Money is simple a tool to facilate the exchange of goods or services.  Direct exchange of goods and services is called bartering.  Using money (or diamonds or gold) has some key advantages over bartering.

Money or some equivalent placeholder like diamonds or gold display the following attributes:

• serves no useful purpose on it’s own (e.g., you can’t eat it, read it, talk to it, and so on)
• the supply is controlled (it’s production and issuance is largely through goverments or other central bodies)
• how and when it can be used and by whom is regulated (e.g., anti-money laundering, financial institution regulation, fraud control)
• Is portable, recognizable and believed to hold value

These are the key factors as to why money replaced barter as the main method of facilitating economic exchange.

The monetary system

Humans created money as the key resource underlying the monetary system ( replacing barter).  The rules for production, issuance and use of money can be manipulated for the good of all.

That is, to some extents we can control our economic destiny.

The use of fractional reserves is one of those regulatory practices employed by countries around the world to manage the way money is used.

The intent of these practices is promoting overall greater real economic activity – that is the creation of more goods with a real use for which humans have a need or derive benefit (e.g., food).

The rub of course, is the risk that instead of promoting economic posperity money becomes recognized for it’s real worth – nothing. This leads to economic depressions, the worst in recent memory occurring in the 1930’s, which culminated in world wide conflict.

In recent years governments have employed more rules and attempts at manipulation to avoid the events of the 1930’s.  To some extent these have worked and a major devaluation of money has been avoided.

Can this avoidance of economic collapse continue without a major resdesign of the monetory system?  More of my thoughts tommorow.