear from this definition of payments that, in order for there to be payments, there first needs to be money. So, the paper first discusses why money might evolve as a result of some frictions inherent in real-world economies. It then discusses the evolution of banks, arguing that banks developed in order to provide payment services (making ‘money’ work more efficiently). The paper then discusses how banks can save on the use of collateral to make payments – collateral that they can convert into loans to earn a return – by the development of ‘payment systems’. Such systems will involve some form of netting of payments (clearing) and final settlement in some asset. ‘Central banks’ fit into this picture by providing, in their liabilities, a settlement asset that the other banks are happy to use. In so doing, they are incentivised to worry about monetary and financial stability

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File URL: http://repec.org/mmf2006/up.14642.1145636019.pdf
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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 106.

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Date of creation: 02 Feb 2007
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Handle: RePEc:mmf:mmfc06:106

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Web page: http://www.essex.ac.uk/afm/mmf/index.html

Related research

Keywords: Money; banks; payment systems; central banks;

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  1. Gorton, Gary & Huang, Lixin, 2006. "Bank panics and the endogeneity of central banking," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1613-1629, October.
  2. François R. Velde & Warren E. Weber & Randall Wright, 1999. "A Model of Commodity Money, with Applications to Gresham's Law and the Debasement Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 291-323, January.
  3. Peter Rupert & Martin Schindler & Andrei Shevchenko & Randall Wright, 2000. "The search-theoretic approach to monetary economics: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 10-28.
  4. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  5. Charles M. Kahn & William Roberds, 2002. "The economics of payment finality," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 1-12.
  6. Gary Gorton & Lixin Huang, 2002. "Banking Panics and the Origin of Central Banking," NBER Working Papers 9137, National Bureau of Economic Research, Inc.
  7. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
  8. Charles M. Kahn & James McAndrews & William Roberds, 1999. "Settlement risk under gross and net settlement," Staff Reports 86, Federal Reserve Bank of New York.
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