Ray Galvin’s new book, soon to be published by Cambridge Scholars:

What is Money? And how to make it work better for everyone

Why read this book?

We use money every day, but what exactly is it? You’re not alone if you can’t answer that question: nor can many politicians, bankers and even economists. The topic isn’t taught in schools, and most economics courses hardly mention it. Fortunately, several leading researchers have recently made great progress on the subject, but their writings can be dense and difficult to follow. This book sets out what we now know about money in clear, straightforward, enjoyable terms. It explains how money comes into and out of existence, the key role of central banks, how government budgets work (or not!) and how they could work better. It also covers foreign exchange, cryptocurrencies, tax, and key movements in history that have made money what it is today. It’s especially written for economics students, but in language most people can understand and enjoy. Bankers, politicians, investors and economists should also find it engaging.

What the critics say …

“Engaging reading on a topic that could not be more important. Ray Galvin makes the principles of money accessible, clear and engaging through practical examples and thought-provoking explanations. He not only shows what money is, but how it underpins power and structures in society. Perfect also for younger readers curious about how money works.

- Professor Minna Sunikka-Blank, University of Cambridge, UK

“Money is an essential element in politics, the economy and everyday life, but most of us understand very little about where it comes from, how it’s ‘made’ and how it ‘works’. Thankfully, in What is Money, Ray Galvin provides insightful answers to these questions and more, including on further issues from currency exchange to cryptocurrency. This book is fascinating, informative, and critical, while remaining remarkably easy to read despite the complexity of the topics. It has a great deal to offer for a wide variety of readers, from scholars across disciplines, to policy practitioners and citizens. Understanding money will surely help us govern the world better.”

- Professor Jared Sonnicksen, RWTH Aachen University, Germany

Outline of the book:

Introduction

The Introduction begins by observing that although money impinges on almost every aspect of our lives, most people do not know what it essentially is or how it gets its power. This includes politicians, columnists, and even many economists. There are two reasons people would benefit from a better understanding of money. One is simply that it’s a fascinating, engaging and even mind-bending subject. The other is that the few, relatively well-resourced people who do understand what money is and how it works get enormous advantage over the rest of humanity. The more we foster widespread public understanding of what money is and how it works, the more likely it will be that governments adopt financial policies that maximise its advantages for everybody. The Introduction also notes that although the book is based rigorously on credible research practices, it explains its subject matter in clear, straightforward terms, mostly using everyday language.

Chapter 1. Let there be money!

This chapter introduces the basic concepts of the book. Money is an IOU (also called an “obligation” or “debt”). The state creates money by spending it into existence. Modern money is therefore often called “Fiat money”, meaning “Let there be money!” There’s no material limit on how much money the state creates, because for the past 53 years money hasn’t been tied to a gold standard. The aim should be to create just enough money to ensure that the full capacity of the economy is utilized: too much and we get high inflation; too little and the economy stagnates. Because the state guarantees to accept back the money it has created, for payment of tax obligations, this money has value to everyone, since everyone has to pay taxes. The money the state creates is called “narrow money” and sometimes “high-powered money” in the book (though different countries call it different things). Most narrow money sits in the reserve accounts of commercial banks at the central bank and never gets into the wider economy, so economists often also call it “outside money”. Commercial banks also create money out of nothing, by issuing loans, which make up most of the money that circulates in the economy. This money is called “broad money” and sometimes “lower-powered money” in the book, and economists often call it “inside money”. The banks use the narrow money in their reserve accounts as collateral to help guarantee the value of the broad money they create.

Chapter 2. The magical, tumultuous life of central banks

This chapter explains the basic function of the central bank as the government’s own bank, and the place where every commercial bank has to hold its narrow money account. It explains the daily reconciliation of commercial banks’ accounts to each other, and how this gives the central bank a tool for influencing interest rates and therefore inflation. The chapter also explains central banks’ recently developed money-making activity known as quantitative easing, and how this has utilized the notion of fiat money. Finally, the chapter discusses central banks’ limitations in stabilising the economy against booms and busts, such as the great financial crisis of the late 2000s and early 2010s. There’s a huge array of financial institutions alongside commercial banks, creating many different kinds of so-called “near money”, which includes exotic financial instruments such as credit default swaps, futures, etc.). These continually flow, in enormous swathes, across the economy. Thy can quickly become unstable and lead to crashes that threaten more conventional investments, and central banks don’t (yet) have all the means to tame them.

