To explain the monetary system, we must analyze how money is born. In almost every country on Earth, one of the ways new money can be born involves a central bank. If the bank feels that an increase in the money supply would help us, it can simply make more money. It is easy. It doesn’t even need to be printed as a coin to be born. The next step involves commercial banks. These are the banks that you and I use to cash checks and deposit money. All the central bank needs to do is buy some things from these banks using the money it just made and now the commercial banks have more money.

There is another way that money can be born. It involves commercial banks. If I go to the bank and deposit $ 500, the bank says, “great”, we will keep this money for you and anytime you want, you can withdraw or spend this $ 500. The point is, legally, banks only need to reserve one fraction of the money they are given. This is known as fractional reserve banking. It means that if someone else comes in, say Bob and wants to borrow some money, say $ 300, the bank can lend him $ 300. And now, whenever he wants, he can spend this $ 300. But here’s the thing: Bob can spend $ 300 and I can spend $ 500 for a total of $ 800, even though there is only $ 500 in the bank. By the way, you can act as a central bank and control the money supply yourself. It is illegal, but technically you can increase the money supply through counterfeiting, and you can decrease the money supply by subtracting money. For example, burning it.

If you burn your own money, you get poorer, but because the money supply has decreased, the power of other people’s money increases and they become a little richer. Of course, given the amount of money you could probably raise and burn, its effect will be quite imperceptible. In a world where nothing was stable and survival was a challenge, food, clean water, antibiotics, and such machines would be our economy. When what you use as money has intrinsic value, is useful in itself, it is known as commodity money. It can also include precious metals, such as gold and silver, the rarity of which makes it likely to be accepted by other people as goods and services. Now when you can safely store all your products in one place and don’t need to defend or carry them around, representative money often makes more sense. Store your valuables in a trusted place, like a bank, and get some slips of paper, saying “yes, I own those things.” Now you can walk around with some easy-to-carry strips of paper and use them to buy the things you want. Now we are closer to what we call money today. I say closer, because almost all the money we know of today does not represent any real useful product anywhere on Earth. This note does not represent the amount of food, water, gold, spices or video games that I have stored in a bank, it is only money. It’s called fiat money