TLDR
Money works because it does three things: it lets you make purchases, it holds value over time and it gives you a consistent way to price everything
In Canada, money exists in both physical form (cash) and digital dollars, which are the numbers you see in your bank account or mobile wallet. Most of the money we use today is digital (created when banks make loans), and it works exactly the same as cash for buying items
Money drives the economy through spending, saving, interest and taxes, creating a continuous flow that supports individual, businesses and government services
We use money every day without thinking much about it but understanding how it works can help you make smarter financial decisions. Money does more than just pay for things; it keeps the economy running smoothly.
What is money and why do we use it?
Money is anything people accept as payment for goods and services. It makes buying and selling simple because everyone agrees that the good or service has a value.
We use money because it helps us buy things, save for later life and compare prices. Economists group these into three functions: medium of exchange, the store of value and the unit of account. Here’s a breakdown of each:
Medium of exchange
Before money was introduced, people used to barter for what they wanted, trading goods in exchange for other goods. This agreement depended on people wanting to buy what the other had. Imagine trying to buy groceries by trading your laptop skills – you’d need to find a store owner interested in web design. Money simplified everything by creating something that everyone accepts as payment.
Store of value
Another reason why we use money is because it holds value over time, which means you can save it and use it later. Unlike groceries like produce or meat, which rot and lose value quickly, money lasts and can be used when you need it.
Unit of account
Money gives us a common way to measure prices. It lets you instantly compare costs without doing mental gymnastics. This means you can immediately recognize the difference between a $5 cup of coffee and a $30 shirt. This makes budgeting and everyday decisions simpler.
Where does money come from?
In Canada, money exists in two main forms: physical cash and digital money. Most money today is created digitally by banks when they issue loans.
Physical currency
The Bank of Canada creates, issues and manages all Canadian bank notes, ensuring a steady supply of cash in circulation to meet public demand. They also ensure that bank notes are designed with the latest technological designs to stay ahead of counterfeiters.
The production of Canada’s physical currency comes from two sources:
- The Royal Canadian Mint produces coins from their specialized facilities in Ottawa, Ontario and Winnipeg, Manitoba.
- Canadian bills are printed by the Canadian Bank Note Company, a private-sector security printer.
Digital currency
Most money isn’t physical cash – its digital. When a bank approves a mortgage or business loan, it doesn’t hand out cash. Instead, itadds money to your account digitally which you can then spend.
Physical Currency vs Digital Currency
Each form of currency has different uses and advantages.
| Money Type | Physical Currency | Digital Currency |
|---|---|---|
| Form | Bills and coins | Numbers in your bank account and payment apps |
| Material | Polymer (waterproof plastic) for bills and metal alloy for coins | Digital code and encrypted data |
| How it’s Made | Printed at Bank of Canada facilities and minted at the Royal Canadian Mint | Created digitally when banks issue loans and recorded in banking systems |
| Percentage of Transactions | 11% of total payment volume | 86% of total payment volume |
| Where It’s Used | • In-person transactions • Cash-only establishments • Donations/tips | • Online shopping • Bill payments • E-transfers • Mobile payments |
| Advantages | • Works without internet • Good for budgeting | • Instant transfers • Safer from theft • Easy to track • Convenient for online use |
| Storage | • Wallet • Cash Register • Safe | • Bank accounts • Digital wallets • Payment apps |
What are the key currency characteristics that make money work?
For money to work, it needs to be
- Easy to carry (portable)
- Long-lasting (durable)
- Easy to split into smaller amounts (divisible)
- Widely accepted (universal acceptance)
These traits make it easy to use money for buying, saving and comparing prices, without the hassle of bartering.
Portable
The portability of money also helps explains why we use it. While paper cash is relatively easy to carry around, the option of digital funds greatly increases convenience. A credit card or phone is much easier to carry than stacks of hundred-dollar bills. By that same token, digital currency is easier to take with you internationally, as you can face currency restrictions when crossing borders.
Durable
Money has to be made durable to last through repeated use, which is the reason Canada uses waterproof polymer bills. A single polymer note lasts 2.5 times longer than a paper note and doesn’t degrade. Its physical nature allows for high-tech security features like windows, holograms and detailed printing, which makes it harder to counterfeit.
Divisible
Divisibility of money is another trait that makes it more convenient. For example, breaking down bills into smaller bills makes tasks like splitting restaurant cheques or making change a much easier process than bartering
Universal acceptance
Money works because we all agree it works. The government backs it, and as long as everyone trusts the system, those bills and digits in your account have real value even though they’re not tied to physical assets like gold or silver anymore.
How does money actually drive the economy?
Money moves constantly through the economy as people earn, spend, save and pay taxes.
Jobs and wages
Most Canadians’ sole source of income is from their jobs. This money is then spent on essential items such as housing, healthcare and food, as well as any non-essential goods and services like clothes or entertainment. Any time money changes hands, it impacts the economy by supporting individuals and businesses. The flow of cash is one of the primary ways that money helps drive the economy.
Savings and investments
The money that isn’t spent is usually saved in the bank or invested through the stock market. Investing and saving can help an individual’s money grow and give companies the funding they need to grow and expand, which in turn creates jobs and economic growth.
Spending patterns
As people earn or save more, they have more money to spend. They also tend to borrow more when interest rates are low. When people spend more or less, it changes what businesses produce and sell, and how the economy grows.
Government and taxes
The government collects money through taxes. Taxes are an important source of revenue for the Canadian government and are used to provide Canadians with services such as healthcare, education and basic infrastructure such as highways and maintaining safety and order within communities.
FAQ
Money in Canada is primarily created digitally by banks when they issue loans. Physical cash is produced by the Bank of Canada and coins are minted by the Royal Canadian Mint.
Money loses value over time because of inflation, which is the increase in prices and the falling value of money. As prices rise, the same amount of money buys less. This can be caused by rising demand, supply shortages or other economic factors.
Yes. Digital money is considered as real as physical cash, despite not being tangible. It has value and can be used to make purchases.
Spending helps the economy by keeping money in circulation and driving demand. When you buy goods or services, you create income for workers at a business, who in turn spend or invest further. This creates a ripple effect that sustains jobs and keeps that money circulating through the system.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
