CENTRAL OF FACT SHEETS What is money? Money in the modern 1 Currency economy In Samoa this includes tala notes, as well as tala Money today is a type and sene coins. of IOU1, but one that is special because 2 Bank deposits everyone in the Created by the commercial economy trusts that . it will be accepted by other people in exchange for goods 3 and services. reserves Created by the country’s There are three main central bank, in Samoa types of money. Each this is CBS. represents an IOU from one sector of the economy to another.

1 IOU - A document acknowledging a debt. CENTRAL BANK OF SAMOA FACT SHEETS

the Central Bank of Samoa’s objec- What counts as tives is to safeguard the value of the money? currency. The Central Bank does this in many The first role of money is to be a ways, including: store of value – something that is expected to retain its value in a fair- • Deciding which currency rep- ly predictable way over time. resents legal tender, i.e. only official Money’s second role is to be a unit notes and coins produced by CBS. of account – the thing that goods and services are priced in terms of, • Producing banknotes that are dif- for example on menus or price tags. ficult to counterfeit. Tala notes have many complicated security features. Thirdly, money must be a medium of exchange – something that peo- • Ensuring the value of the tala re- ple hold because they plan to swap mains stable over time, so curren- it for something else, rather than cy will hold its stored value. This because they want the good itself. means CBS works to maintain a low and stable rate of inflation3. Currency CBS has an inflation target it aims to achieve over time. The aim of this is Samoa’s currency2, the tala (notes to ensure money is relatively stable and coins) and sene (coins), is is- in the amount of products and ser- sued by the Central Bank of Samoa. vices it can buy.

To make sure the tala does not lose For example if three tala can buy its usefulness in exchange, one of a loaf of bread today, we want to

2 For more about Samoa’s currency, see the CBS Factsheet “Currency”. 3 Inflation - A sustained increase in the general level of prices for goods and services. As inflation rises, every tala you own buys a smaller percentage of a good or service. (For more on this topic see the CBS Factsheet “Inflation”.) ensure a loaf of bread costs around of his or her banknotes with a bank, the same price next year. they are simply swapping a Central Bank of Samoa IOU for a commer- This means people can be confident cial bank IOU. The commercial bank their money will be worth a stable gets the extra banknotes, and in amount of real products from one return it credits the consumer’s ac- year to the next. count by the amount deposited.

Consumers only swap their curren- Bank deposits cy for bank deposits because they are confident that they could always Currency only accounts for a small be repaid. Banks therefore need to amount of the money in the eco- ensure that they can always obtain nomic system. The rest consists of sufficient amounts of currency to deposits with banks. meet the expected demand from depositors for repayment of their For security reasons, consumers IOUs. generally do not want to store all of their assets as physical banknotes. In the modern economy, bank de- Moreover currency does not pay posits are often the default type of interest4 making it less attractive to money. hold than other assets, such as bank deposits, that do. Most people now receive payment of their salary in bank deposits rath- For these reasons, consumers prefer er than currency. And rather than to mostly hold an alternative medi- swap those deposits back into cur- um of exchange – bank deposits. rency, many consumers use them as a store of value, and increasingly as When a consumer makes a deposit a medium of exchange.

4 Interest - Money paid regularly at a particular rate for the use of money lent, or for delay- ing the repayment of a debt. (For more on this topic see the CBS Factsheet “Interest”.) CENTRAL BANK OF SAMOA FACT SHEETS

For example, when a consumer pays for this large volume of transactions a shop by debit card, the banking would be cumbersome. sector reduces the amount it owes to that consumer – the consum- So banks are also allowed to hold a er’s deposits are reduced – while different kind of IOU from the Cen- increasing the amount it owes the tral Bank of Samoa, known as cen- shop – the shop’s deposits are in- tral bank reserves. These are just creased. an electronic record of the amount owed by the central bank to each Unlike currency in Samoa, which is individual commercial bank. printed and minted by the Central Bank, bank deposits are mostly cre- Reserves are a useful medium of ated by commercial banks them- exchange for banks, just as deposits selves. are for households and companies.

This process, and If one bank wants to make a pay- its limits, are discussed in further ment to another – as they do every detail in the CBS Factsheet “How is day on a large scale when customers money made?”. want to make transactions – they will tell the Central Bank who will then adjust their reserves balances Central Bank accordingly. reserves If lots of households wanted to con- Commercial banks need to hold vert their deposits into banknotes, some currency to meet frequent commercial banks could swap their deposit withdrawals and other out- reserves for currency to repay those flows, but to use physical banknotes households.

For more CBS Fact Sheets, visit www.cbs.gov.ws