Why is the money supply so important?

It is over a year since news broke that HSBC was to write off $11bn due to problems in the sub-prime market. Since then, phrases such as “credit crunch” and “liquidity crisis” have become ubiquitous. To understand why central bankers are concerned about current problems, one has to appreciate the importance of money. Without money, there would be no medium of exchange and trade would revert to using barter. Barter is where you exchange what you produce, e.g. a publican who wanted to educate her children would need to find a teacher that wanted a pint of beer. This is called a “double ...