Preface

Summary

“Money makes the world go around,” they sing in the musical Cabaret. The musical is dark and melancholic. The song's message is that money makes the world go around; not love, not having children and grandchildren – just money.

As economists we think otherwise. We think that money is not an end in itself. Money is the oil in the machinery that helps the economy to function. We think of money as the unit of account, just like distance is a unit of measurement. It would be meaningless to answer the question “How far is it?” with 110. One must add the unit of measurement, “yards” or “meters.” Money is useful as means of payment so that one can avoid returning to a barter economy. Money is also a store of value, creating a time gap between earning and spending to allow borrowing in the meantime, which facilitates investment. Money, however, only functions in an efficient way if there is trust and confidence. In early times money circulated in the form of coins, with a promised content of silver, copper, or gold. It was tempting to debase the coins and reduce or replace some of the silver with less valuable metals. When paper money came into use in the form of banknotes, it was tempting to produce too many of them, until their value depreciated and they could no longer be exchanged into the promised silver or gold content. Since the mid-nineteenth century, money has mainly been in the form of bank deposits. Trust is still critical, not least our trust in banks. As the economy develops and grows more sophisticated, so does money. In a modern society, it is inconceivable for the world to go around without money. Modern societies have delegated the task of safekeeping money to central banks.

On Central Banking contains six lectures given at the Norwegian Academy of Science and Letters. The lectures analyze different aspects of central banking but the questions raised could also be relevant for other institutions in society. The key words are trust and confidence.