Definition of Money
Money serves three purposes. It is a medium of exchange, a store of value and a unit of account. It is used to pay debts, purchase goods and services and is accepted by the government for taxes. Legal Tender laws are enacted to require people to use the government's money in payment of lawful debts among private citizens.
There are Four Types of Money
1. Commodity Money
Commodity money started as barter. The exchange of cattle and sheep advanced to one of gold and silver because metals are not perishable, their purity and weight can be measured easily and they can be traded for any good or service. Unlike diamonds, metals can be melted down and reformed into smaller quantities for smaller purchases without losing value.
In 2100 BC, gold cubes were used in China. In 600 BC, the Lydians used precious metal coins in Asia Minor. In 400 BC the Greeks began minting coins. From about 300 AD to 1100 AD, the Byzantine empire (Eastern Holy Roman Empire) used a coin called the Solidus. One could not file or chip the coins or issue a false coin under the penalty of chopping off your hand. As a result, the Byzantines never bankrupted, never went into debt and never devalued the currency over a span of 800 years. The Byzantine Empire had a perfect monetary system: the best in history.
The Western Roman Empire, on the other hand, used every imaginable means to devalue their currency and plunder the people. As a result, it collapsed in 476 AD long before the Byzantines who eventually succumbed in 1453 AD for reasons having nothing to do with the stability of their currency.
Nota Bene: It should be noted here that the amount of gold in the world does not affect its ability to serve as money. As the world economy grows, only the quantity that will be used to measure any given transaction will change. After a time, it might take a very small amount of gold to buy something, but gold can be effectively traded in small quantities. In addition, transactions may also be accomplished with other metals such as silver, nickel or copper. We come to the startling truth that it does not matter how big the supply of real money (gold) is: Any supply will do. The free market will simply adjust by changing the value of gold. More money does not supply more capital, is not more productive and does not result in economic growth. Our "elastic" monetary system, based on fractional reserve banking is just a clever way for bankers to make money and Congress to take your money and spend it without your knowing about it.
2. Receipt Money
During the days of the Roman Empire, goldsmiths maintained vaults where they stored their gold. It followed logically that they might also store gold for other people for a fee. Thus, the first banks were born. The goldsmiths gave their depositors receipts for gold deposited and because the receipts could be redeemed by a bearer at any time, they had intrinsic value and were traded as money. Goldsmiths also loaned money from their reserves and collected interest just as is done today.
3. Fractional Money
Of course, goldsmiths quickly realized they only needed 10 to 15% of their stockpiles on hand for redeeming customer receipts for "their" gold. So it logically followed that to collect more interest, they could loan more money than they had on hand by using receipts backed by nothing except the goldsmith's knowledge that all their depositors would not come to collect their gold on any given day. Thus was born fractional receipt money, the precursor to our present day banking system. As long as these illegal and fraudulent loans were repaid, no one was the wiser. But if the loans failed (flood, drought), the goldsmith was caught short. This began a "run on the bank" and only the first in the door were made whole. The rest lost their money and "hung" the goldsmith. Without the crime of loaning more money in receipts than the goldsmith had on hand in real gold, there would never be a run on the bank to redeem the receipts. Of course, at the time this was considered a serious crime because it was recognized clearly as fraud. The money did not exist and everyone understood it.
4. Fiat Money
Fiat money is money that has value only because a government says it has value. It is not backed by anything. Fiat money has two characteristics. a) It does not represent anything of intrinsic value. b) It is decreed to be legal tender (laws that require everyone to use it in settlement of private debts). These two characteristics always go hand-in-hand because fiat money is worthless and it would be rejected by the public without the government's threat of fines or imprisonment for failure to accept it as money. A review of the history of money and banking shows that manipulation of fiat money by governments has failed every time it has been tried.
Fractional money partially backed by gold or silver is a hybrid between receipt money (honest money) and fiat money that has nothing to back it. When the fraction in fractional receipt money reaches zero, the fractional receipt money is then truly fiat money. Because we are on a Fiat Money system in the US today, all money (the M1 money supply) is created by debt, not by work. If all debts were paid, there would be no money.
Learn more about the History of Money and Banking.
These pieces really set a standard in the industry.
The time is coming where the finances of the public will be run more like those of the private. I support this but worry we are tossing babies out with dirty bathwater. We did not get in this quandary overnight, we ought not expect to leave it behind in some paroxysm of fiscal austerity. But a crisis it is and glad I am that you and others are talking and educating on it. Be well. Jamie