Thinking about Money
We are all very familiar with money. We earn it and save it and spend it. But when you think about it, it's pretty weird. Who invented that? Nobody did. It evolved as people and human society did, in response to various selection pressures. The result is a pretty strange structure that works - sorta
It comes in a few forms: cash and checks and numbers written in various accounts. All forms share this characteristic: they are kinds of IOU's where somebody promises to pay the IOU when the bearer presents it to them. With cash, you have physical tokens. These days these are usually state issued banknotes and coins. But, many things have been used as those tokens, from seashells to IOU's run up by sailors in bars. Long ago states took the stance that taxes could only be paid in money the state itself issued. This clobbered other forms of tokens. Since money is physical and physically moves from buyer to seller the nature of the transaction is pretty obvious. At the end of the transaction the buyer has less money in their pocket and the seller has more. Presumably, the buyer gets something they value in exchange for the money that is worth as much to them as the money is. The idea is that the net worth of both buyer and seller remains constant but the transaction causes the proportion of cash to other values they possess to change for each. (It's actually quite a bit more complicated. What is a good worth in money? That is very hard to say and may be different for buyer and seller. But let's stick with the simple case for now and I'll look at that next week.)
Most of us have bank accounts and are familiar with the idea that some of the money we own is in the form of numbers in that bank account. When we take cash from our pocket and deposit it the number associated with the account gets bigger and it gets smaller when we withdraw cash and put in our pocket. Checks are a form of IOU. The check writer promises to transfer money to the receiver when the check is presented at the writer's bank. And I've used checks as money in that I could sign them over to someone and use that to pay for a good that they sell me.
When we do transactions there is always a buyer and a seller; somebody who's cash holdings goes down paired with somebody who's holdings increase the same amount. With a bank account this isn't completely obvious since you only see one side of the transaction. In book-keeping it is much more obvious. Each transaction needs to be explicitly informed about where the money came from and where it is going. In book-keeping, the goal is that the transaction balance. That is the loss or gain in one account has to be matched by the complementary loss or gain in another account.
If a person lends another person some money, then clearly the lender has less money at the end of the transaction and the borrower has more. If a bank was a lender like you or me they would have cash in an account that they would transfer to the borrower's account. That is the lender's account would decrease and the borrower's increase. With banks this gets modified. Many regulations are involved, but the take-away is that a bank can lend you money by just raising the amount in your account without diminishing any of their accounts by the same amount.
This is how money is made.
A borrower causes money to be created on the spot that is available for them to spend based on their promise to repay the loan from future earnings. When the loan is repaid then the money created is extinguished. The goal is that once that is all done, the result of the project will increase the net wealth of the individual and society by producing something of lasting value. I think this is called 'fiat money' because it is money created by fiat. It's not physical stuff that has to be found like gold. The problem with currencies based on any sort of base like gold runs into problems because the amount available is limited and can't accommodate a growing economy. The system of money that has evolved in our society is a strange thing to behold but it works quite well.
What do you think?