Chapter 3. Spanish gold, Italian IOUs, and the rise of capitalism

This chapter is not a rave against capitalism. It’s an attempt to explain how the seeds of capitalism were sown when northern Italian financiers stopped lending metal coinage to merchants and instead issued them promissory notes – IOUs – as a new form of loan. This had two great advantages. First, the amount of “money” available for commerce and industry was no longer limited to the supply of gold, silver or precious metal coinage. Second, the amount of money in the economy could be better matched to the capacity of the local economy to make good use of it: workers and material resources no longer had to sit idle due to lack of money for wages and investment. Conversely, limited resources didn’t get swamped with “too much money chasing too many goods and services”. Meanwhile the opposite was happening in Spain, where limited capacity was initially swamped with gold, then starved of money when the gold stopped coming. The chapter also describes how the northern Italian system spread to Holland, then Britain, and was eventually captured by governments to form today’s central banking and commercial banking system that’s described in Chapter 2.

Chapter 4. How (not) to fix and grow an economy

This chapter explains how a government could potentially use its money-making and money-dissolving power to grow its economy in step with its country’s skills, material resources and labour capacity, while avoiding the risk of high inflation. The chapter explains the theory of deficit financing and uses the first budget of the current British Labour government as a case study, pointing out its weaknesses and mis-steps in the light of what money actually is today. It also clarifies what government “deficit” and “debt” mean, how governments differ from households regarding money acquisition and budgeting, and why governments’ preoccupation with “balanced budgets” can be self-defeating.

Chapter 5. The power and oomph of money: money as a quantity of social stuff

This chapter attempts to close some gaps in recent, emerging theories of what money is today. Again, however, it’s written in a style that readers should find engaging and enjoyable. It argues that (modern) money as a debt, obligation or IOU is not just an abstract notion. Money is also a powerful form of “stuff” that passes between people when they pay it or earn it. In this sense it’s like gold coinage, except that the “stuff” it consists of is not material, but social. It represents a real, tangible obligation (if you owe it) or a real, tangible entitlement (if you own it). As such it’s rooted in basic human social relations that are seen even in pre-money and pre-literate societies. Due to my background among Māori people in New Zealand I use their pre-European social relations as an example. Social obligation is what gives money its power or, as I call it in the chapter, its “power and oomph”.

Chapter 6. Taxation: its roller-coaster history and future possibilities

This chapter gives a brief outline of taxation throughout history, highlighting its main recurring features and weaknesses. It argues that the main problem with tax today is that over 60% of it is income tax, which is unprecedented in the history of taxation. This was appropriate in the 1950s, 60s and 70s when wages were high in comparison to property prices and capital markets, and when most of the increase in personal wealth came from wages earned through work. Now, however, by far the largest increase in wealth comes from investment and reinvestment in capital markets, and this enormous wealth is hardly taxed at all. The chapter then looks briefly at the G20’s proposal for a globally coordinated wealth tax.

Chapter 7. Why the Euro is a problem-child among modern currencies

The euro was born on 1 January 1999 when 11 countries adopted it and began to phase out their own currencies. There are now 19 countries using or soon to use the euro as a common currency. The euro massively reduces the administrative and cost burdens of exchanging different currencies across borders, since these countries have intense trade and travel relationships with each other. It also gives monetary stability to member countries with smaller economies and less stable economic pasts. A serious problem, though, is that governments often cannot create as much money as they need to, to stimulate the unutilized capacity in their economies. There are strict rules against large government deficits, as if these would be a form of cheating. Under the euro’s longstanding rules the eurozone economies therefore look destined to underperform. However, these rules were radically relaxed almost overnight in March 2025, and especially so in Germany, when the US appeared to withdraw its defence guarantee and eurozone countries realised they’d have to spend heavily on defence.

Chapter 8. Foreign exchange

This chapter explains how money flows between countries, despite them all having different currencies that each behave as a closed-loop system. It focuses on three main issues, though it deals with these in an integrated way throughout the chapter: First, it explains how the wholesale, retail and newly emerging “mini” foreign exchange agencies function: how they use “near money” to shift wealth between countries. Second, it outlines the increasing importance of “remittances”: the millions of small sums that immigrant workers send home, which now amount to three times the total of all foreign development aid. This includes discussion on recent successful attempts by the UN, the World Bank and prominent international banking quangos to get the bloated commission costs a on these remittances sharply reduced. Third, using the example of Uganda, it explains the mechanisms in the international foreign exchange regime that can make a low-income country progressively poorer.

