Money Tips Network

The earliest issues of money that was not backed by gold were known as fiduciary issues. Money is now totally divorced from its precious metal origins. It will never regress. Imagine the political problems involved in basing a monetary system on a commodity whose biggest producers were South Africa and the Soviet Union.

The next stages of the development of money – banknotes and cheques are dealt with in Chapter 4, on the banks. It is sufficient to point out here that banknotes were, in origin, claims on gold and silver. Now money depends on the confidence of its users in the strength of the economy. When economies break down (as they occasionally do in wartime) money disappears and is replaced by some other commodity such as cigarettes.

At money has grown more sophisticated, so it has grown farther away from its origins. For large sums, payment by cheque is far easier and safer than payment by notes and coins. The money is debited from the payer’s bank account and credited to the payee’s. Even if someone presents a cheque for cash at a bank, he or she will be paid in banknotes, which are, in origin, only a claim on the real assets, gold and silver. The system depends on the confidence of all those concerned. Shopkeepers accept cheques because banks will honour them. Bank accounts are therefore money in the same sense as notes and coins are, since they can be used instantly to purchase goods.

Banks can thus create money. This is because only a small proportion of the deposits they hold is needed to meet the claims of those who want to withdraw cash. Much of the need is met by those who deposit cash. Simple way for a bank to lend money is to create a deposit (or account) in someone’s favour.