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What is money?

We explain the different types of money, including the important role of central bank money in supporting trust and confidence in the financial system.

Money is what people receive when they:

  • get paid their wages
  • receive financial support from the government
  • sell something to their neighbour
  • get a gift from a friend.

Money makes it easy for people to buy and sell things.

Money is central to everyday life

Not all money is the same. There are 2 types of money

Central bank money

Money we design and create is central bank money. This money is like a promise from the government to pay the owner of the money what it states it is worth. It will always be worth what it says it is and has the lowest credit risk of all types of money.

Private money

Money that is created by private firms, such as commercial banks, is money that is like a promise from the private firm to pay the owner of the money what it states it is worth. This is private money. All private money is 'digital' or 'electronic' - you can only get it, spend it and store it if electronic devices are involved. If you have a bank account, the balance available to buy things is an example of private money.

Pete has private and central bank money

Together, central bank money and private money make up all the money used in Aotearoa New Zealand. Private money is the most common type of money.

In New Zealand, 93% of money is private money (held in bank accounts) and 7% of money is cash (banknotes and coins).

Money tree

Central bank money is government-backed and issued by the central bank, the Reserve Bank of New Zealand. Cash is currently the only type of central bank money available to anyone. Cash is also the only physical money available in New Zealand. All private money exists digitally (as an electronic record). The diagram below shows the different types of money that exists—or that could exist—in New Zealand.

The money tree

About the money tree diagram

The first tier of the money tree splits money into physical or digital. There is 1 form of physical money — cash (banknotes and coins). Only we have the right to issue cash in New Zealand.

The second tier separates digital money by issuer either by the private sector or by us. We offer a digital account to some financial institutions so they can move money between themselves. These are called ESAS accounts. Currently, we do not provide digital money that is available for all New Zealanders to use. If we did, this would be called central bank digital currency (CBDC).

Find out more about ESAS

Paying with private money

To use private money you need a payment instrument. A debit card, a credit card, contactless technology (like PayPal or Apple Pay) and internet banking are all examples of payment instruments.

In Aotearoa New Zealand, private money is more popular than central bank money (cash).

Pete's payment instruments

What does the future hold for central bank money?

New types of private money and payment instruments are emerging all the time. But we still need to make sure our central bank money is fit for purpose and meets people's needs — including those who can't access private products.

There are 2 reasons for this:

  • Central bank money builds trust and confidence in private money. We call this acting as a value anchor for private money. This value anchor is the reason everyone can transact in New Zealand dollars with confidence and the reason we can use monetary policy to help keep prices stable and employment at the maximum sustainable level.
  • Cash allows people who can't access electronic money to receive money and use it. Because anyone can use it any time, cash contributes directly to financial and social inclusion and is the reason local economies impacted by natural disasters can keep functioning.

Value anchor

Central bank money is a value anchor because:

  • it allows people to easily work out what their private money is worth
  • people know they can convert their private money 1:1 into cash whenever they want, so they are willing to trust banks to look after their money.
How does a value anchor work?

Anyone can use it any time

Central bank money plays an important role in allowing all New Zealanders to pay their bills, make purchases, give gifts and participate socially. In this way, it directly contributes to financial and social inclusion, and therefore economic wellbeing.

There are a range of reasons why people may use cash, such as:

  • it helps them budget and manage expenditure
  • it is preferred in their community or social setting
  • banks won’t accept them as customers or they don't trust banks
  • they find using private money too difficult
  • they like the fact that cash payment is anonymous.

Most people use cash at times, and around 6% of people need to use it always. During the 2022 cyclone, electronic payments were not available for several days in Wairoa and Tairāwhiti.