3rd October 2026
What is money? We use it every day, but most of what we are taught about money misrepresents what it actually is. In this Understanding Economics video, I explain why money is not a physical thing at all.
Banknotes, coins and the numbers in your bank account are representations of something else, which are promises to pay. Money records debts between people, banks and governments. What you think of as money in your bank account is, in accounting terms, just a promise made to you by your bank.
This is not a new idea. From tally sticks and coins to banknotes and modern electronic payments, money has always depended upon records of obligations. When payments take place today, nothing physical has to move between bank accounts. Accounting records simply change to show who owes what to whom.
Banks also create new money when they lend. When a bank provides a loan, it simultaneously records the borrower’s debt and creates a deposit that can be spent. When that loan is repaid, those records are cancelled, and that means that the money the loan created then disappears.
Government money works through a similar process. Government spending creates money, while taxation removes it. The requirement to settle taxes in pounds also creates continuing demand for sterling throughout the UK economy.
But, in all this, money should never be confused with real wealth. Money cannot build houses, grow food, teach children or care for people. Those things require people, skills, knowledge and physical resources.
Money is an extraordinarily important economic tool, but it is ultimately a system for recording promises and organising economic activity. Understanding that distinction between money and real wealth is fundamental to understanding how our economy actually works.