What is money?
24 November 2015 (updated on 19 June 2024)
You use euro banknotes and coins and likely also have a bank account. But what actually is money? How is it created and what role do central banks like the ECB play?
How much do you know about your money?
Money has evolved over time
Early currency was usually commodity money – made of something valuable, such as gold. Later on, money consisted of banknotes that could be exchanged against gold or silver. Modern economies, like the euro area, use fiat money, which isn’t tied to a commodity at all.
The euro as fiat money
Fiat money is declared legal tender and issued by a central bank. It can’t be directly converted into, for example, gold. The paper used for banknotes isn’t worth much, yet is accepted because it is widely usable and central banks work to keep the value of money stable.
Money in different shapes
Our euro can take the form of banknotes and coins, but it can also exist in a bank account as a computer entry or be stored in a savings account. To make sure our currency stays fit for future, we are also working on future banknotes and on a possible digital euro to complement cash.
Banknotes
Euro banknotes are produced jointly by the national central banks of the euro area. The ECB is responsible for managing the quantity of banknotes in circulation and overseeing the activities of the national central banks.
Learn more about euro banknotesCoins
While the ECB is responsible for approving the volume of euro coins that may be issued, euro area countries remain the sole legal issuers. The European Commission coordinates coin-related matters.
Learn more about commemorative coinsFuture banknotes
We are preparing for a new series of euro banknotes to make them even more secure and sustainable. For the first time ever, euro banknotes will also get a completely new design.
Find out more about future euro banknotesDigital euro
We’re preparing for the possible introduction of a digital euro to ensure people have direct access to central bank money in digital form. A digital euro would allow people to pay anytime and anywhere in the euro area – like banknotes today, but digitally.
Find out why we are looking into a digital euroHow is money created?
To understand how money is made, it’s important to distinguish between two types of money.
- Central bank money is backed by a public institution, like the ECB. In the euro area, the national central banks can create this kind of money. It is most visible to citizens in the form of banknotes. Another type of central bank money is the deposits that commercial banks have at the central bank – known as central bank reserves. These are created electronically through our open market operations.
- Commercial bank money makes up most of the money that people actually use. It is backed and balanced by the assets held by commercial banks. So it is created by banks expanding their balance sheets. For example, if a commercial bank grants you a loan to buy a car, they create money in this way. And when you repay the loan, the money created disappears.
How much money is in the economy?
The ECB defines monetary aggregates to measure the amount of money in the euro area and provide information about the state of the economy: from a narrow monetary aggregate (M1) of banknotes, coins, and bank deposits which customers can withdraw quickly, to a broad monetary aggregate (M3) that also includes longer-term deposits and other similar assets.
Check how much you’ve learned!
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