CORE PRINCIPLES OF MONEY AND BANKING

The Five Core Principles of Money and Banking
Five core principles inform our analysis of the financial system and its interaction with the real economy. These principles are based on Time, Risk, Information, Markets, and Stability:

1.Time has value:
The first principle of money and banking is that time has value. Time has a price.  Time affects the value of financial transactions. Financial instruments with long maturities attract a higher compensation as compared to those with short term maturities. A dollar today is valuable than a dollar tomorrow.

2.Risk requires compensation:
With uncertainty, comes risk and dealing with risk requires that you consider the full range of possibilities in order to eliminate some risks, reduce others, pay someone to assume particular risks, and live with what’s left. Needless to say, no one will assume your risks for free. Compensation is made in the form of payments.

3.Information is the basis for decisions:
Most people collect information before making decisions. The collection and processing of information is the foundation of the financial system. Without information or with limited information, one makes un-informed choices that could lead to negative outcomes like losses. This is crippled by transaction costs.

4.Markets determine prices and allocate resources:
Markets are the place, physical or virtual where buyers and sellers meet.
Financial markets gather information from a large number of individual participants and aggregate it into a set of prices that signals what is valuable and what is not.
Thus markets are sources of information.
By attaching prices to different stocks, they provide a basis for the allocation of capital.

5.Stability improves welfare:
Stability is a desirable quality.
Volatility creates risk, reducing volatility reduces risk.
Hence, a major goal of financial systems is to provide economic stability.
Central banks have the major role of keeping the economy stable or stabilizing it if it falters. Central banks accomplish this by effecting monetary policies, such as adjusting the cost of money