Terminology & money: A gentle introduction in 2022


Surprisingly, the terminology varies from country to country, and words are used in different contexts to mean different things. When discussing the nuances of money it’s important to be pedantic, so I try to follow the following conventions:


There are two main types of money: a lot of money and a little money. There is no common standard definition for this, so below is my attempt to explain its common usage.

In general, we think of money as generic money. Bills, currency, bank deposits, your Paypal account, things you can quickly access and use to pay off your debt. It is the money of commerce, the money that makes the world go round.

More specifically, a scratch card is a credit to a central bank. In their physical form, they are banknotes and coins. In its digital form, the money balance is the account balance of special banks, called clearing banks, that have a (bank) account with the country’s central bank. I discuss this in [a friendly introduction to interbank payment systems].

For example, Lloyds Bank has a sterling account with the Bank of England. The balance is a credit from the central bank and is considered a “tied currency”, and in the UK it is called reserves. In general, ordinary people and businesses do not have access to digital means of change.

Cleaning benches

A clearing bank is a bank that has an account with the country’s central bank. For each currency/country there is a hierarchy of banks:

• The central bank (issues the currency)

• Clearing banks (banks that have a central bank account)

• Other banks (banks that have an account with a credit institution)

Clearing banks have a special status in their ecosystem because they have an account with the central bank and can therefore send money electronically to all other clearing banks, without having separate accounts with all clearing banks. For more information, see [A Brief Introduction to Interbank Payment Systems].

Smaller banks, foreign banks, or new banks will have a choice: become a clearinghouse by opening a central bank account; or to open an account with a settlement bank and move down the hierarchy, with potentially slower incoming and outgoing payments – and more commissions!

currency / money

The Bank of England defines currency as physical notes and coins. That’s all. The money in your bank account is not “currency” (they are deposits…but more on that later).

Sometimes “currency” is used more generically to denote the fiat currency of a specific government, such as GBP, SGD, or USD.

bank deposit

A deposit is your bank account balance with which you make electronic payments or directly withdraw physical money from an ATM.

Deposits are digital, so note positions stored in a locked box in a bank vault do not count as deposits. If you give the bank teller a handful of dollars, you must hand over your money (or “currency”) and ask the bank to convert it into deposits for you.

It is important to understand two things:

1. Central bank charges (notes) are not the same as deposits!

2. A deposit at one bank is not the same as a deposit at another bank

3. Your bank deposit is not “your money”

If you keep a bundle of notes (or jewelry or documents) in a locked box in a bank vault, it’s “your money” and you pay the bank a fee to keep your assets safe. The bank is indifferent to the contents of the box and cannot consider the items in the box as its property. If the bank breaks, you will get the contents of your box back.


A budget is a way of thinking and documenting what you have and what you owe.

• Goods = things you have

• Commitments = things you need

If you have more equity than you owe, you will have positive equity. In business parlance, justice is called justice.

As you earn, your net worth (+ money) increases and your liabilities stay the same, increasing your net worth.

When you spend money on food, your net worth (money) decreases and your liabilities remain the same, decreasing your net worth.

If you buy an asset that retains its value, such as a rare ship, your actions remain the same:

• If you bought cash or deposit, your assets will change type but will remain the same value (-cash / + pot) and your liabilities will remain the same

• If you used your credit card to purchase the rare ship, your assets (+ ship) and liabilities (+ credit card account) will increase.

If you pay your credit card in cash or with a deposit, your capital (cash / debited from your credit card statement) will remain

Why is it important? In all forms of money, you are responsible for another:

• Physical money is good for the holder and is an obligation of the central bank (the central bank owes something to you, the note holder)

• The deposit is good for the account holder and an obligation of the bank (the bank owes something to you, the account holder)

• Reserves are an asset for the clearing bank and liability of the central bank (the central bank owes the clearing bank)

• Your Paypal balance is a resource for you and an obligation to make Paypal (Paypal “supports” you with a deposit in a bank, which in turn is the bank’s property and responsibility).

digital currency

So what do we mean when we talk about digital currencies? Different people use different words: digital fiat, crypto-fiat, e-Cash, central bank digital money (CBDC), electronic money… There is no global definition, but in the simplest form, it means direct responsibility for foreign bank money, performed in digital format. A kind of digital version of paper notes and coins with similar characteristics. The above reserves are a special form of digital currency that can only be maintained by an approved list of clearing banks and RTGS participants.

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