The first form of money is the banknotes issued by central banks, such as 8  the Adam Smith £ These account for just 3% of the stock but 40% of all consumer transactions. Next is electronic central bank money in the form of the reserves that commercial banks hold with us, including to settle transactions with one another. Finally, and most significantly, the electronic deposits that commercial banks create when they extend loans to borrowers, accounting for fully 80% of money in the system. 9  The private financial sector cannot create money without limit, but is disciplined by competition, constrained by prudential regulation, and limited by decisions of households and companies that can reduce the stock of money (by, for example, repaying existing debt). Monetary policy is the ultimate limit on money creation because it directly influences the price of money and other financial assets and therefore the demand for the money created by the private sector. 10  Most of the institutions that underpin sterling’s effectiveness as money are now housed in the Bank of England. -  11  In particular:  Our commitment to the highest quality banknotes that you and the publican can use with confidence.
And a few may view paper money – even the Bank of England itself – as archaic vestiges of an old centralised order of payments that will soon be swept aside by a digital, distributed future. And that’s my topic today: the future of money. Specifically, how developments in money and payments technologies could transform our economy in ways good and bad. And how, for the good of the people of the United Kingdom, the Bank of England is helping to manage the potential risks and to realise the promise of the future of money. What is money? In The Wealth of Nations, Adam Smith defines money by the roles it plays in society, in particular, how well it serves as:  -  A store of value with which to transfer purchasing power from today to some future time;  -  A medium of exchange with which to make payments for goods and services; and  -  A unit of account with which to measure the value of a particular good, service, saving or loan. These functions of money operate in a hierarchy (Figure 2). There are many assets that people view as stores of value — houses, for instance — that are not used as media of exchange. By comparison, an asset can only act as a medium of exchange if at least two people are prepared to treat it as a store of value, at least temporarily.