Chapter 9. Virtual cash: the arrival of central bank digital currencies

Central Bank Digital Currency (CBDC) is a new form of digital narrow money designed to play the role of cash. There’s a move in over 130 countries, including the eurozone, to allow individuals to have a CBDC bank account, held at the central bank. Their CBDC bank balance will be embedded in a digital wallet in their mobile phone, and they’ll pay shopkeepers directly from wallet to wallet. This will cut out the large, electronically complex broad money-narrow money loop of today’s debit and credit card payments. Central banks hope it will also fend off the challenge of cryptocurrencies and protect their economies from cryptocurrencies’ unpredictable impacts. The disadvantage is that CBDCs will divert narrow money away from commercial banks, reducing their collateral for issuing loans. This could severely dent the wider economy, hence commercial banks’ strong objections to CBDCs. An advantage lies in the World Bank’s aim to support the development of CBDCs for low-value international remittances – which could reduce their commission and transaction costs to almost zero.

Chapter 10. Alternatives to money: Cryptocurrencies, gold, and Elvis’ blue suede shoes

This chapter discusses cryptocurrencies, focussing on Bitcoin, together with two other major phenomena that continually press around the boundaries of the monetary system and challenge its authenticity and stability: gold, and unique artistic items. Crypto currencies, such as Bitcoin, tend to act as another alternative source of wealth, and their growth is designed to mimic that of the gold supply. But unlike money, which serves as a guaranteed tax token, cryptocurrencies don’t have a solid institutional backing such as tax write-offs and are only worth what (other) people think they’re worth, making them an inherently unstable store of value. Bitcoin also suffers long-term instability due to its “mining” method and its exponentially increasing energy demands. It’s also proving increasingly vulnerable to hackers, who’ve found a way to bypass its extremely secure “blockchain” technology and are now successfully stealing billions of US dollars’ worth.

Gold is another alternative to money, and although the gold standard ended 54 years ago, gold is always there in the background. Its market price tends to track inflation, though with great volatility. One of the reasons people hoard gold is as a hedge against currency collapse. But like Bitcoin, the value of gold depends on (other) people thinking it’s valuable. The same goes for diamonds, great works of art, and hugely overpriced mementos such as Elvis’ blue suede shoes (which recently sold at auction for a fabulous price).

Chapter 11. Fixing money: Government deficits, debt and bonds

This chapter expands on one of the most important themes of the book: a sensible approach to government deficits, debt and bonds. The chapter suggests there are two sensible types of government deficit budgeting and one toxic. The first sensible type is investing in human and material resources that will bring future gains. This includes welfare, education, health, infrastructure and long-term gain enterprises the private sector shies away from. The second is increasing the money supply sufficiently to cater for economic growth and a modest level of inflation. Both these can be financed by new money creation because the first is highly likely to pay for itself in the medium term, and the second simply increases the supply of narrow money in line with modest inflation and economic growth. A third type of government deficit is toxic: spending just to keep normal levels of service going. This should be avoided or funded by extra taxation (see Chapter 6).

The chapter then maps out a model for how governments and their central banks could work better together to facilitate the second of these deficit types. It also identifies areas where government bonds can be very useful, both socially and economically.

Chapter 12. Concluding comments and ongoing challenges

This chapter reflects on the motivation for the book, its most important themes, and the type of public discussion I’d like it to stimulate. It first explains that I came to write the book after working in an economics faculty for over a decade and realising how little was understood or taught in economics education on the nature of money and how it comes into and goes out of existence. The chapter then revisits the issue of money as the creation of the state, and the possibilities this opens up if we follow it through consistently with a better informed understanding of what money is and how it can work. Part of this is the relationship between government deficits and debt. Another part is getting the fairest possible tax system, since tax is the main mechanism by which the money supply is held in check. The chapter then offers a challenge to readers and critics to scrutinize the arguments of the book. It especially invites readers to critique what the book actually says, not a distorted or inaccurate version of it.